No. 81-309
IN THE SUPREME COURT OF THE STATE OF MONTANA
1982
MELVIN L. FOX,
Plaintiff and Respondent,
vs.
7L BAR RANCH COMPANY,
a Montana corporation,
Defendant and Appellant.
Appeal from: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone
Honorable Diane G. Barz, Judge presiding.
Counsel of Record:
For Appellant:
Moses Law Firm, Billings, Montana
Stephen C. Moses argued, Billings, Montana
Charles E. Snyder, Billings, Montana
For Respondent:
Overfelt Law Firm, Billings, Montana
Lee Overfelt argued and Sidney P. Kurth argued,
Billings, Montana
Submitted: March 2, 1982
Decided: May 131 1982
I I =
I/ k Clerk
Mr.J u s t i c e John C. Sheehy d e l i v e r e d t h e Opinion o f t h e
Court .
T h i s i s a n a p p e a l from a judgment and o r d e r r e n d e r e d on
May 2 6 , 1981, i n t h e T h i r t e e n t h J u d i c i a l D i s t r i c t , Yellowstone
County. P l a i n t i f f Melvin Fox b r o u g h t t h i s n o n j u r y a c t i o n a s
an i n d i v i d u a l s h a r e h o l d e r t o d i s s o l v e and l i q u i d a t e t h e
d e f e n d a n t f a m i l y Montana c o r p o r a t i o n , 7L Bar Ranch. The
D i s t r i c t Court ordered t h e d i s s o l u t i o n of t h e corporation
and t h e appointment of a r e c e i v e r . T h i s o r d e r was based on
two p r o p o s i t i o n s . F i r s t , t h e s h a r e h o l d e r s i n t h e 7L B a r
Ranch C o r p o r a t i o n had a d e a d l o c k i n v o t i n g power and had
f a i l e d f o r a period of a t l e a s t t h r e e consecutive annual
m e e t i n g s t o e l e c t s u c c e s s o r d i r e c t o r s whose t e r m s had e x p i r e d
o r would have e x p i r e d upon e l e c t i o n of t h e i r s u c c e s s o r s , i n
( ,
v i o l a t i o n of s e c t i o n 35-1-921 (1) a ) (iii) MCA. Secondly,
t h e c o u r t found o p p r e s s i v e c o n d u c t by t h e members o f t h e
board o f d i r e c t o r s toward Melvin Fox i n v i o l a t i o n o f s e c t i o n
35-1-921 (1)( a ) (ii),MCF-. The D i s t r i c t C o u r t o r d e r e d l i q u i d a t i o n
of t h e 7 L B a r t o t a k e p l a c e p u r s u a n t t o s e c t i o n s 35-1-922,
MCA t h r o u g h 35-1-930, MCA. De:fendant a p p e a l s , r a i s i n g t h e
following issues:
1. Whether a motion t o d i s m i s s o r a d i r e c t e d v e r d i c t
s h o u l d have been g r a n t e d b e c a u s e t h e m a t t e r b e f o r e t h e c o u r t
was res j u d i c a t a ?
2. Whether a motion t o d i s m i s s o r a d i r e c t e d v e r d i c t
s h o u l d have been g r a n t e d b e c a u s e t h e p l a i n t i f f a d m i t t e d t o
" u n c l e a n hands?"
3. Whether a motion t o d i s m i s s o r a d i r e c t e d v e r d i c t
s h o u l d have been g r a n t e d b e c a u s e t h e p l a i n t i f f d i d n o t p r o v e
h i s case?
4. Whether t h e D i s t r i c t C o u r t e r r e d i n a d m i t t i n g , o v e r
o b j e c t i o n f o r l a c k of r e l e v a n c y , t h e c o r p o r a t e m i n u t e s and
financial statements of Fox Land & Cattle Co. and Fox
Ranches, Inc., which were not parties to the action and were
not mentioned in the complaint or amended complaint?
5. Whether the court erred by finding "oppression" on
the part of defendant?
6. Whether the court erred by finding that there
existed "shareholder deadlock?"
7. Whether the court erred by ordering dissolution of
defendant corporation?
FACTS
The 7L Bar Ranch Co. was incorporated in 1964 by William
Fox and his two sons, Richard and Melvin. Upon William's
death, and the subsequent probate distribution of his estate,
the shareholders in the 7L Bar Ranch were:
Melvin Fox 1,500 shares
Richard Fox 1,499 shares
Lydia Fox (Richard and Melvin's
mother) 1 share
They are also the directors and officers of this corporation
which owns 17,600 a.cres of land--1,400 acres of it farmland,
with the rest used for grazing. The farmland is worked by a
tenant farmer on a sharecrop basis.
Melvin Fox is also a shareholder and director of a second
family corporation, Fox Land and Cattle Co. The shareholder
breakdown in that corporation is:
- - -Land
Fox & Cattle Co. Treasury Stock 144 shares
Richard Fox 678.5 shares
Melvin Fox 678.5 shares
Lydia Fox 2 shares
Sharon (Fox) Wolfe 600 shares
(Richard and Melvin's sister)
Marital deduction trust 925 shares
(Principle beneficiary is Lydia)
This corporation began in 1960, and is involved in the
cattle and real estate business. Richard, Melvin, and
Sharon are the directors and officers, with Richard the
general manager.
A khird related corporation is Fox Ranches, Inc.,
started in 1958. It owns a 14,463 acre cattle ranch near
Two Dot. Its directors and officers are the same as the 7L
Bar, their shares apportioned thusly:
Fox Ranches, Inc, ~ y d i a
P
Fox 120 shares
Melvin Fox 1,717.5 shares
Richard Fox (General
Manager) 1,760.5 shares
Melvin managed the ranch in Two Dot for about five
years until 1972, when he moved to Denver because of disputes
with his father. After his father's death in 1974, he
returned to Montana to be co-personal representative of the
estate with Richard. Difficulties that had long been brewing
within the family developed further until both personal repre-
sentatives were eventually removed. The present controversy
stems from an apparent deep-seated animosity and its effect
on the interlocking nature of the family corporations.
In 1967, the assets of the three corporations were combined
in support of common loans. Fox Land and Cattle serves as
the financing agent for the other two corporations. All
income from the 7L Bar goes into Fox Land and Cattle's
account, while 7L Bar maintains about a $430 balance. Fox
Land and Cattle is the sole user of 7L Bar's grazing land,
the leasing value of which has been appraised at $48,000.
The actual annual amounts paid have ranged from $7,848 to
$14,400.
Accordingly, Melvin claims that the 7L Bar is a "captive
corporation." The cash flow of the corporation in which he
has a 50 percent interest is controlled by one in which he
has a 25 percent interest.
-4-
Since its inception the 7L Bar has not declared any
dividends. Melvin has never received dividends or remuneration
of any kind from the 7L Bar, nor have any of the other
stockholders. He has, however, borrowed from the corporations.
He has never received dividends or remuneration of any kind
from the other two corporations, though both show retained
earnings of over $400,000, and Fox Land and Cattle has cash
assets that exceed $400,000.
Melvin brought this claim because he had pledged all
his stock in the three corporations for $241,500 in loans to
support various business activities. The bank threatens to
call its loans because the stock has no real value for
loan purposes. Richard has told the bank that he would
purchase the stock in the event of a foreclosure of Melvin's
loan,
The District Court found that the conduct of the share-
holders of 7L Bar, namely Richard and Lydia, revealed calculated
and planned oppressive conduct designed to deprive Melvin of
his rightful portion of the corporate holdings and profits
by making sure he had no access to them. Further, the
District Court found that the actions of the directors
have not been in the best interests of Melvin effectively
depriving him of any voice in its management.
RES JUDICATA
This issue arises from a ruling made by the District
Court during the probate of the William Fox estate. Melvin,
as legatee, moved to have the corporations liquidated and
distributed in cash or assets. The court denied his motion
and ordered distribution to be made "in kind."
The probate court determination, it is argued, bars
Melvin from obtaining a corporate dissolution or liquidation
in this case. The criteria to be used in determining
whether an action is barred by - judicata are set out in
res
S-W Co. v. John Wight, Inc. (1978), 179 Mont. 392, 405, 587
P.2d 348, 355, quoting from Smith v. County of Musselshell
(1970), 155 Mont. 376, 378, 472 P.2d 878, 880:
". .
. These criteria are: (1) the parties or
their privies must be the same; (2) the subject-
matter of the action must be the same; (3) the
issues must be the same, and must relate to the
same subject-matter; and, (4) the capacities
of the persons must be the same in reference to
the subject-matter and to the issues between them."
Regardless of Melvin's motives for seeking a liquidation
during probate, the court's ruling there did not make the
matter res judicata for the purposes of this action.
Of the four criteria set out above, an important one is
the identity of issues. Harris v. Harris (1980), - Mont .
, 616 P.2d 1099, 1101, 37 St.Rep. 1696, 1699. In Brannon
v, Lewis and Clark County (19631, 143 Mont. 2001 2071 387
P-2d 706, 710-11, this Court approved the following language
from Phoenix Mut. Life Ins. Co. v. Brainard (1928), 82 Mont.
39, 44, 265 P. 10, 12: "Unless it clearly appears that the
precise question involved in the second case was raised and
determined in the former, the judgment is no bar to the
second action."
Here, the question involved is whether, pursuant to
statute, the corporation should be liquidated because of
oppression and shareholder deadlock. That precise question
was neither raised nor determined during probate proceedings.
There, the court's decree of distribution, over Melvin's
objection, was essentially an interpretation of the will.
It is no bar to this action.
Furthermore, we are not convinced in this case by
appellant's argument that judgment in the first of two suits
involving the same claim, demand, or cause of action bars
not only all matters actually determined, but also every other
matter which might have been litigated and decided as incident
to or essentially connected therewith as a claim or defense.
Western Baptist Home Mission Board v. Griggs (Ore. 1967),
433 P.2d 252, 254-55. See also State v. District Court
(1925), 75 Mont. 122, 127, 242 P. 421, 423.
Under section 26- 3-102, YCA:
"That only is deemed to have been adjudged in a
former judgment which appears upon its face to
have been so adjudged or which was actually and
necessarily included therein or thereto."
In this case, oppression and shareholder deadlock were
not matters which the probate court adjudicated. In fact,
it would have been impossible for those issues to have been
considered at that time. The rule concerning matters which
"might have been litigated," "does not mean that matters
that could not, in any state of case, have been determined
in the first action will nevertheless be treated as having
been determined by the judgment of that action." Phillips
v. Big Sandy Co. (Ky. 1912), 149 S.W. 957, 959. Where two
causes, although seeking the same relief, rest upon a different
state of facts, the adjudication in the one constitutes no
bar to a recovery in the other. County of Mobile v. Kirnball
(1881), 102 U.S. 691, 705, 26 L.Ed. 238, 242. See also
Roberts v. Roberts (9th Cir. 1961), 286 F.2d 647, 651;
Hustad v. Reed (1958), 133 Mont. 211, 224-25, 321 P.2d 1083,
1091; Hays v. Sturgill (Ky. 1946), 193 S.W.2d 648.
The issues regarding "unclean hands" and proof of the
case raise considerations that do not lend themselves to
individual analysis. We deal with them as they apply in the
remainder of this opinion.
RELEVANCE - DOCUMENTS
OF
Appellant contends that the corporate minutes and
financial statements of the other two family corporations
should not have been admitted into evidence. We disagree.
"Rule 401. Definition of relevant evidence.
Relevant evidence meansevidence having any
tendency to make the existence of any fact that
is of consequence to the determination of the
action more probable or less probable than it
would be without the evidence. Relevant evidence
may include evidence bearing upon the credibility
of a witness or hearsay declarant." M.R.Evid.
Here, it is of consequence to the issue of oppression
to examine the documents in question. Considering the
interrelationship of the three corporations, both in membership
and in business dealings, it is difficult to imagine how
they could be understood as independent entities. As we
have noted, Fox Land and Cattle is the exclusive lessee of
7L Bar's grazing land, as well as its financing agent. If
any claim of intercorporate manipulation resulting in oppression
is to be established, and it was argued extensively in the
lower court, then the records of all the corporations involved
must necessarily be admitted. Those records reflect a history
of joint operations. They are relevant and all relevant
evidence is admissible, unless excepted by the constitution,
statute or rules of court. Rule 402, M.R.Evid.
OPPRESSION
This action was brought pursuant to section 35-1-921,
MCA which provides in pertinent part:
"Power of court - liquidate assets and business
to
- corporation
of - venue. (1) The district courts
shall have full power to liquidate the assets and
business of a corporation: '(a) in an action by
a shareholder when it is established that:'
"(ii) the acts of the directors or those in control
of the corporation are illegal, oppressive, or
fraudulent . . ." (Emphasis added.)
It is derived from section 90 of the ABA Model Business
Corporation Act. The ABA Comments, quoted in the Annotations
to section 35-1-921, Vol. 4, state:
"When there is a statutory grant of such a
power there are still two factors with which
one seeking dissolution must contend: (1)
Courts have tended to construe the statutes
as discretionary rather than mandatory, even
though the language of the particular statute may
appear to make if mandatory. (2) Courts have
tended to look beyond the language of the statute
and into the equities of the situation."
This Court construed the statute recently in Skierka v.
Skierka Bros., Inc. (1981), Mont . - 629 P.2d 214, 38
,
St.Rep. 754, stating that '"Olppression may be more easily
found in a close-held, family corporation than in a larger,
public corporation." 629 P.2d at 221. The reason for such
a rule is obvious. Shares in a closely held corporation are
not offered for public sale. Without readily available
recourse to the market place, a dissatisfied shareholder is
left with severely limited alternatives if one group of
shareholders chooses to exercise leverage and "squeeze" the
dissenter out. See Exadactilos v. Cinnaminson Realty Co.
(N.J. 1979), 400 A.2d 554, 560-61, and authorities cited
therein, Tinney, Oppressive Conduct - Majority Shareholders,
by
Directors, - - - in Control - Corporation," 5 POF2d
or Those of
645, 652 (1975), O'Neal, Oppression - Minority Shareholders,
of
§ 2.15 (1975), O'Neal, Close Corporations (2d ed. 1971).
There are a number of definitions of "oppressive conduct"
found in case law. In Application of Topper (1980), 433
N.Y.S.2d 359, 363-366, it is stated that "to a great extent,
a definition of 'oppressive' depends on the special nature
of close corporations" as understood by the statute, relevant
commentators, and case law. Topper, supra, at 364.
Many courts hold that "the term oppression suggests
harsh, dishonest or wrongful conduct and a visible departure
from the standards of fairdealing which inure to the benefit
of majority and to the detriment of the minority." Jackson
v. St. Regis Apartments, Inc. (Mo.App. 1978), 565 S.W.2d
178, 183.
Some courts find it helpful to analyze the situation in
terms of the "fiduciary duty" of good faith and fair dealing
owed by majority shareholders to the minority. Fix v. Fix
Material Co., Inc. (Mo.App. 1976), 538 S.W.2d 351, 358;
Baker v. Commercial Body Builders, Inc. (Ore. 1973), 507
Topper, supra, at 365, states that "[Bloth O'Neal and
other commentators have developed a definition for oppression
in terms of 'the reasonable expectations of the minority
shareholders in light of the particular circumstances of
each case.' (33 Business Lawyer 873, 886; see, 55 Virginia
Law Review 1043, 1064 [I9691) ."
Generally, it is agreed that "courts will proceed on a
case-by-case basis." Skierka, supra, 629 P.2d at 221;
Jackson, supra, 565 S.W.2d at 183; - supra, 538 S.W.2d at
Fix,
358. Because of the special circumstances underlying closely
held corporations, courts must determine the expectations of
the shareholders concerning their respective roles in corporate
affairs. These expectations must be gleaned from the evidence
presented. Exadactilos, supra, 400 A.2d at 561. That is
the province of the District Court, which found here:
"That the conduct of the shareholders of 7L Bar;
namely Richard Fox and Lydia Fox, reveal calculated
and planned oppressive conduct designed to deprive
Melvin Fox of his rightful portion of the corporate
holdings and profits by making sure Melvin has no
access to them. (Finding of Fact No. 44.)
"That the actions of the directors, Lydia Fox and
Richard Fox, have not been in the best interests of
the owner of half the shares of the 7L Bar, Melvin
Fox. The animosity between Melvin Fox and other
members of his family holding stock in the three
corporations dates back to 1972 when Melvin Fox left
the family business to pursue other business endeavors.
(Finding of Fact No. 45.)
"That Melvin Fox has been effectively deprived
of any voice in management of the 7L Bar."
(Finding of Fact No. 46.)
These findings, supported by the evidence, constitute a
violation of Melvin's reasonable expectations as a share-
holder. The interrelationship of the three corporations,
with Fox Land and Cattle Company acting as financing agent
for the other two, allows Richard Fox in particular to
control "whether or not any other corporation in which
Melvin Fox holds stock can make a profit." (Finding of Fact
No. 34,) This power is especially pronounced in the 7L Bar,
where Melvin owns 50 percent of the stock, but has yet to
realize any monetary remuneration.
The 7L Bar is comprised principally of grazing land, of
which Fox Land and Cattle Company has been the sole user since
1964. The reasonable value of the rental per year is approx-
imately $50,000. (Finding of Fact No. 22. ) Because of the
policies of the majority of the board of directors of 7L Bar
(Richard and Lydia Fox), rentals since 1977 have been:
(Finding of Fact No. 27.)
Such a policy violates the duty of good faith and fair
dealing owed to Melvin as 50 percent owner of 7L Bar, and is
demonstrably contrary to his reasonable expectations in that
"after the death of William FOX, Melvin Fox requested that
the grazing land be rented to a third party at its actual
value." (Finding of Fact No. 19.)
Furthermore, no dividends have ever been declared by
any of the corporations. OINeal, in Oppression - Minority
of
Shareholders, S 3.04, p. 62 (1975) states that "[Iln close
corporations, dividend withholding is often applied when a
minority shareholder is in financial straits and is highly
dependent upon income from dividends." In footnote 1 to
that section, he states:
"Although dividend withholding is used as a
squeezeout technique and is used in corporations
of all sizes, this technique (indeed practically
all squeeze techniques) is applied most frequently
in close corporations '. .Most of the abuses
in the field of dividend policy have occurred
among the smaller corporations, especially in
cases where there is concentrated control in a
single family.' Graham, Controlling Versus
Outside Stockholders, 4 Va L Weekly Dicta Comp
111, 114 (1952-1953)."
Footnote 5 goes on to say that "[iln timing squeeze-out
attempts the majority benefits from the fact that in a close
corporation, everyone usually knows everyone else's business,
especially their financial circumstances."
It can be said here that the corporations are in a
position to declare dividends, that the refusal to do so
acts as a hardship on Melvin, and when considered in light
of all other circumstances, that such refusal strengthens
Melvin's argument that he is being squeezed. This, is a
case where the cumulative effects of many acts and incidents
constitute sufficient evidence of oppressive conduct to
compel liquidation without a showing of inevitable ruin.
- supra at 358; Central Standard Life Insurance Company
Fix,
v. Davis (Ill. 1957), 141 N.E.2d 45, 50.
Additionally,
". .
. the logic which supports judicial reluctance
to interfere with dividend policies in large
corporations does not apply to close corporations.
Management in large corporations has no incentive
to deny adequate dividends, for such a policy would
result in lowered stock prices and the danger
of a proxy fight or a takeover. However, in
close corporations the dividend policy often
reflects the personal financial needs of the
controlling shareholders, and no market exists
to reflect the dissatisfaction of other share-
holders with this policy. When it is also
considered that in close corporations dividend
withholding may be used by controlling share-
holders to force out minority shareholders,
the traditional judicial restraint in interfering
with corporate dividend policy cannot be justified.
'In fact, it would not be too extreme to put the
burden of proving the propriety of its dividend
policy on the controlling shareholders.' Manne,
Our Two Corporation Systems: Law and Economics,
53 Va L Rev 259, 280 (1967)." Quoted in O'Neal,
supra, 5 3.05, footnote 2, at 71-72.
Perhaps the most persuasive consideration in favor of
dissolution here is that "[Ilt is being increasingly realized
that the relationship between the stockholders in a close
corporation vis-a-vis each other in practice closely approximates
the relationship between partners." Topper, supra at 364,
Weiss v. Gordon (1969), 301 N.Y.S.2d 839. See also Application
of Pivot Punch & Die Corporation (1959), 182 N.Y.S.2d 459,
Again, OrNeal is instructive. Oppression of Minority
Shareholders,
"See Illinois Rockford Corp. v. Kulp, 41 I112d
215, 222, 242 NE2d 228, 233 (1968); Tilley v.
Shippee, 12 I112d 616, 623-624, 147 NE2d 347,
351-352 (1958). The enterprise before us is a
'close corporation' in the strictest sense, that
is, one in which, regardless of the distribution
of the shareholdings, 'management and ownership
are substantially identical' ...In such a
case, it seems almost self-evident, the fiduciary
obligation of the majority to the minority extends
considerably beyond what would be its reach in the
context of a larger or less closely held enterprise.
Here the relationship between the shareholders is
very much akin to that which exists between partners
or joint venturers."
DEADLOCK
The statutory basis for this claim is also section 35-
1-921, MCA, specifically that portion which provides for
liquidation when it is established that:
". . . (iii) the shareholders are deadlocked in
voting power and have failed for a period which
includes at least two consecutive annual meeting
dates to elect successors to directors whose
terms have expired or would have expired upon
the election of their successors. ." .
It is well settled that, in addition to the bare statutory
requirements, there is a further burden of proving equitable
grounds for dissolution. Jackson v. Nicolai-Neppach Co.
(Ore. 1959), 348 P.2d 9, 21, ABA Comments, supra. Here,
there is substantial evidence to support the District Court's
finding of the requisite deadlock. That much is not seriously
in doubt.
As for equitable grounds, we find considerable guidance
in the recent decision of the Washington Supreme Court in
Henry George & Sons v. Cooper-George, Inc. (Wash. 1981), 632
P.2d 512. In its initial interpretation of a statute identical
to ours, that Court concluded that:
.
". . once the requisite showing of the jurisdic-
tional requirements are met, the trial court, in
its discretion, shall determine whether there
exist equitable grounds for ordering dissolution
of the corporation. In so ruling, the trial court
should consider the seriousness of the deadlock
and whether the corporation is able to conduct
business profitably despite the deadlock. Moreover,
the trial court should consider whether such a
dissolution will be beneficial or detrimental to
all the shareholders, or injurious to the public.
For example, the court may consider such factors
as the length of time the company has been in
business, the stated purpose of the business, the
original incorporators, whether one shareholder has
shown a clear design to take over the business and
is in a financial posture to do so to the detriment
of other shareholders who may be injured financially
by tax consequences, what the market for sale and
purchase is at the instant time, whether the share-
holders are in a relatively equal bargaining position,
and whether it is in the best interests of all
the shareholders to leave them to find their own
solutions by one party buying out the others in
a fair market value situation rather than by a
forced sale. The determination by the trial court
will not be disturbed by an appellate court except
in clear instances of abuse of discretion." 632
P.2d at 517.
We find no such abuse of discretion here. In addition
to the jurisdictional requirements of deadlock, there was
also proof of oppression, itself an independent statutory
ground for dissolution. When we consider the necessary
overlapping of these issues, together with the importance of
equitable considerations in a case-by-case analysis, a
summary discussion of the equities in this case seems appropriate.
Much is made of Melvin's "unclean hands." By his own
admission, he intentionally created the voting deadlock in
order to effect a dissolution. As we have stated, technical
satisfaction of the deadlock requirements is not enough to
warrant dissolution. Therefore, regardless of Melvin's
motives for seeking a dissolution, dissolution could not be
ordered absent the underlying equitable grounds.
This is a case where control of a set of corporations,
designed to be run by one person, brought to boil an already
bitter family struggle between people with a demonstrated
inability to get along.
After the death of his father, Melvin Fox had a reasonable
expectation of sharing in his inheritance. That is what he
was banking on when he took out the loans. In this particular
case, a division of the 7L Bar would neither disrupt the
business of a going concern nor do any injury to the public.
On the other hand, to disallow a division would greatly
harm Melvin Fox by making him the victim of corporate
formalities. There is no alternative adequate remedy. As
this Court stated in Skierka, supra, oppression may be
more easily found in a close-held, family corporation. 629
P.2d at 221. That opinion at 222 went on to quote from
Thisted v. Tower Management Corporation (1966), 147 Mont. 1,
15, 409 P.2d 813, 821 that "[Rlelief will be granted when,
in view of all the circumstances, to deny it would permit
one of the parties to suffer a gross wrong at the hands of
the other party who brought about the condition." The
equities clearly favor the respondent. Affirmed.
Justice
We Concur:
chief- Justice
.- - -.