Whitehorn v. Whitehorn Farms, Inc.

DA 07-0325
October 28 2008
IN THE SUPREME COURT OF THE STATE OF MONTANA

2008 MT 361

BRIAN D. WHITEHORN,

Plaintiff and Appellant,

v.

WHITEHORN FARMS, INC., a Montana corporation;
EARL G. WHITEHORN; and WAYNE A. WHITEHORN,

Defendants and Appellees.
___________________________________________

WHITEHORN FARMS, INC., a Montana corporation;
EARL G. WHITEHORN; and WAYNE A. WHITEHORN,

Counter-Plaintiffs,

v.

BRIAN D. WHITEHORN and UNITY WITH GOD SOCIETY,

Counter-Defendants.

APPEAL FROM: District Court of the Twelfth Judicial District,
In and For the County of Chouteau, Cause No. DV 03-41
Honorable David Rice, Presiding Judge

COUNSEL OF RECORD:

For Appellant:

Ward E. Taleff; Taleff Law Office, Great Falls, Montana

For Appellees:

David G. Dennis; Church, Harris, Johnson & Williams,
Great Falls, Montana

Submitted on Briefs: August 19, 2008
Decided: October 28, 2008

Filed:
__________________________________________
Clerk
Justice Jim Rice delivered the Opinion of the Court.

¶1 This case arises from a dispute between the shareholders of a family farming

corporation, Whitehorn Farms, Inc. Brian Whitehorn (Brian) brought suit in the Twelfth

Judicial District Court, Chouteau County, claiming that he was an oppressed minority

shareholder and that Whitehorn Farms, Inc. should be dissolved or forced to repurchase

his shares in the corporation. Brian named Whitehorn Farms, Inc., Earl Whitehorn, and

Wayne Whitehorn (collectively the “Corporation”) as defendants. Brian’s oppression

claim was based on the Corporation’s termination of him as an employee, officer, and

director. The Corporation answered that its actions did not constitute oppression and

counterclaimed against Brian for conversion of corporate property.

¶2 The District Court, sitting without a jury, denied Brian’s request for relief and

granted the Corporation’s conversion claim. Brian appeals from the court’s denial of his

oppression claim. We affirm.

¶3 We restate the issues on appeal as follows:

¶4 Did the District Court err in holding that Brian Whitehorn was not an oppressed

minority shareholder?

FACTUAL AND PROCEDURAL BACKGROUND

¶5 The farmland owned by Whitehorn Farms, Inc. has been in the Whitehorn family

since Chester Whitehorn homesteaded it in the early 1900’s. Chester’s sons, Stanley,

Wallace, and Wayne Whitehorn, incorporated Whitehorn Farms in the 1960’s. By 2001,

Stanley’s sons, Earl and Brian, had become shareholders, officers, directors, and

employees, and had taken control of most of the farming operations.

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¶6 Brian grew up on the farm, left for college in 1969, returned in 1975, and worked

on the farm until 1980, when he took full-time employment with Columbia Grain in

Great Falls. In 1985, Brian’s employment with Columbia Grain ended and he began B &

E Farms, Inc. with his brother Earl. Brian and Earl were not employees of Whitehorn

Farms during the time they operated B & E Farms. B & E farmed parcels of land that it

leased from third parties and also performed some contract farming for Whitehorn Farms.

Brian and Earl operated B & E farms until 2000, at which time B & E lost its leases. B &

E discontinued its operations in 2000, and merged with Whitehorn Farms in 2002.

¶7 Brian and Earl began working again for Whitehorn Farms in 2001 as employees,

as well as being officers and directors, along with Stanley and Wayne. As employees

they received a modest salary, health insurance, gas, vehicle use, housing, utilities, and

groceries. Additionally, in-kind distributions of grain were occasionally given to the

employees as bonuses. Whitehorn Farms’ main shareholders are Earl, Brian, and Wayne;

together they control over seventy-nine percent of the voting interest. Other family

members hold small or future interests in corporate stock.

¶8 Brian received over fifty-three percent of his shares through gifts between 1989

and 2000. Another twenty-seven percent of his shares were purchased from other

shareholders with the proceeds of two life insurance policies on Wallace Whitehorn. The

Corporation had originally purchased the insurance plans and then transferred them to

Brian with the intent that the proceeds from them be used to purchase shares of

Whitehorn Farms stock. The only shares of stock Brian received after becoming

employed by Whitehorn Farms in 2001 constituted less than five percent of his total

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shares, which he acquired from the merger of B & E Farms into Whitehorn Farms. Brian

became a director of Whitehorn Farms in 1991 and an officer in 2001.

¶9 In the late 1990’s, Brian and his wife, Jacqueline Whitehorn, decided to construct

a residence on land belonging to Whitehorn Farms. Whitehorn Farms deeded a parcel of

land to them for no monetary consideration. In 1999, Brian proposed to transfer

ownership of the residence and the land to Whitehorn Farms if Whitehorn Farms paid

sixty thousand dollars toward Brian’s construction loan on the residence. Whitehorn

Farms agreed and paid the money, but Brian did not deed the property to the Corporation.

At a Whitehorn Farms corporate meeting in 2001, Brian requested that the Corporation

give Jacqueline a number of Whitehorn Farms shares as compensation for her investment

in the residence. Based on Brian’s representation that the residence now belonged to

Whitehorn Farms, the Corporation agreed to give her 200 shares. At the 2002

shareholder meeting, without disclosure from Brian that he had not deeded the property

to the Corporation, the Corporation gave Jacqueline the 200 shares. Moments later, she

announced that the property had not been deeded back to Whitehorn Farms. Immediately

following this startling disclosure, Brian proposed that the house would be transferred to

the Corporation if all of the shares held by Jacqueline were purchased for a specified

amount. Brian and Jacqueline were then in the process of dissolving their marriage. The

Corporation declined. Nine days later, Brian deeded the property to Jacqueline as part of

their marital settlement agreement.

¶10 In September 2002, Brian asked Earl to issue Brian’s salary checks payable to

“Unity with God Society,” a Nevada Corporation Sole which Brian had formed to protect

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his assets from a judgment creditor. After discussing it with the Corporation’s

accountant, Earl denied Brian’s request.

¶11 In late October 2002, the officers of Whitehorn farms met and agreed to pay each

employee an in-kind distribution of 2,500 bushels of grain. Shortly thereafter, Brian

delivered 2,997.93 bushels of grain to Cereal Food Processors, Inc. (CFP). Brian directed

CFP to credit the grain to the account of the “Unity with God Church.” Brian wanted to

sell the grain on a “basis” or futures contract instead of for cash, but was advised that

CFP had a 5,000 bushel minimum for selling on a basis contract. Thus, on November 4,

Brian delivered an additional 2,119.14 bushels to CFP, for a total of 5,117.08 bushels.

The entire amount was credited to the Unity with God Church account. This constituted

2,617.08 bushels in excess of what Brian had been authorized to take as an in-kind

distribution. Further, Brian could have satisfied CFP’s 5,000 bushel minimum by

combining his 2,500 bushel share with the remaining bushels being placed in the name of

the Corporation, but he did not. On December 2, 2002, at Brian’s direction, CFP issued a

check to Unity with God Church for $22,280.47, as payment for all of the bushels Brian

had delivered.

¶12 Customarily, grain scale tickets were provided to Earl within a day or two of the

Corporation’s grain deliveries. However, on this occasion, Brian did not deliver the scale

tickets for a month, despite requests to do so from Earl.

¶13 Sometime in December, Brian left a note for the other officers explaining that the

excess bushels he had taken were a lump-sum, in-kind payment of his salary for

November, December, and first ten months of 2003. He stated his belief that this would

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reduce the Corporation’s FICA taxes. Brian then left on a vacation to several distant

states for several months, knowing that there was disagreement with his actions and

doing nothing to correct or address the problem. In January 2003, Earl discovered that

Brian had opened an unauthorized account in the name of Whitehorn Farms at a business

and had charged a number of personal items to this corporate account.

¶14 Brian did not seek permission to take the extra bushels, either before or after his

deliveries to CFP. Nor was Brian authorized to unilaterally approve and receive a

distribution of grain, change the method of his employment compensation, or change the

timing of his compensation.

¶15 The other officers, directors, and shareholders of the Corporation viewed Brian’s

actions of taking the additional bushels as theft or conversion. They held a special

meeting on February 17, 2003, and removed Brian as a director, officer, and employee of

the Corporation. The special meeting was properly noticed and Brian received notice of

the meeting, but did not attend.

¶16 Brian filed his petition for this action on November 5, 2003. On January 27, 2004,

Whitehorn Farms held its annual shareholder meeting for the 2003 tax year. Brian

attended and actively participated in the meeting. Prior to voting on directors, Brian was

advised of his ability to cumulate his votes and vote for any candidate he chose. Brian

made no effort to nominate or elect himself and instead nominated and moved to re-elect

the current directors.

¶17 After a trial without a jury, the District Court issued its Findings of Fact,

Conclusions of Law and Order on March 30, 2007. The court held that the Corporation

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had acted reasonably in response to Brian’s actions, and that Brian was not an oppressed

minority shareholder. Additionally, the court held Brian liable for conversion of

corporate assets. Brian appeals from the District Court’s holding that he is not an

oppressed minority shareholder.

STANDARD OF REVIEW

¶18 A district court’s findings of fact are reviewed to determine whether the findings

are clearly erroneous. Hidden Hollow Ranch v. Fields, 2004 MT 153, ¶ 21, 321 Mont.

505, ¶ 21, 92 P.3d 1185, ¶ 21. A district court’s findings are clearly erroneous if

substantial credible evidence, does not support them, if the trial court has

misapprehended the effect of the evidence, or if a review of the record leaves this Court

with the definite and firm conviction that a mistake has been committed. Ray v. Nansel,

2002 MT 191, ¶ 19, 311 Mont. 135, ¶ 19, 53 P.3d 870, ¶ 19. We review a district court’s

conclusions of law for correctness. Hidden Hollow, ¶ 21.

DISCUSSION

Did the District Court err in holding that Brian Whitehorn was not an oppressed
minority shareholder?

¶19 On appeal, Brian raises several individual issues, including whether the District

Court erred by disregarding his reasonable expectations as a shareholder to be able to

access the value of his shares, and whether the District Court erred by not considering the

Corporation’s fiduciary duties to Brian as a shareholder, and instead improperly

considered only Brian’s actions. All of the stated issues are closely related to Brian’s

central contention that the District Court erred by ultimately concluding that he is not an

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oppressed minority shareholder. Thus, we will discuss Brian’s sub-issues within the

context of this central issue.

¶20 The Corporation responds that Brian is arguing a new theory of the case on appeal.

It asserts that Brian claimed oppression by way of the Corporation’s termination of his

employment in the District Court, and now argues that he has suffered oppression of

shareholder rights by the Corporation’s failure to buy out his stock interest. It contends

that Brian should be estopped from arguing a new theory on appeal. Alternatively, the

Corporation argues that the District Court did not err and that Brian is not an oppressed

shareholder because the Corporation took reasonable actions to address Brian’s

wrongdoings.

¶21 Taking up the Corporation’s procedural argument first, our rule with regard to

arguments presented for the first time on appeal is well established. “The general rule in

Montana is that this Court will not address either an issue raised for the first time on

appeal or a party’s change in legal theory.” Becker v. Rosebud Operating Servs., Inc.,

2008 MT 285, ¶ 17, 345 Mont. 368, ¶ 17, 191 P.3d 435, ¶ 17 (internal citation and

quotation omitted).

¶22 Brian’s primary argument in the District Court was that he was oppressed by being

terminated as an employee and officer. The District Court held that he had not been

oppressed, and was liable for conversion. Not directly challenging the conversion

holding on appeal, Brian argues that the Corporation nonetheless oppressed him as a

shareholder, even if removing him as an employee, director, and officer was not

oppression. Brian’s argument on appeal could be summed up by his briefing statement

8
that “[h]is reasonable expectations as a shareholder were distinct from those as an

employee, yet the corporation and the district court failed to separate the two.” In

essence, Brian contended in the District Court that the Corporation should buy his shares

from him because of oppression, but his appellate contention is primarily that the lack of

access to his shares constitutes oppression.

¶23 While this altered approach may be, without more, an impermissible change of

argument on appeal, Brian also asserted in his complaint that the Corporation had

oppressed him as a shareholder, and the District Court addressed, albeit briefly, the issue

of shareholder oppression. Consequently, we conclude that Brian’s appellate argument,

while clearly a change in emphasis, is not an entirely new theory, and that excluding

consideration of his arguments would be an unduly harsh application of the rule.

Applicable Law

¶24 The Montana Code Annotated provides that a district court may dissolve a

corporation if “the directors or those in control of the corporation have acted, are acting,

or will act in a manner that is illegal, oppressive, or fraudulent.” Section 35-1-938(2)(b),

MCA (2001) (emphasis added). Additionally, § 35-1-939(1)(d), MCA, provides that the

court has the discretion to grant relief other than dissolution, including an order

“providing for the purchase at fair value of shares of any shareholder, either by the

corporation or by other shareholders.”

¶25 In Fox v. 7L Bar Ranch Co., 198 Mont. 201, 209, 645 P.2d 929, 933 (1982), this

Court discussed shareholder oppression in the context of a family corporation:

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 Oppression may be more easily found in a close-held, family corporation
than in a larger, public corporation. 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.

(Internal citations and quotations omitted.)

¶26 In Fox, we further explained that “[t]here are a number of definitions of

‘oppressive conduct’ found in case law . . . [I]t 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.” Fox, 198 Mont. at 209, 645 P.2d at 933

(internal citations and quotations omitted). We then offered three definitions or

approaches for analyzing oppression: whether there has been “harsh, dishonest or

wrongful conduct and a visible departure from the standards of fair dealing which inure

to the benefit of [the] majority and to the detriment of the minority;” an analysis of “the

‘fiduciary duty’ of good faith and fair dealing owed by majority shareholders to the

minority;” and an assessment of “the reasonable expectations of the minority

shareholders in light of the particular circumstances of each case.” Fox, 198 Mont. at

209-10, 645 P.2d at 933 (citations and quotations omitted). Portions of these definitions

are incorporated within Brian’s arguments, which are directed toward the subjects set

forth below.

Lack of Access to Share Value

¶27 Brian argues that the value of his investment is tied up in the Corporation and

therefore he has been “completely divested of his assets as a shareholder . . . .” Brian

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fails to point to any “dishonest or wrongful conduct” by the Corporation, Fox, 198 Mont.

at 209, 645 P.2d at 933, but provides the following general reasons why the value of his

shares are locked in and he has thus been oppressed: his inability to sell his shares or to

receive any current benefit from them because they are not marketable, the Corporation’s

policy of not paying dividends, and the Corporation’s failure to repurchase his shares.

Brian further argues that the District Court erred by failing to consider his separate rights

as a shareholder in addition to his rights as an employee.

¶28 However, Brian has not demonstrated how the “oppressions” about which he

complains are different than those borne by other shareholders of the Corporation. The

fact that his shares are not marketable is typical of closely held corporations generally

and is likewise true of Whitehorn Farms. The articles of incorporation contain no

provision providing a right to have shares purchased by the corporation or other

shareholders. Brian complains that the Corporation pays no dividends, but he is well

aware from his long involvement with the Corporation that it has historically not paid

dividends. While failing to issue dividends to shareholders could be an oppressive tactic,

the mere non-issuance of dividends is not oppressive in all circumstances. Here, the

District Court concluded that neither Brian nor Earl had any capital investment—having

received their shares as gifts—which would lead to an expectation of profits, and that

“[o]nly their employment by the farm caused them to receive the full benefits as

employees and officers, just the same as they saw received by their father and uncle.”

Brian does not directly challenge the District Court’s conclusion that the termination of

his employment was justified and thus, without other evidence of oppressive intent, the

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Corporation’s failure to pay dividends is insufficient to establish oppression. Lastly,

Brian complains that the Corporation has not repurchased his shares. The articles of

incorporation do not mandate such a purchase, and Brian fails to point to any authority

that requires a corporation to repurchase the shares of a shareholder merely because the

shareholder wants out of the corporation. Thus, in every regard, Brian appears to be in

the same position as all the other shareholders. Only those employees and officers who

contribute to the operation of the Corporation accrue additional benefits, and Brian does

not contest his loss of those positions. Brian’s significant stock interest in the

Corporation does have value, and he may yet sell his interest to other shareholders or to

the Corporation. However, given the lack of evidence of oppressive intent, there is no

reason he is entitled to an order forcing the Corporation to repurchase his shares.

¶29 Brian also asserts there has been an “effective severance of Brian’s rights as a

shareholder” and that the District Court failed to consider his separate rights as a

shareholder. However, although the District Court, reflecting the emphasis of Brian’s

case before it, did not analyze this issue in depth, it did consider the claim, noting that

“[Brian] cannot complain to this court or anyone else about his current situation as a

shareholder who is receiving nothing from his shares. The Court did not receive any

evidence that Brian was being squeezed out of participation as a shareholder.” Brian did

not present evidence of any inhibition upon the exercise of his shareholder rights, and on

appeal he has not challenged the District Court’s finding of fact that, at a shareholder

meeting after Brian had been terminated as an employee, he was advised that he could

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cumulate his votes and nominate and attempt to elect himself to the board of directors.1

Indeed, while Brian chose not to nominate himself, he participated as a shareholder by

nominating and moving to re-elect the current directors.

Reasonable Shareholder Expectations

¶30 Brian argues that he “had a reasonable expectation that he would retain his stock

value, which he regarded as his inheritance, regardless of his status as an employee or

officer of the corporation.” We have explained that the expectations of a shareholder in a

closely held corporation “must be gleaned from the evidence presented. That is the

province of the District Court . . . .” Fox, 198 Mont. at 210, 645 P.2d at 933 (internal

citation omitted).

¶31 Assessing Brian’s reasonable expectations, the District Court made two holdings.

As alluded to in the above discussion, the District Court first held that because Brian

acquired a vast majority of his shares by gift and at a time when he was receiving no

benefit from them, he had no capital investment that would lead to a reasonable

expectation of benefit from holding his shares. Second, the District Court held that only

Brian and Earl’s “employment by the farm caused them to receive the full benefits as

employees and officers . . .” and that his reasonable expectations in continuing to receive

these benefits were destroyed by his own wrongful actions.

¶32 Brian has failed to point to any reasonable expectation as a shareholder that has

been violated. As demonstrated above, a shareholder’s expectations within this

1
This shareholder meeting occurred shortly after Brian had filed suit, but Brian does not
challenge the District Court’s reliance upon the meeting.

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corporation were necessarily limited and, importantly, there is no evidence of an intention

to “exercise leverage and ‘squeeze’ the dissenter out.” Fox, 198 Mont. at 209, 645 P.2d

at 933. The only benefits Brian lost were those associated with his status as an employee

and officer, which he had no reasonable expectation to retain after he converted the

Corporation’s property. Any expectation regarding his right to participate in the

management has not been violated because he can, and has, participated as a shareholder

in nominating and electing directors. Indeed, he has been encouraged to do so by the

Corporation.

Fiduciary Duty

¶33 Brian argues that the majority shareholders breached their fiduciary duty to him by

taking punitive and unnecessary actions against his shareholder rights, while his actions,

though perhaps wrongful, were not a breach of his corresponding fiduciary duties as a

shareholder. He argues the District Court improperly focused on his actions, and

overlooked the duties of the Corporation and the other shareholders to him. Brian also

argues that the Corporation’s response to his actions was oppressive because the

Corporation had less harmful alternatives.

¶34 “[T]he fiduciary duty between stockholders of a close corporation is one of the

utmost good faith and loyalty. However, the controlling group should not be stymied by

a minority stockholder’s grievances if the controlling group can demonstrate a legitimate

business purpose and the minority stockholder cannot demonstrate a less harmful

alternative.” Daniels v. Thomas, Dean & Hoskins, Inc., 246 Mont. 125, 137-38, 804 P.2d

359, 366 (1990) (internal quotation omitted). Additionally, fiduciary duties run between

14
all shareholders, not just from majority shareholders to minority shareholders. Sletteland

v. Roberts, 2000 MT 382, ¶ 30, 304 Mont. 21, ¶ 30, 16 P.3d. 1062, ¶ 30.

¶35 Brian argues that the Corporation had less harmful alternatives than removing him

as an officer and employee. Brian asserts that in response to his conversion of the grain

and other breaches of duty to the Corporation, the Corporation should have merely

required him to pay back the value of the grain taken and attempted to limit his authority

as an employee and officer.

¶36 We note that Brian’s assertions about the shareholder’s punitive actions and the

Corporation’s less harmful alternatives relate to the actions taken to remove him as an

employee and officer, and not to any treatment of him as a minority shareholder. The

District Court held that the majority shareholders did not breach their fiduciary duties to

him as an employee and officer because “[d]ue to [Brian’s] acts, it was reasonable for the

other shareholders to conclude that there were no measures short of termination to assure

that he would not do further damage to the corporation.” We would be hard pressed to

disagree, and the District Court’s conclusion that “Brian Whitehorn has reaped what he

sowed” appears apt. Clearly, there was a “legitimate business purpose,” Daniels, 245

Mont. at 138, 804 P.2d at 366, in the actions taken against Brian as an employee and

officer. The alternatives which Brian suggests do not apply to him as a minority

stockholder and, thus, a reasonable alternative in that regard has not been suggested by

the evidence. The District Court rightly concluded that no fiduciary duty to Brian had

been breached.

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¶37 Lastly, Brian asserts that the District Court erred by considering his actions and by

failing to focus on the actions of the Corporation. He argues that his actions were

irrelevant because he did not harm the Corporation. However, in assessing the

Corporation’s claim for conversion, the court recognized that the claim must show

resulting damages and concluded that the Corporation had indeed been harmed by

Brian’s actions, a holding which Brian has not challenged on appeal. Further, the court

could not have determined the propriety of the Corporation’s response without

considering what i t was responding to—Brian’s actions. Thus, the court properly

considered the duties and actions of all the parties.

¶38 The District Court did not clearly err in entering its findings of fact or make

incorrect conclusions of law. Its determination that Brian was not an oppressed

shareholder is affirmed.

/S/ JIM RICE

We concur:

/S/ KARLA M. GRAY
/S/ JAMES C. NELSON
/S/ JOHN WARNER
/S/ BRIAN MORRIS

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