Real Carriage Door Company, Inc., V. Don T. Rees

Filed
Washington State
Court of Appeals
Division Two

May 11, 2021

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON

DIVISION II
REAL CARRIAGE DOOR COMPANY, INC., No. 53991-8-II
ex. rel. SCOTT T. REES, MARDIE A. R.
BRODERICK and JEREMY E. BRODERICK,
Shareholders Thereof; and SCOTT T. REES,
MARDIE A. R. BRODERICK and JEREMY
E. BRODERICK, Individually,

Appellants,

v. PART PUBLISHED OPINION

DON T. REES,

Respondent.

MAXA, J. – Scott Rees, Mardie Broderick, and Jeremy Broderick (collectively,

appellants) appeal the trial court’s dismissal after a bench trial of their claims against Don Rees

for minority shareholder oppression, breach of fiduciary duty, and fraud.

Don Rees is the president, chief executive officer (CEO), and majority shareholder of

Real Carriage Door Company, Inc. (RCDC), a family business. Scott1 and Mardie are Rees’s

children and Jeremy is his son-in-law. They are minority shareholders of RCDC who at one time

worked for the company. When Rees filed for a divorce from his wife, the appellants sided with

her and eventually terminated their employment with RCDC. Rees subsequently discontinued

1
This opinion will refer to appellants by their first name when referencing them as individuals to
distinguish them from family members with the same last name. No disrespect is intended.
No. 53991-8-II

making dividend distributions to all shareholders and, to replace the dividends he ordinarily

would have received as the majority shareholder, increased his own salary by over $1 million in

the first year and over $700,000 in subsequent years.

We hold that, contrary to the trial court’s conclusion, under the facts of this case Rees’s

conduct constituted minority shareholder oppression as a matter of law and entitles the appellants

to relief. In the unpublished portion of this opinion, we affirm the trial court’s dismissal of the

appellants’ breach of fiduciary duty and fraud claims.

Accordingly, we reverse in part and affirm in part the trial court’s judgment dismissing

the appellants’ claims, and we remand for the trial court to determine the appropriate relief for

the appellants’ minority shareholder oppression claim.

FACTS

Background

Rees was the founder, president, and CEO of RCDC. RCDC was converted to an S

corporation organization, which meant that RCDC did not pay federal income tax at the

corporate level. Instead, RCDC shareholders were responsible for paying taxes on their pro rata

shares of RCDC’s profits. At that point, Rees owned 51 percent and his wife Beth Rees owned

49 percent of the company’s shares.

In 2006, Beth2 began working for RCDC and eventually took on a human resources role.

Rees later created positions in RCDC for their two adult children, Scott and Mardie, and

Mardie’s husband, Jeremy. Between 2010 and 2013, Rees and Beth gifted shares of RCDC

stock to Scott, Mardie, and Jeremy as incentive for them to continue to work for and contribute

2
This opinion will refer to Beth by her first name to distinguish her from Rees. No disrespect is
intended.

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No. 53991-8-II

to the success of RCDC. Rees and Beth wanted the appellants to eventually take over the

business.

Scott owned 6 percent of RCDC’s shares. He managed RCDC’s website and computer

needs. Mardie owned 3.1 percent of RCDC’s shares. She worked in sales at RCDC, but she

stopped working at RCDC in October 2009 after giving birth to her child. Jeremy owned 2.9

percent of RCDC’s shares. Jeremy worked as a door drafter, in pricing, and in sales engineering

at RCDC.

After gifting Scott, Mardie, and Jeremy their respective shares, Rees retained 51 percent

and Beth retained 37 percent of RCDC’s shares.

Rees Separation and Divorce

In March 2013, Rees and Beth separated. The appellants blamed Rees for the couple’s

marital problems, and the appellants’ relationships with Rees deteriorated. Rees filed for divorce

in April 2014. The divorce was finalized in January 2015. As part of the divorce settlement,

Rees agreed to purchase Beth’s ownership interest in RCDC. After this purchase, Rees now

owned 88 percent of the company’s shares.

Scott terminated his employment at RCDC in December 2014. Jeremy terminated his

employment at RCDC in January 2015. None of the appellants had any further involvement with

the company after January 2015.

Discontinuance of Dividends

Rees’s and Beth’s combined annual salary in the two years before 2015 was $190,000.

They also received dividend distributions of $976,987 in 2013 and $1,116,257 in 2014. Before

2015, all shareholders, including the appellants, received pro rata dividend distributions on a

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quarterly basis. As RCDC’s profits increased, the shareholders’ dividend distributions increased

pro rata.

In 2015, RCDC – at Rees’s direction – stopped distributing dividends to shareholders and

began paying Rees a dramatically increased salary instead. Rees’s salary was $1,213,618 in

2015, $834,562 in 2016, $973,926 in 2017, and $954,500 in 2018. In other words, instead of

distributing profits to all shareholders, RCDC essentially paid those profits to Rees in the form of

a salary.

Rees explained that the reason RCDC changed its profit distribution was because the

appellants no longer worked for the company:

They had abandoned, and they had all completely left, and I was alone carrying
everything; and so it didn’t make sense to me to continue to pay dividends to those
who were contributing nothing to the welfare and ongoing future of Real Carriage
Door.

Report of Proceedings (RP) (June 19, 2019) at 52.

It was my decision that I was alone, and the minority shareholders were no longer
part of the corporation in the sense that they were no longer working and
contributing and making any contribution whatsoever to the corporation; and so it
came to me in my business decision to not declare any dividends from the year
2015 forward and for those reasons and those reasons alone.

RP (June 19, 2019) at 68.

Complaint and Bench Trial

In 2018, the appellants – individually and as shareholders of RCDC – filed a lawsuit

against Rees in which they asserted claims for minority shareholder oppression, breach of

fiduciary duty regarding RCDC and the shareholders, and fraud. They also sought declaratory

and injunctive relief. The case proceeded to a bench trial. Scott, Mardie, and Rees all testified to

the facts described above.

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No. 53991-8-II

The trial court issued detailed findings of fact and conclusions of law, including the

following conclusions of law (which also included some factual findings):

3. Defendant Rees did not breach his fiduciary duty to the corporation and the
minority shareholders. The evidence showed that the corporation’s practice was to
distribute profits to the Plaintiffs as salary and gifts of dividends. Not distributing
gifts of dividends was a reasonable and honest exercise of the directors’ judgment
and was not a breach of his fiduciary duty.

4. There was an implied agreement to pay the minority stockholders a salary and
gifts of dividends only during the period of their employment and was terminated
when they left the corporation.
....

6. Defendant Rees’ decision to not distribute dividends was within the power of
RCDC and his authority of management. This decision was made in good faith and
was reasonable.
....

8. Defendant Rees actions were business judgments. He provided reasonable
explanations for his conduct which were not oppressive. The minority shareholders
failed to show oppressive conduct.
....

11. The reasonable expectations for the minority shareholders were that they
would receive a salary and gift distributions of shares while employed at RCDC.

Clerk’s Papers (CP) at 264-65.

The trial court also entered conclusions of law that the appellants did not prove their

minority shareholder oppression, breach of fiduciary duty, and fraud claims. Therefore, the court

entered a judgment that dismissed all of the appellants’ claims with prejudice.

The appellants appeal the trial court’s judgment.

ANALYSIS

A. STANDARD OF REVIEW

When reviewing a trial court’s decision following a bench trial, we ask whether

substantial evidence supports the trial court’s findings of fact and whether those findings support

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No. 53991-8-II

the conclusions of law. Columbia State Bank v. Invicta Law Group PLLC, 199 Wn. App. 306,

319, 402 P.3d 330 (2017). Evidence is substantial if it is sufficient to persuade a rational, fair-

minded person that the declared premise is true. Viking Bank v. Firgrove Commons 3, LLC, 183

Wn. App. 706, 712, 334 P.3d 116 (2014). We view the evidence and all reasonable inferences in

the light most favorable to the prevailing party. Columbia State Bank, 199 Wn. App. at 319. On

appeal, we do not review the trial court’s credibility determinations. Id. Unchallenged findings

of fact are treated as verities on appeal. Id.

Here, several of the trial court’s key factual findings are included in the court’s

conclusions of law. If findings of fact are mischaracterized as conclusions of law, we analyze

them as findings of fact. Allen v. Dan & Bill’s RV Park, 6 Wn. App. 2d 349, 365, 428 P.3d 376

(2018).

We review the trial court’s application of facts to law and the court’s legal conclusions de

novo. Viking Bank, 183 Wn. App. at 712.

B. MINORITY SHAREHOLDER OPPRESSION CLAIM

The appellants argue that Rees engaged in minority shareholder oppression by paying

RCDC’s profits to himself as a salary rather than making regular dividend distributions that

would benefit all the shareholders. We agree.

1. Legal Principles

a. Duty to Minority Shareholders

It is a recognized principle that majority shareholders “must, at all times, exercise good

faith toward the minority stockholders.” Hay v. Big Bend Land Co., 32 Wn.2d 887, 897, 204

P.2d 488 (1949).

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No. 53991-8-II

The foundation of a minority shareholder oppression claim is RCW 23B.14.300(2)(b).

See Scott v. Trans-System, Inc., 148 Wn.2d 701, 708-09, 64 P.3d 1 (2003). Under that statute,

trial courts have discretion to dissolve a corporation in a proceeding by a shareholder if there is

proof that “[t]he directors or those in control of the corporation have acted . . . in a manner that is

illegal, oppressive, or fraudulent.” RCW 23B.14.300(2)(b). Judicial dissolution is such an

extreme remedy that it should be applied with caution. Scott, 148 Wn.2d at 708-09. But courts

also may consider alternative remedies that are less severe than dissolution, including an award

of damages to minority shareholders. Id. at 717-18.

Courts have adopted two tests for determining oppressive conduct toward minority

shareholders under RCW 23B.14.300(2)(b). See Scott, 148 Wn.2d at 710-11. The first test, the

“reasonable expectations” test, defines oppressive conduct as an act taken by the majority in

violation of the minority’s reasonable expectations – “ ‘those spoken and unspoken

understandings on which the founders of a venture rely when commencing the venture.’ ” Id. at

711 (quoting Robblee v. Robblee, 68 Wn. App. 69, 76, 841 P.2d 1289 (1992)). This test is most

appropriate when the minority shareholder was one of the original participants in forming the

corporation. Scott, 148 Wn.2d at 711.

The second test defines oppressive conduct as “ ‘burdensome, harsh and wrongful

conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of

its members; or a visible departure from the standards of fair dealing, and a violation of fair play

on which every shareholder who entrusts his money to a company is entitled to rely.’ ” Id.

(quoting Gimpel v. Bolstein, 125 Misc. 2d 45, 50-51, 477 N.Y.S.2d 1014 (Sup. Ct. 1984)). The

court in Scott approved a statement that oppressive conduct also includes “ ‘the plundering of a

‘close’ corporation by the siphoning off of profits by excessive salaries or bonus payments and

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No. 53991-8-II

the operation of the business for the sole benefit of the majority of the stockholders, to the

detriment of the minority stockholders.’ ” Scott, 148 Wn.2d at 713 (quoting Baker v.

Commercial Body Builders, Inc., 264 Or. 614, 629, 507 P.2d 387 (1973)).

The minority shareholder bears the burden to prove oppressive conduct by a

preponderance of the evidence. Scott, 148 Wn.2d at 712. Once the minority shareholder shows

oppressive conduct, “the burden shifts to the majority shareholder . . . to show there were

legitimate business justifications for the conduct.” Id. at 709. “[A]cts are not oppressive where

there is a reasonable explanation for them.” McCormick v. Dunn & Black, P.S., 140 Wn. App.

873, 889, 167 P.3d 610 (2007).

b. Business Judgment Rule

The business judgment rule provides immunity to corporate management for a

transaction that is within the corporation’s power and management’s authority if “there is a

reasonable basis to indicate that the transaction was made in good faith.” Scott, 148 Wn.2d at

709; see also RCW 23B.08.300(4). Absent “evidence of fraud, dishonesty, or incompetence,”

courts generally will not interfere with the judgment of corporate management. In re Spokane

Concrete Prods., Inc., 126 Wn.2d 269, 279, 892 P.2d 98 (1995). However, immunity does not

apply when a corporate director or officer acts “in bad faith and with a corrupt motive.”

Interlake Porsche & Audi, Inc. v. Bucholz, 45 Wn. App. 502, 509, 728 P.2d 597 (1986).

2. Rees’s Increased Salary in Lieu of Dividends

To prevail on their minority shareholder oppression claim, the appellants were required to

prove the (1) Rees engaged in oppressive conduct, and (2) there was no legitimate business

justification for the conduct. Scott, 148 Wn.2d at 712-13.

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No. 53991-8-II

a. Oppressive Conduct

The appellants had the initial burden to prove oppressive conduct by a preponderance of

the evidence. Scott, 148 Wn.2d at 712. We hold that the trial court erred in concluding that the

appellants did not satisfy this burden.

The evidence is undisputed that in 2015, RCDC at Rees’s direction (1) stopped

distributing dividends to shareholders, thereby depriving them of their share of company profits;

and (2) converted the dividends the shareholders would have received into a dramatically

increased salary for Rees. In other words, instead of distributing profits to the shareholders as

RCDC historically had done, Rees paid those profits to himself.

As a matter of law, this conduct was wrongful and oppressive. The Supreme Court

adopted the statement that oppressive conduct includes “ ‘the plundering of a ‘close’ corporation

by the siphoning off of profits by excessive salaries or bonus payments and the operation of the

business for the sole benefit of the majority of the stockholders, to the detriment of the minority

stockholders.’ ” Scott, 148 Wn.2d at 713 (quoting Baker, 264 Or. at 629). That is exactly what

happened here. Rees’s decision to increase his salary in lieu of paying dividends benefitted him

by preserving his pre-2015 total compensation to the detriment of the appellants, who no longer

shared in company profits.

Rees argues that the trial court’s findings of fact support the conclusion that paying Rees

a large salary in lieu of paying dividends was justified. First, the trial court found in finding of

fact 20 that RCDC took this action because Rees “now either performed or oversaw the previous

duties” of the appellants after they no longer were employed at RCDC. CP at 264. Rees’s

additional responsibilities certainly justified some increase in his salary. But nothing in the

record supports a finding that because the appellants no longer were working at RCDC, Rees was

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No. 53991-8-II

justified in discontinuing the distribution of dividends and increasing his annual salary by

$700,000 to $1 million.

Second, the trial court found in conclusion of law 3 that “[t]he evidence showed that the

corporation’s practice was to distribute profits to the [appellants] as salary and gifts of

dividends.” CP at 264 (emphasis added). The court found in conclusion of law 4 that “[t]here

was an implied agreement to pay the minority stockholders a salary and gifts of dividends only

during the period of their employment and was terminated when they left the corporation.” CP

at 264 (emphasis added). These conclusions are factual findings, which we analyze as findings

of fact. Allen, 6 Wn. App. 2d at 365.

Based on these findings of fact, the trial court concluded that “[t]he minority shareholders

failed to show oppressive conduct.” CP at 265. And the court concluded that the appellants

failed to prove their minority shareholder oppression claim.

Substantial evidence does not support the factual findings supporting the trial court’s

dismissal of the appellants’ claims. Conclusions of law 3 and 4 refer to “gifts of dividends.” CP

at 264. Although Rees and Beth gifted stock, there was no evidence that the dividends paid were

“gifts.” In other words, the trial court failed to recognize the distinction between stock and

dividends. The court correctly found that that the appellants’ “reasonable expectations” were

that they would receive “gift distributions of shares while employed at RCDC.” CP at 265. But

as the owners of the gifted stock, the dividends the appellants received were not “gifts”; they

were the appellants’ share of the company profits.

Regarding the implied agreement to pay dividends to the appellants during their period of

employment that the trial court found in conclusion of law 4, Rees, Scott, and Mardie all testified

that the appellants were gifted RCDC shares to incentivize them to continue working for RCDC.

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No. 53991-8-II

But the gift of shares is a different issue than distribution of dividends. The appellants are not

claiming that Rees should have continued to gift them shares after they left the company. They

are claiming that they were entitled to dividends on the gifted shares that they already owned.

Further, there was no evidence that supported the finding that there was an implied agreement to

distribute dividends to appellants only while they were working for RCDC. Again, the

appellants certainly expected that they no longer would receive gifts of stock if RCDC did not

employ them. But entitlement to dividends is a different issue.

We hold that the undisputed evidence that Rees paid RCDC’s profits to himself instead of

paying dividends establishes that the appellants proved that Rees engaged in oppressive conduct

against them as minority shareholders. Substantial evidence does not support the trial court’s

findings that lead the court to conclude otherwise.

b. Reasonableness of Decision/Business Judgment

Because the appellants demonstrated oppressive conduct, the burden shifted to Rees to

show “legitimate business justifications for the conduct.” Scott, 148 Wn.2d at 709. In addition,

Rees could avoid liability under the business judgment rule by showing that the dividend

decision was reasonable and made in good faith. Id. We hold that the trial court erred in

concluding that Rees established a reasonable, good faith reason for dramatically increasing his

salary in lieu of payment of dividends.

The trial court concluded that Rees’s decision to increase his salary in lieu of distributing

dividends was reasonable and made in good faith. Specifically, the court made the following

conclusions of law: (1) “[n]ot distributing gifts of dividends was a reasonable and honest

exercise of the directors’ judgment,” CP at 264; (2) the decision not to distribute dividends “was

made in good faith and was reasonable,” CP at 264; and (3) “Defendant Rees’ actions were

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business judgments. He provided reasonable explanations for his conduct which were not

oppressive,” CP at 265.

The only findings of fact that provided support for these conclusions were the three

discussed above: finding of fact 20 and the findings of fact incorporated in conclusions of law 3

and 4. The trial court concluded that Rees’s decision to pay himself a dramatically increased

salary in lieu of paying dividends was reasonable because he had taken on extra responsibilities

and that dividends were gifts to the minority shareholders to which they were entitled only while

they worked for RCDC. However, as discussed above, finding of fact 20 does not justify

increasing Rees’s salary by $700,000 to $1 million. The court concluded that the decision not to

distribute dividends was reasonable because dividends were merely gifts that would be paid only

while the appellants were working for RCDC. However, as discussed above, substantial

evidence does not support the findings in conclusions of law 3 and 4.

Significantly, Rees did not explain why there was a business reason for not paying

dividends and how his dividend decision benefitted RCDC. Instead, he admitted that the only

reason he discontinued paying dividends was because the appellants no longer worked for

RCDC. He was using the payment of dividends to reward the appellants while they worked for

RCDC and to not reward them when they did not. But that is not a legitimate, good faith

business reason for discontinuing the distribution of dividends while simultaneously increasing

his own salary. Dividends are not “bonuses” to be distributed for good performance. They are a

way that the existing shareholders share in a company’s profits.

Rees also testified that “the majority shareholders of any corporation in the United States

can declare dividends or not declare dividends.” RP (June 19, 2019) at 67-68. Rees may be

correct that no law requires a company to make dividend distributions and that whether to

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distribute dividends generally is within a corporation’s business judgment. See 1 F. HODGE

O’NEAL & ROBERT B. THOMPSON, OPPRESSION OF MINORITY SHAREHOLDERS AND LLC

MEMBERS § 3:5 (rev. 2d ed. 2011). However, there is a well-established principle that majority

shareholders owe a duty of good faith to minority shareholders, Hay, 32 Wn.2d at 897, and Rees

is incorrect that a majority shareholder simply can stop paying dividends without a valid business

justification.3

We hold that substantial evidence does not support the trial court’s findings and therefore

that those findings do not support the court’s conclusions that Rees’s decision to discontinue the

distribution of dividends was reasonable. Instead, we hold that the undisputed evidence

establishes as a matter of law that Rees’s justification for paying RCDC’s profits to himself

instead of paying dividends – because the appellants no longer worked for RCDC – was not a

legitimate business reason.

c. Summary

We hold that substantial evidence does not support the trial court’s findings of fact and

conclusions of law regarding the appellants’ minority shareholder oppression claim, and

therefore that the trial court erred in dismissing that claim. We also hold as a matter of law that

the appellants established their minority shareholder oppression claim.

There are a number of possible remedies for minority shareholder oppression, including

the award of damages. Scott, 148 Wn.2d at 717-18. We remand for the trial court to determine

the appropriate remedy.

3
The appellants also argue that the testimony of RCDC’s bookkeeper demonstrates that Rees
acted in bad faith when he stopped making dividend distributions. However, Rees disputed that
testimony, and the trial court’s findings indicate that the court did not accept the bookkeeper’s
testimony on this issue.

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CONCLUSION

We reverse in part and affirm in part the trial court’s judgment dismissing the appellants’

claims, and we remand for the trial court to determine the appropriate relief for the appellants’

minority shareholder oppression claim.

A majority of the panel having determined that only the foregoing portion of this opinion

will be printed in the Washington Appellate Reports and that the remainder shall be filed for

public record in accordance with RCW 2.06.040, it is so ordered.

In the unpublished potion of this opinion, we hold that (1) Rees’s salary was not

excessive, and therefore Rees did not breach his fiduciary duty to RCDC; (2) the $3 million Rees

received from RCDC was a loan and not a distribution of profits, and therefore Rees did not

breach his fiduciary duty to RCDC’s shareholders; and (3) Rees’s actions did not constitute

fraud.

ADDITIONAL FACTS

As part of his divorce settlement with Beth, Rees agreed to pay $3 million to purchase

Beth’s ownership interest in RCDC. In order to make the payment to Beth, Rees obtained

approximately $3 million from RCDC, which was funded through a bank loan and existing

RCDC cash reserves.

RCDC’s bookkeeper, Jennifer Pomeroy, was responsible for handling RCDC’s financial

accounts. After the divorce settled, Rees instructed Pomeroy to record the transfer of money to

Beth on RCDC’s books as a note receivable from Rees. Pomeroy took notes at the meeting and

recorded that she was supposed to create an amortization schedule to record interest and that the

payments made to Beth should be booked as a loan to Rees. However, Pomeroy recorded the

payments to Rees as “Owner Draws – Beth.” Ex. 117.

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In October 2016, Rees scheduled a special shareholders meeting to discuss the 2015

transfer of $3 million from RCDC to Rees. The appellants received timely notice of the special

meeting and the topic of the meeting, but did not attend. At the meeting, it was agreed that the

RCDC funds transferred to Rees in 2015 were supposed to have been documented as a loan. It

also was agreed that the loan was to be memorialized in a promissory note payable to RCDC and

executed by Rees. The promissory note was backdated to an effective date of December 31,

2015. Rees subsequently made all payments due under the loan.

Shelley Drury, a certified public accountant specializing in business valuation and

forensic accounting, testified as the appellants’ expert. Robert Ryan, a certified public

accountant who worked with RCDC, testified as Rees’s expert.

The trial court made the following conclusions of law:

5. Defendant Rees’ salary was not excessive but was reasonable and comparable
to prior years when viewed as a whole given his role in RCDC and RCDC’s
success; his different job roles, job functions and increased work hours once the
four family members left the company.
....

7. Defendant Rees is authorized to pay himself a reasonable salary and the salary
payment from 2015 to the present for Defendant Rees were reasonable for a
President/CEO and were not excessive.
....

9. Plaintiffs, minority shareholders failed to prove fraud by clear, cogent and
convincing evidence that Defendant Rees deceived them or that he did anything
that was procedurally wrong regarding the distribution of salary, the termination of
distribution of dividends or the corporation loan he received and paid after his
marriage was dissolved.

10. The funds provided to Defendant Rees by RCDC used to pay his ex-wife Beth
Rees was a loan secured by a promissory note. The Plaintiffs had terminated their
employment with the corporation and failed to attend a special meeting after
receiving timely notice. The Loan was not disguised.

CP at 264-65.

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The court also entered conclusions of law that the appellants did not prove their breach of

fiduciary duty and fraud claims. Therefore, the court entered a judgment that dismissed all the

appellants’ claims with prejudice.

ANALYSIS

A. BREACH OF FIDUCIARY DUTY CLAIM

The appellants argue that Rees breached his fiduciary duty to RCDC and to company

shareholders when he (1) paid himself an excessive salary rather than making dividend

distributions and (2) received a $3 million distribution from RCDC that he later characterized as

a loan. They claim that Rees violated his duty to RCDC because he jeopardized the company’s S

corporation status, caused the company to pay extra payroll taxes, and decreased the company’s

value. We disagree.

1. Legal Principles

RCW 23B.08.300(1) requires corporate directors to discharge their duties to the

corporation “(a) In good faith; (b) With the care an ordinarily prudent person in a like position

would exercise under similar circumstances; and (c) In a manner the director reasonably believes

to be in the best interests of the corporation.” Similarly, corporate directors and officers owe a

fiduciary duty of good faith and loyalty to their corporations. See Interlake Porsche & Audi, 45

Wn. App. at 508.

Shareholders also owe a fiduciary duty to the corporation and to other shareholders. See

McCormick, 140 Wn. App. at 894-95. The scope of this fiduciary duty owed to the corporation

has not been well-defined in case law “beyond the common sense prohibition against retaining

personal profit owing to the corporation.” Id. However, as noted above, it is a recognized

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principle that majority shareholders “must, at all times, exercise good faith toward the minority

stockholders.” Hay, 32 Wn.2d at 897.

To prevail in a breach of fiduciary duty action, the plaintiff must establish that a

shareholder breached his fiduciary duty and that the breach was a proximate cause of sustained

losses. McCormick, 140 Wn. App. at 894. Whether a party has breached a fiduciary duty is a

question of law. Lodis v. Corbis Holdings, Inc., 172 Wn. App. 835, 857, 292 P.3d 779 (2013).

2. Reasonableness of Rees’s Post-2015 Salary

The appellants’ primary argument regarding breach of fiduciary duty to RCDC is that the

salaries RCDC paid to Rees were excessive, which constituted a breach of fiduciary duty

because it threatened the company’s S corporation status. They point out that under federal law,

an S corporation can have only one class of stock, and that disguising a dividend distribution to

one shareholder as salary violates this rule.

However, this argument depends on a finding that Rees’s annual salaries after 2014 in

fact were excessive. Therefore, the question is whether Rees’s salaries were reasonable.

Significantly, this is a different issue than the one addressed in the published portion of this

opinion – whether recharacterizing Rees’s total compensation as salary instead of dividend

distributions constitutes minority shareholder oppression.

a. S Corporation Background

The appellants’ breach of fiduciary duty claim relies on their allegation that Rees’

decision to pay an increased salary in lieu of distributing dividends threatened RCDC’s S

corporation status.

An S corporation is a small domestic business corporation with less than 100

shareholders and only has one class of stock. 26 U.S.C. § 1361(a), (b)(1)(A). As a pass-through

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entity, S corporations do not pay federal income taxes at the corporate level. 26 U.S.C. §

1363(a); see also Palomarez v. Wilcox, 15 Wn. App. 2d 187, 191, 475 P.3d 512 (2020). Instead,

each shareholder reports the S corporation’s taxable income or loss on their individual tax returns

and pays taxes that are proportional to their individual percentage ownership interest. 26 U.S.C.

§ 1366(a)(1).

If an S corporation has more than one class of stock, it risks losing its status as an S

corporation with the Internal Revenue Service. See 26 U.S.C. § 1361(b)(1)(D); 26 C.F.R. §

1.1361-1(l)(1). A corporation only has one class of stock when “all outstanding shares of stock

of the corporation confer identical rights to distribution and liquidation proceeds.” 26 C.F.R. §

1.1361-1(l)(1). Whether a stock confers the same rights to all shareholders depends on “the

corporate charter, articles of incorporation, bylaws, applicable state law, and binding agreements

relating to distribution and liquidation proceeds.” 26 C.F.R. § 1.1361-1(l)(2)(i).

b. Findings of Fact

The trial court made several factual findings relevant to the reasonableness of Rees’s

salary after 2014. First, the court found in findings of fact 6, 7, 8, and 12 that all the appellants

had stopped working at RCDC by January 2015 and that they had no further involvement with

the company since then. The appellants argue that substantial evidence does not support the

finding that they had no further involvement with the company.

However, the appellants do not provide any citations to the record or any substantive

analysis explaining why substantial evidence does not support these findings. And in fact, Rees

testified that he “was completely in charge of the company, and the entire family had abandoned

the operation.” RP (June 18, 2019) at 40. This statement is corroborated by testimony from

Scott and Pomeroy that Scott did not perform any services for RCDC after he left the company

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in December 2014. Finally, there is no evidence that suggests that Mardie and Jeremy continued

to provide any support after January 2015. We conclude that substantial evidence supports

findings of fact 6, 7, 8, and 12.

Second, the trial court found in finding of fact 17 that (1) total shareholder/officer

compensation was $1,166,987 in 2013 and $1,306,257 in 2014, which consisted of annual

salaries of $190,000 and dividend distributions; and (2) total shareholder/officer compensation in

2015 was $1,213,618, which consisted of all salary and no dividends. The appellants do not

challenge these findings, asserting only that the $190,000 was not Rees’s salary alone.

Therefore, they are verities on appeal. Columbia State Bank, 199 Wn. App. at 319.

Third, the trial court found in conclusion of law 5 that “Defendant Rees’ salary was not

excessive but was reasonable and comparable to prior years when viewed as a whole given his

role in RCDC and RCDC’s success; his different job roles, job functions and increased work

hours once the four family members left the company.” CP at 264. Similarly, the court found in

conclusion of law 7 that “the salary payment from 2015 to the present for Defendant Rees were

reasonable for a President/CEO and were not excessive.” CP at 264. These conclusions are

factual findings, which we analyze as findings of fact. Allen, 6 Wn. App. 2d at 365. The

appellants also treat conclusion of law 5 as a finding of fact, arguing that substantial evidence

does not support the conclusion.

The appellants rely on expert testimony from Drury to argue that Rees’s salary was

unreasonable. Drury testified that a reasonable, fair market salary for Rees would be $200,000.

The appellants claim that because only Drury gave an opinion about what a reasonable salary

should be and both Rees and Pomeroy testified that he changed the composition of his total

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compensation by increasing his salary and excluding dividend distributions, substantial evidence

does not support the trial court’s conclusion that Rees’s salary was reasonable.

However, the record shows that Ryan provided testimony that rebutted Drury’s opinion.

Ryan testified that Drury’s fair market value replacement salary was irrelevant here because an

owner’s salary is “based more directly on how much value they bring to the company.” RP

(June 18, 2019) at 75. He also explained why Drury’s methodology was flawed. We do not

reweigh evidence on appeal. Columbia State Bank, 199 Wn. App. at 319.

Further, even Drury also admitted that “owner compensation . . . [is] very much

discretionary when there is a single owner or a majority owner that has control.” RP (June 17,

2019) at 112. And Drury conceded that (1) she only interviewed the appellants and possibly

Pomeroy regarding Rees’s duties at RCDC, (2) she did not analyze the value that Rees brought

to RCDC in terms of revenue generation, and (3) she did not analyze how his efforts and services

performed related to revenue.

In addition, the evidence showed that Rees’s total compensation in 2015 and after was

comparable to the total shareholder/officer compensation before 2015. Total compensation was

$1,166,987 in 2013 and $1,306,257 in 2014. Rees’s 2015 salary of $1,213,618 actually was

lower than his total compensation in 2014, and his salary was less than $1 million in subsequent

years. Only the characterization of the compensation changed from salary plus dividends to

salary only. In fact, the appellants do not challenge Rees’s total compensation, only the

characterization.

The trial court found that “when viewed as whole” Rees’s salary after 2014 was

reasonable, not excessive. CP at 264. We conclude that with regard to Rees’s total

compensation, substantial evidence supports this finding.

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c. Other Arguments

In addition to their S corporation arguments, the appellants also argue that Rees’s

increased salary caused harm to RCDC and its shareholders based on Drury’s testimony that (1)

RCDC incurred greater payroll taxes and (2) the increased salary potentially diminished the

value of RCDC. These arguments technically could apply even if Rees’s salary was not

excessive for purposes of S corporation law.

But Ryan testified that RCDC was not paying more in payroll taxes, and that Rees’s

increased salary did not lower RCDC’s value. The trial court did not make any findings

regarding the credibility of these two witnesses, but the court apparently accepted Ryan’s

testimony. We do not reweigh evidence on appeal. Columbia State Bank, 199 Wn. App. at 319.

d. Conclusions of Law

The trial court entered a conclusion of law that “Rees did not breach his fiduciary duty to

the corporation.” CP at 264. The court also entered a conclusion of law that the appellants failed

to prove their breach of fiduciary duty claim.

With regard to the breach of fiduciary duty, the appellants’ claim depends on a finding

that Rees’s salaries after 2014 were excessive. As discussed above, we conclude that substantial

evidence supports the trial court’s findings that Rees’s salaries were reasonable and not

excessive. In addition, there is evidence to support the conclusion that Rees’s salaries did not

cause any other damage to the company. Therefore, we conclude that to the extent that the

breach of fiduciary duty claim is based on the size of Rees’s salary, the court’s findings support

the conclusion that Rees is not liable for breach of fiduciary duty to RCDC.

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3. $3 Million Rees Received from RCDC

The appellants argue that Rees breached his fiduciary duty to RCDC’s shareholders by

receiving a $3 million distribution of profits from RCDC and then later attempting to

characterize it as a loan. We disagree.

The trial court made the following findings of fact:

15. Plaintiffs received timely notice of A Special Meeting that was scheduled for
October 14, 2016. Plaintiffs failed to attend the meeting.

16. On October 14, 2016 at the Special Meeting it was discussed and agreed that
the RCDC funds given to Defendant Rees were supposed to have been documented
as a loan to Defendant Rees. It was agreed that the loan was to be memorialized in
a promissory note payable to RCDC and executed by Defendant Rees. Upon
agreement, the promissory note was backdated to an effective date of December
31, 2015. Defendant Rees subsequently made all payments due under the loan.

CP at 263.

In conclusion of law 10, the trial court made a finding that “[t]he funds provided to

Defendant Rees by RCDC used to pay his ex-wife Beth Rees was a loan secured by a promissory

note. . . . The Loan was not disguised.” CP at 265. This conclusion is a factual finding, which

we analyze as a finding of fact. Allen, 6 Wn. App. 2d at 365.

Regarding finding of fact 15, the evidence was undisputed that the appellants received

notice of the meeting and did not attend. The appellants claim that the trial court failed to

acknowledge that they could not attend the meeting because of their personal work schedule and

that their presence would have been futile. But the appellants do not explain why this

information is relevant.

Regarding finding of fact 16 and conclusion of law 10, the appellants challenge the trial

court’s determination that the $3 million Rees received from RCDC was a loan, not a

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distribution.4 They focus on the fact that the 2015 cash advances originally were classified as an

owner draw in RCDC’s accounting records and then reclassified as a loan at the 2016

shareholders’ special meeting with a backdated promissory note.

But Pomeroy’s personal notes from a meeting with Rees that occurred around the time of

the divorce settlement specified that the $3 million Rees received from RCDC was to be

recorded as a loan to Rees. And Pomeroy’s personal understanding was that the transaction

should have been documented as a loan to Rees to be repaid by him. Further, Rees testified

about the meeting with Pomeroy and that his understanding was that the $3 million would be

booked as a loan to himself.

This evidence supports a finding that the $3 million Rees received from RCDC always

was intended to be a loan, and the October 2016 special meeting merely confirmed that fact and

did not constitute an after the fact characterization of the transaction. Therefore, we conclude

that substantial evidence supports finding of fact 16 and conclusion of law 10.

The trial court made a conclusion of law that the appellants failed to prove their breach of

fiduciary duty claim. To the extent that this claim is based on the $3 million Rees received from

RCDC, we conclude that the court’s findings support this conclusion.

B. FRAUD CLAIM

The appellants argue that Rees is liable for fraud because he paid himself an excessive

salary and received an improper $3 million distribution from RCDC. Specifically, they assert

4
The appellants also argue that the trial court erred in entering finding of fact 16 because
substantial evidence does not support the finding that Rees made all payments under the loan.
But they do not explain why substantial evidence does not support this finding. And Rees
testified that he made all the payments due under the note. Therefore, substantial evidence
supports this specific finding.

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that the trial court erred by applying the elements of common law fraud instead of the broader

standard for corporate fraudulent conduct. We disagree.

As discussed above, we conclude that substantial evidence supports the trial court’s

findings that Rees’s salary was not excessive and that Rees’s $3 million distribution was

properly characterized as a loan. Therefore, regardless of the standard for fraud that is applied,

we conclude that these findings support the trial court’s conclusions of law that the appellants

failed to prove their fraud claim.

CONCLUSION

We reverse in part and affirm in part the trial court’s judgment dismissing the appellants’

claims, and we remand for the trial court to determine the appropriate relief for the appellants’

minority shareholder oppression claim.

MAXA, J.

We concur:

SUTTON, J.

GLASGOW, A.C.J.

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