#27158-a-LSW
2015 S.D. 52
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
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STEVE SCHULTZ, MARK SCHULTZ,
DAVID SCHULTZ, and THE SCHULTZ
FAMILY TRUST, as Stockholders of
Cosmos of the Black Hills, Inc., a South
Dakota Corporation, and as individuals,
and DONALD SCHULTZ and ELOISE
SCHULTZ as Trustees of the SCHULTZ
FAMILY TRUST, and DAVID SCHULTZ,
as a Director of Cosmos of the Black Hills, Inc.
on behalf of Cosmos of the Black Hills, Inc.
a South Dakota Corporation, Plaintiffs and Appellants,
v.
LYLE SCANDRETT and HEIDI BYBEE, Defendants and Appellees.
****
APPEAL FROM THE CIRCUIT COURT OF
THE SEVENTH JUDICIAL CIRCUIT
PENNINGTON COUNTY, SOUTH DAKOTA
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THE HONORABLE ROBERT GUSINSKY
Judge
****
REBECCA L. MANN
DAVID E. LUST of
Gunderson, Palmer, Nelson
& Ashmore, LLP
Rapid City, South Dakota Attorneys for plaintiffs
and appellants.
JEFFREY G. HURD of
Bangs, McCullen, Butler, Foye
& Simmons, LLP
Rapid City, South Dakota Attorneys for defendants
and appellees.
****
ARGUED ON APRIL 21, 2015
OPINION FILED 06/24/15
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WILBUR, Justice
[¶1.] This is a dispute between two families of shareholders owning stock in
Cosmos of the Black Hills, Inc. (“Cosmos”). The Schultzes, the minority
shareholders, brought an action against the Scandretts, the majority shareholders,
alleging breach of fiduciary care, breach of fiduciary loyalty, minority shareholder
oppression, and request for accounting. The jury rendered a verdict in favor of the
Scandretts on the breach of fiduciary duty claims and the circuit court issued
findings of fact and conclusions of law in favor of the Scandretts on the remaining
claims. The Schultzes appeal. We affirm.
Background
[¶2.] Cosmos, an optical illusion tourist business, is a corporation organized
and existing under the laws of the State of South Dakota. Plaintiffs are minority
shareholders of Cosmos. The individual Plaintiffs are members of the same family
(collectively, “Schultzes”). Don Schultz is married to Eloise Schultz, and they have
four sons: Steve, Mark, David, and Matt. Matt is not a party to this action.
Defendants, Lyle Scandrett and Heidi Bybee, are members of the same family
(collectively, “Scandretts”). Lyle is Heidi’s father. Lyle and his wife, Marlene
Scandrett, along with Heidi and her husband, Kevin Bybee, are the majority
shareholders. Marlene and Kevin are not parties to this action.
[¶3.] In the early 1950s, Don constructed and opened Cosmos. The premise
of Cosmos is simple: a customer purchases a ticket; walks on an approximately 30–
minute, guided tour; and returns to the gift shop where souvenirs can be purchased.
Initially, Cosmos was operated by either Don and Eloise or Don’s parents, Fred and
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Marie Schultz. Don stopped working at Cosmos after the summer of 1958. In 1959,
the business was incorporated with Don holding 1,500 shares and his parents
holding 1,500 shares.
[¶4.] Lyle began working at Cosmos as a tour guide in 1957. Lyle taught
school in Wessington, South Dakota, but worked at Cosmos during the summers
from 1957 through 1959. In 1960, Schultzes hired Lyle to manage Cosmos and
issued him one share of stock to ensure his status as a shareholder. After Cosmos
hired Lyle as manager, Cosmos issued an additional 50 shares to Don. In 1968,
Lyle and Marlene purchased all of the shares owned by Fred and Marie. As a
result, Don and Eloise owned 1,550 shares and Lyle and Marlene owned 1,501
shares out of the total 3,051 outstanding shares.
[¶5.] Until 1969, Cosmos paid Lyle $5,000 to manage Cosmos from
Memorial Day to Labor Day each year. In 1969, Don entered into an incentive
compensation agreement with Lyle (“Compensation Agreement”), whereby Lyle
agreed to work at Cosmos throughout the entire year, instead of only part of the
year, in exchange for a new compensation plan. The Compensation Agreement had
two goals: first, “to keep the Cosmos open as early and as late as possible to ‘protect
the property and the business from freeloaders’ and ‘malicious mischief[;]’” second,
“to provide additional income to [Lyle].” In the Compensation Agreement, Lyle’s
salary was reduced from $5,000 to $2,500 per year. The decrease in salary,
however, was offset by Cosmos’s agreement that Lyle would receive most of the
income during the “off-season,” i.e., between Labor Day and Memorial Day. The
Compensation Agreement provided that if Lyle was willing to operate Cosmos
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during the off-season, then he could keep all of the ticket income less $5 per day for
operating expenses and less any employee wages incurred in the off-season
operations. Lyle also received one-half of the net souvenir sales income after Labor
Day and before Memorial Day. The Compensation Agreement is still in effect
today, with two adjustments: Lyle’s salary has been increased to $10,000 per year,
and Lyle now pays all off-season expenses, rather than just $5 per day.
[¶6.] In 1972, Lyle expressed concern to Don that if he continued to work as
a minority shareholder, Don and Eloise’s sons could grow up, take control of
Cosmos, and terminate Lyle. In response, Don agreed to grant Lyle a controlling
interest in Cosmos for the purpose of ensuring that Lyle would remain in control of
the company, thereby protecting his employment arrangement. Don and Eloise
decided it was important to retain Lyle because “[w]ith the passage of time it
became clear that the continued success of the business was due to the efforts of
Lyle, as none of the Schultz family was contributing anything more than moral
support.” In August 1972, Cosmos issued 100 additional shares to Lyle. As a
result, Schultzes owned 1,550 shares, and Scandretts owned 1,601 shares. That
difference still exists today.
[¶7.] Scandretts have been the majority shareholders since 1972. Schultzes
held two of the three board of directors’ seats from Cosmos’s incorporation in 1959
until 2008. In 2008, Heidi was elected to the board of directors. Thereafter, the
board consisted of Lyle, Heidi, and David. Over the years, Don and Eloise gifted
some of their shares to their children: Steve, Mark, David, and Matt. In 2004, Lyle
condensed the corporate minutes into a document entitled the “Historical Record.”
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The Historical Record outlined the Compensation Agreement. That same year,
Don, Eloise, and David signed a “Shareholders Attachment” that indicated they
were shareholders of Cosmos, that they had read the Historical Record, and that
they were satisfied with the Historical Record as written, thereby ratifying the
Compensation Agreement. In 2009, Don and Eloise assigned their stock to the
Schultz Family Trust. Don acted as the agent for Schultzes in handling matters
relating to Cosmos. Until the fall of 2008, Don had always been the member of the
Schultz family who communicated with Lyle regarding Cosmos. Don told Lyle that
Cosmos was doing well under Lyle’s leadership and that Schultzes were indebted to
Lyle for the success of Cosmos. Prior to the current dispute, Schultzes did not
express to Lyle any dissatisfaction with his management of Cosmos. Since 1989,
the dividends paid to Schultzes have increased by an average of 17.84% per year,
totaling over $3 million.
[¶8.] In 2005, the shareholders discussed whether to add restrooms and
expand the gift shop. Discussions for this project spanned several years. In 2008,
the shareholders discussed the plans for the gift shop and the addition of a new
deck. The shareholders agreed that Heidi should plan the construction of the gift
shop and deck. When the bids for the project came back higher than expected,
David Schultz expressed concern to Heidi about the cost of the project. Heidi
restructured the expansion and reduced the cost by a third. Schultzes continued to
oppose the expansion. In a letter to Lyle and Heidi from Steve Schultz, Steve
stated, “I am appalled by the way this situation has been managed and by the way
you have treated my parents. This is unacceptable; you need to change your
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approach or prepare yourselves for a long, painful sequence of shareholder
disputes.” At a board of directors meeting on November 3, 2008, David Schultz said
in a written statement, “[S]teve is wealthy, he is tenacious, and he enjoys
confrontation. [Don] has held him back for 30 years; Steve will fight you to his last
breath and leave instruction in his will to keep the fight going beyond his lifetime.”
Ultimately, the directors voted to approve a plan to expand the gift shop and
restrooms, with Lyle and Heidi voting in favor and David voting against.
[¶9.] In 2008, Don asked Lyle why dividends had decreased from the
previous year. For the first time, Lyle disclosed to Schultzes information about his,
Heidi’s, and Kevin’s compensation from Cosmos. Schultzes had never requested
this information from Scandretts. Scandretts point out that “[t]he information was
always available.” After receiving this information, Schultzes began asking
questions about management compensation and the financial position of Cosmos.
At the 2009 board of directors’ meeting, David made a motion to set the manager’s
salary for the entire year at $60,000 and eliminate the off-season bonus. The
motion failed for lack of a second.
[¶10.] On September 21, 2011, Schultzes filed the present action against
Scandretts alleging breach of fiduciary care, breach of fiduciary loyalty, minority
shareholder oppression, and request for accounting. Schultzes claimed that the
Compensation Agreement was adverse to the best interests of Cosmos and the
shareholders. They further contended that while Lyle’s compensation has increased
dramatically, his management responsibilities have decreased upon the hiring of
Heidi and Kevin and other hourly employees. Finally, Schultzes argued that
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Scandretts engaged in self-dealing, misused corporate assets, paid themselves
unjustified salaries and benefits, and acted in bad faith against Cosmos and its
shareholders.
[¶11.] This case was tried from May 7 to May 9, 2014. The fiduciary duty
claims were tried to the jury, while the oppression and accounting claims were tried
to the circuit court. The jury returned a verdict in favor of Scandretts on the
fiduciary duty claims. On July 1, 2014, the circuit court issued findings of fact,
conclusions of law, and a judgment in favor of Scandretts on the remaining claims.
Schultzes appeal and raise the following issues for our review:
1. Whether the circuit court erred when it instructed the
jury that “South Dakota law does not allow a shareholder
to use the fiduciary duty concept to rewrite an original
deal he or she made with the corporation.”
2. Whether the circuit court erred when it declined to
instruct the jury on employment-at-will concepts and that
officers and directors have a duty to terminate a contract
entered into by the corporation if the contract becomes
against the best interests of the corporation.
3. Whether the circuit court erred when it declined to
instruct the jury that directors owe a fiduciary duty of
undivided and unselfish loyalty to the corporation.
Standard of Review
[¶12.] “A trial court has discretion in the wording and arrangement of its jury
instructions[.]” Vetter v. Cam Wal Elec. Coop., Inc., 2006 S.D. 21, ¶ 10, 711 N.W.2d
612, 615. But “no court has discretion to give incorrect, misleading, conflicting, or
confusing instructions.” State v. Whistler, 2014 S.D. 58, ¶ 13, 851 N.W.2d 905, 910
(quoting State v. Zephier, 2012 S.D. 16, ¶ 9, 810 N.W.2d 770, 772). Thus, “we
generally review a trial court’s decision to grant or deny a particular instruction
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under the abuse of discretion standard.” Id. (quoting State v. Hauge, 2013 S.D. 26,
¶ 17, 829 N.W.2d 145, 150). “To constitute reversible error, an instruction must be
shown to be both erroneous and prejudicial, such that ‘in all probability they
produced some effect upon the verdict and were harmful to the substantial rights of
a party.’” Id. (quoting State v. Cottier, 2008 S.D. 79, ¶ 7, 755 N.W.2d 120, 125).
“The jury instructions are to be considered as a whole, and if the instructions when
so read correctly state the law and inform the jury, they are sufficient.” State v.
Doap Deng Chuol, 2014 S.D. 33, ¶ 31, 849 N.W.2d 255, 263 (quoting Hauge, 2013
S.D. 26, ¶ 17, 829 N.W.2d at 150-51).
Analysis
[¶13.] 1. Whether the circuit court erred when it instructed the
jury that “South Dakota law does not allow a shareholder
to use the fiduciary duty concept to rewrite an original
deal he or she made with the corporation.”
[¶14.] Schultzes claim that the circuit court erred when it instructed the jury,
over their objection, as follows:
South Dakota law does not allow a shareholder to use the
fiduciary duty concept to rewrite an original deal he or she made
with the corporation.
Instruction 27. The court relied on language from Mueller v. Cedar Shore Resort,
Inc., 2002 S.D. 38, 643 N.W.2d 56, in formulating Instruction 27. In that case, we
said, “We are not prepared to allow a shareholder to use the fiduciary duty concept
to rewrite the original deal he or she made with the corporation, a modification that
the original parties to the transaction almost certainly would not have chosen.” Id.
¶ 28, 643 N.W.2d at 67. Schultzes contend that the language from Mueller, as
applied in Instruction 27, was “taken out of context, applied incorrectly, and [was]
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misleading and confusing.” Schultzes further allege, as evidence of prejudice, that
their “entire breach of fiduciary duty claims were effectively taken away from the
jury” because “[t]he jury had no choice but to find for Scandretts[.]” Thus, Schultzes
contend the case should be reversed and remanded for a new trial. 1
A. Context
[¶15.] Schultzes argue that Instruction 27 took the cited language in Mueller
“out of context.” They argue that as a result, the jury was misled into believing that
the passage from Mueller was “black letter law.” In order to determine the context
of Mueller and Instruction 27, we first consider the fiduciary duty of care and
loyalty as it relates to majority and minority shareholders.
[¶16.] This Court has recognized that majority, dominant, or controlling
shareholders, or a group of shareholders acting together to exercise effective control,
owe a fiduciary duty to minority shareholders in a closely held corporation. See
Mueller, 2002 S.D. 38, ¶¶ 26-30, 643 N.W.2d at 66-67 (applying this rule); Hayes v.
N. Hills Gen. Hosp., 1999 S.D. 28, ¶¶ 51-52, 590 N.W.2d 243, 252-53 (recognizing
the rationale that “officers and directors have a fiduciary duty when dealing with
minority shareholders[,]” and that this “rationale supports the adoption of a
1. At the outset, we question both parties’ extensive reliance on the doctrine of
minority shareholder oppression in support of their arguments on this issue.
This issue relates to an instruction to the jury regarding fiduciary duty, not
minority shareholder oppression. Moreover, minority shareholder oppression
was tried before the circuit court, not the jury. Thus, any applicability of
minority shareholder oppression to this issue is suspect. Furthermore, the
parties disagree on whether Schultzes appealed the issue of minority
shareholder oppression. Scandretts argue that Schultzes did not “appeal the
Findings of Fact and Conclusion[s] of Law or Judgment on their claims for
minority shareholder oppression or accounting.”
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fiduciary duty between dominant shareholders and minority shareholders”). The
fiduciary duty that majority shareholders owe to minority shareholders in a closely
held corporation “is characterized by a high degree of diligence and due care, as well
as the exercise of utmost good faith and fair dealing.” Mueller, 2002 S.D. 38, ¶ 26,
643 N.W.2d at 66. This fiduciary duty, however, is limited in certain circumstances.
In Mueller, we stated that “the scope of the fiduciary duty owed by a family-owned
corporation that has gifted its shares to the shareholders is somewhat more limited
than that duty owed in the context of a traditional close corporation.” Id. ¶ 28, 643
N.W.2d at 66-67. In cases where the minority shareholders received their shares by
gift or inheritance, the minority shareholders are only entitled to “decent” conduct
by the majority shareholders. Id.
[¶17.] Instruction 27 originated from a section in Mueller discussing the
application of the “decent” conduct standard to minority shareholder fiduciary duty
claims:
Because of the potential for abuse, the scope of the fiduciary
duty owed by a family-owned corporation that has gifted its
shares to the shareholders is somewhat more limited than that
duty owed in the context of a traditional close corporation. . . .
[W]here the shareholders receive their stock by gift and invest
no capital, the shareholders’ minimum economic return and
right of participation become limited. Hamilton, supra at § 8.25.
We are not prepared to allow a shareholder to use the fiduciary
duty concept to rewrite the original deal he or she made with the
corporation, a modification that the original parties to the
transaction almost certainly would not have chosen. To do so
would significantly undermine a primary method of tax
planning and wealth sharing by holding family business owners
hostage, subject to the demands of every gifted shareholder,
whether reasonable or not. Therefore, the question is whether
[the minority shareholders] have identified in the record
sufficient evidence to demonstrate that the conduct of the
individually named directors, under these circumstances,
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amounted to something below the “decentness” standard set
forth above.
2002 S.D. 38, ¶ 28, 643 N.W.2d at 66-67 (emphasis added). The cited language in
Mueller merely explained why the “decent” conduct standard, rather than the
traditional standard, was appropriate in cases where the minority shareholders in a
closely held corporation received their shares by gift or inheritance. Id. Instruction
27, however, treated this language as a rule of law. Accordingly, the passage from
Mueller was taken out of context as it was stated in Instruction 27.
B. Incorrect Application
[¶18.] Schultzes further argue that Instruction 27 was “applied incorrectly.”
We agree. As given, the language in Instruction 27 was broader than the cited
language in Mueller. Instruction 27 provided, “South Dakota law does not allow a
shareholder to use the fiduciary duty concept to rewrite an original deal he or she
made with the corporation.” (Emphasis added.) The language cited from Mueller in
Instruction 27, however, only pertained to gifted shareholders, not all shareholders.
Id. Furthermore, the circuit court did not determine whether the Schultz Family
Trust, and Don and Eloise Schultz as trustees of the Schultz Family Trust, were
gifted shareholders. The court stated, because “[t]here was no evidence presented
at trial regarding the Schultz Family Trust,” “[i]t is unclear whether the Schultz
Family Trust is to be considered an original shareholder, or a subsequent
shareholder receiving by gift.”
[¶19.] Moreover, in Mueller, we stated that “[w]e are not prepared to allow a
shareholder to use the fiduciary duty concept to rewrite the original deal he or she
made with the corporation[.]” 2002 S.D. 38, ¶ 28, 643 N.W.2d at 67 (emphasis
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added). In this case, the Compensation Agreement was not the original deal that
the gifted shareholders made with the corporation. There was neither testimony
nor argument at trial as to Schultzes’ “deal” as gifted shareholders. It appears that
the original deal the gifted shareholders entered into with Cosmos was that in
return for not investing capital or resources, they would receive limited economic
return and limited right of participation. Thus, in addition to being too broad,
Instruction 27 had nothing to do with Schultzes’ claims as Schultzes were not
making any claim in this lawsuit based on their “deal” with the corporation.
[¶20.] Our conclusion that Instruction 27 did not accurately reflect the
language cited in Mueller is reinforced by a review of Robert W. Hamilton, Business
Organizations: Unincorporated Businesses and Closely Held Corporations § 8.35
(1996), which is the authority relied on in Mueller in support of adopting the
“decent” conduct standard. Hamilton does not state that a shareholder is precluded
from using the fiduciary duty concept to rewrite the original deal he or she made
with the corporation. Instead, Hamilton said that “[t]he fiduciary principle also has
a significant capacity for mischief, since it may be utilized by a sophisticated
investor to obtain a court order in effect rewriting the original ‘deal’ he cut with the
corporation.” Id. (emphasis added). Hamilton reasons that “[l]aw and economics
scholars have . . . criticized the cases creating a special fiduciary duty on the ground
that it imposes an ex post duty that the parties to the transaction almost certainly
would not have selected if they had considered what term to include in their
corporate ‘contract.’” Id. Based on Hamilton’s treatise and Mueller, we conclude
that Instruction 27 was incorrectly applied in this case.
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C. Misleading and Confusing
[¶21.] Schultzes also contend that Instruction 27 “confused and misled” the
jury. Because Instruction 27 incorrectly applied Mueller and took the cited
language out of context, we agree with Schultzes that Instruction 27, if read in
isolation, may have misled and confused the jury. Vetter, 2006 S.D. 21, ¶ 10, 711
N.W.2d at 615 (“[N]o court has discretion to give incorrect, misleading, conflicting,
or confusing instructions.”). Consequently, the circuit court erred when it allowed
Instruction 27.
D. Prejudice
[¶22.] To constitute prejudicial error, however, an instruction must be
prejudicial in addition to erroneous. See Whistler, 2014 S.D. 58, ¶ 13, 851 N.W.2d at
910 (quoting Cottier, 2008 S.D. 79, ¶ 7, 755 N.W.2d at 125). “Erroneous instructions
are prejudicial under SDCL 15-6-61 when in all probability they produced some
effect upon the verdict and were harmful to the substantial rights of a party.”
Vetter, 2006 S.D. 21, ¶ 10, 711 N.W.2d at 615. “[W]hen the question is whether a
jury was properly instructed overall, that issue becomes a question of law
reviewable de novo. Under this de novo standard, ‘we construe jury instructions as
a whole to learn if they provided a full and correct statement of the law.’” Id.
(footnote omitted).
[¶23.] We are not convinced that Schultzes were prejudiced by Instruction 27.
The jury instructions, when viewed as a whole, fully and correctly stated the law
and informed the jury on the fiduciary duty of care and loyalty. Jury Instructions
19, 20, and 21 informed the jury on the applicable fiduciary duty:
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Instruction 19
All officers and directors of a corporation, whether Plaintiff or
Defendants, owe a fiduciary duty to the corporation and its
shareholders. They are required to use a high degree of
diligence and due care and of the utmost good faith and fair
dealing in the exercise of their fiduciary duties to shareholders.
They must act in good faith and refrain from transactions in
which they receive an improper personal benefit.
Instruction 20
Each member of the Cosmos board of directors is required to act
in good faith and in a manner the director reasonably believes to
be in the best interests of the corporation when discharging his
or her duties. The members of the board of directors, when
becoming informed in connection with their decision-making
function or devoting attention to their oversight function, shall
discharge their duties with the care that a person in a like
position would reasonably believe appropriate under similar
circumstances.
Instruction 21
Majority shareholders of a closely held corporation occupy a
fiduciary position in respect to the minority shareholders.
Majority shareholders owe a fiduciary duty of care and a
fiduciary duty of loyalty to the minority shareholders requiring
diligence, due care and the exercise of the utmost good faith and
fair dealing. Majority shareholders must act in good faith and
refrain from transactions in which the majority shareholder
receives an improper personal benefit.
[¶24.] Instructions 19, 20, and 21 allowed Schultzes to present their theory of
the case despite the inclusion of Instruction 27. At trial, the jury viewed the total
amount of compensation received by Lyle, Heidi, Marlene, and Kevin. The jury
listened to testimony from Lyle that he continued to receive his same salary even
after Heidi assumed many of his responsibilities as manager. The jury heard
testimony that Scandretts paid themselves benefits including daycare, vehicles, cell
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phones, health insurance, and personal vacations. The jury listened to testimony
from Lyle indicating that he may have engaged in self-dealing. 2
[¶25.] Schultzes argued during closing arguments that this evidence
demonstrated that Scandretts did not act in the best interests of Cosmos
(Instruction 20) or act with diligence, due care and the exercise of the utmost good
faith and fair dealing (Instructions 19 and 21). Certainly, the jury could have found
that Scandretts were not acting in good faith and in a manner in the best interests
of Cosmos notwithstanding Instruction 27. Nonetheless, Schultzes complain that a
juror who followed Instruction 27 would have believed that South Dakota law does
not require a majority shareholder, director, or officer of a corporation to review,
revise, or terminate his compensation agreement. But Instructions 19, 20, and 21
clearly instructed the jurors that Scandretts had a duty to refrain from improper
personal benefit, which could certainly include consideration of the Compensation
Agreement. Consequently, contrary to their argument, Schultzes’ fiduciary duty
claims were not “effectively taken away from the jury with [Instruction 27].”
[¶26.] In fact, it appears the jury instructions were actually more favorable to
the Plaintiffs than the law required. The jury instructions in this case did not
instruct on the “decent” conduct standard in Mueller, 2002 S.D. 38, ¶ 28, 643
2. The Plaintiffs alleged that Lyle engaged in self-dealing by charging rent to
the corporation for use of two billboards on his property. He purchased
property adjacent to Cosmos for $1,000 and charged Cosmos $1,000 a year to
rent the land. In addition, he charged Cosmos $10,000 a year to lease two
billboards for a total of $11,000 rent.
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N.W.2d at 67. 3 Rather, the circuit court instructed the jury that Scandretts owed
Schultzes the traditional fiduciary duty of care and loyalty. In Mueller, the
plaintiffs claimed that certain individually named directors, who were also the
majority shareholders, breached their fiduciary duty owed to them as minority
shareholders. Id. ¶¶ 25-33, 643 N.W.2d at 66-67. We held that because the
plaintiffs were gifted their shares and because the corporation was a closely held
corporation, “the question is whether [the plaintiffs] have identified in the record
sufficient evidence to demonstrate that the conduct of the individually named
directors, under these circumstances, amounted to something below the ‘decentness’
standard[.]” Id. ¶ 28 643 N.W.2d at 67.
[¶27.] Likewise, in this case, the Defendants are individually named directors
and are members of a family who, collectively, are the majority shareholders.
Plaintiffs Steve, Mark, and David received their shares of the corporation by gift
3. Schultzes contend that Mueller created a distinction between “family-owned”
corporations and closely held corporations and, as a result, the “decent”
conduct standard only applies to “family-owned” corporations. Because
Schultzes and Scandretts are two separate families, Schultzes argue that the
“decent” conduct standard did not apply to them. This interpretation is not
supported by Mueller nor is it consistent with existing law. While Mueller
did state that “the scope of the fiduciary duty owed by a family-owned
corporation that has gifted its shares to the shareholders is somewhat more
limited than that duty owed in the context of a traditional close
corporation[,]” 2002 S.D. 38, ¶ 28, 643 N.W.2d at 66-67 (emphasis added), it
is clear from the context of the decision that this Court did not intend to
create a distinction between family-owned corporations and traditional
closely held corporations. Rather, we created a distinction between close
corporations that gifted its shares to shareholders and traditional close
corporations where the shareholders did not receive their shares by gift or
inheritance. Id. The close corporation in Mueller just so happened to also be
a closely held, family-owned corporation. Furthermore, Hamilton, supra
¶ 20, § 8.25, recognized no such distinction between family-owned
corporations and traditional closely held corporations.
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similar to the plaintiffs in Mueller. As we noted above, the circuit court did not
determine whether the Schultz Family Trust was an original shareholder or a
subsequent shareholder by gift. Thus, while the circuit court correctly instructed
the jury that the Defendants, as officers and directors, owed the traditional
fiduciary duty of care and loyalty to the corporation (Instruction 19), it is unclear
whether the Defendants owed that same fiduciary duty of care to all of the Plaintiffs
as gifted minority shareholders in a closely held corporation. At the very least,
Steve, Mark, and David, as gifted minority shareholders in a closely held
corporation, were only entitled to the limited “decent” conduct standard from the
Defendants as majority shareholders and directors. See id. Thus, in light of all the
reasons provided herein, we conclude that Schultzes failed to demonstrate that they
were prejudiced by Instruction 27. Whistler, 2014 S.D. 58, ¶ 13, 851 N.W.2d at 910
(quoting Cottier, 2008 S.D. 79, ¶ 7, 755 N.W.2d at 125).
[¶28.] 2. Whether the circuit court erred when it declined to
instruct the jury on employment-at-will concepts and
that officers and directors have a duty to terminate a
contract entered into by the corporation if the contract
becomes against the best interests of the corporation.
[¶29.] Schultzes next argue that the circuit court erred when it “denied three
interrelated instructions proposed by [them]” because, “[t]hrough the denial of these
instructions, [they] were prevented from arguing to the jury that Lyle’s
compensation arrangement was an employment at-will arrangement that could be
modify [sic] if it subsequently became adverse to the corporation.” The refusal to
give these instructions, Schultzes argued, “also prevented the jury from determining
if [Schultzes] had a duty to analyze the salaries of Marlene, Heidi and Kevin in
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relation to the best interests of the corporation.” The three proposed jury
instructions provided:
Proposed Instruction 15
The length of time which an employer and employee adopt for
the estimation of wages is relevant to a determination of the
term of employment.
Proposed Instruction 16
An employment contract having no specified term may be
terminated at will, or in other words, at any time, and for any
reason or for no reason, by the employee of the employer.
Proposed Instruction 17
If a contract entered into by a corporation becomes against the
best interests of the corporation and the corporation can
terminate the contract under the contract terms, then the
officers and the directors of a corporation have a duty to
terminate the contract.
[¶30.] Schultzes’ theory for proposing the above three jury instructions, as
evidenced by the language in the instructions, was that Lyle was an at-will
employee of Cosmos and, therefore, he had a fiduciary “duty to terminate [his own
employment] contract” because his contract was no longer in “the best interests of
the corporation[.]” Schultzes advance no authority to support this argument. Nor
do we find any authority that supports this argument. As we have said, the “failure
to cite authority is fatal.” Steele v. Bonner, 2010 S.D. 37, ¶ 35, 782 N.W.2d 379, 386.
Proposed Instruction 17 is an incorrect statement of the fiduciary duty for officers
and directors of a corporation. See SDCL 47-1A-830. Instead, the correct standard
is that “[a]n officer or director of a corporation has a fiduciary duty to act in a
manner that he reasonably believes is in [the corporation’s] best interests.”
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Lindskov v. Lindskov, 2011 S.D. 34, ¶ 15, 800 N.W.2d 715, 719 (emphasis added).
See also SDCL 47-1A-830 (“Each member of the board of directors, when
discharging the duties of a director, shall act in good faith and in a manner the
director reasonably believes to be in the best interests of the corporation.”). Jury
Instruction 20 stated, “Each member of the Cosmos board of directors is required to
act in good faith and in a manner the director reasonably believes to be in the best
interests of the corporation when discharging his or her duties. Therefore, the jury
was instructed on the correct standard.
[¶31.] While a director or officer may have a fiduciary duty in certain
instances to revise his employment contract when discharging his duties as an
officer or director if he reasonably believes it is in the best interests of the
corporation to act in this manner, see SDCL 47-1A-830, there is no requirement that
a director must “terminate” his own employment contract when the contract
“becomes against the best interests of the corporation.” Clearly, an endorsement of
Proposed Instruction 17 would lead to troubling results as it would presumably
require, in almost all conceivable circumstances, directors and officers to reduce
their salaries “in the best interests of the corporation.” 4 Accordingly, the circuit
4. The parties in this case dispute whether Lyle was an at-will employee.
Citing Mueller, 2002 S.D. 38, ¶ 20 n.4, 643 N.W.2d at 64 n.4, Schultzes argue
that “employee/shareholders in a closely-held corporation are at-will.”
Scandretts, on the other hand, cite Mueller, 2002 S.D. 38, ¶ 15, 643 N.W.2d at
63, and Landstrom v. Shaver, 1997 S.D. 25, ¶ 44, 561 N.W.2d 1, 10, for the
proposition that “[c]losely-held corporations are not free to terminate the
employment of the owners ‘at-will.’” Because of our conclusion that the
circuit court did not abuse its discretion in refusing the proposed jury
instructions, we need not determine whether Lyle was an at-will employee.
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court did not abuse its discretion in refusing Schultzes’ proposed instructions. See
State v. Walton, 1999 S.D. 80, ¶ 9, 600 N.W.2d 524, 528.
[¶32.] 3. Whether the circuit court erred when it declined to
instruct the jury that directors owe a fiduciary duty of
undivided and unselfish loyalty to the corporation.
[¶33.] For their third and final assignment of error, Schultzes argue that the
circuit court erred when it refused to give Schultzes’ Proposed Instruction 18:
The fiduciary duty owed by a Director to minority shareholders
requires an undivided and unselfish loyalty to the Corporation
and also requires that there be no conflict between the Director’s
fiduciary duty and self-interest.
Schultzes argue that this instruction on the fiduciary duty of loyalty should have
been given to the jury because “Lyle was not putting the corporation above his own
self-interests (i.e. his Compensation Agreement) which was a breach of his fiduciary
duty of loyalty.” Moreover, Schultzes contend that Lyle did not disclose to the
shareholders the amount of compensation he was paid or the information needed to
calculate his compensation before they signed the Historical Record in 2004,
thereby ratifying the Compensation Agreement.
[¶34.] Schultzes argue that the circuit court “should have granted this
instruction describing the fiduciary duty of loyalty as it is a proper statement of law
and there was sufficient evidence in the record supporting a breach of the duty of
loyalty.” 5 However, the court did instruct the jury on the fiduciary duty of loyalty in
5. We are not persuaded that Proposed Instruction 18 was a correct statement
of the law. Schultzes cite the following language from Mueller in support of
the instruction: “Hallmark behavior of such a breach [of fiduciary duty of
loyalty] includes the failure to disclose information, director or shareholder
self-dealing, making fraudulent misrepresentations regarding past or future
(continued . . .)
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Instructions 19, 20, and 21. The court explicitly indicated to the jury that “[t]here is
no dispute the defendants owed a fiduciary duty of . . . loyalty to the [P]laintiffs[.]”
Instructions 19, 20, and 21 fully set out the law on the fiduciary duty of loyalty.
[¶35.] The circuit court “has a duty to instruct the jury on applicable law
where the theory is supported by competent evidence.” Jahnig v. Coisman, 283
N.W.2d 557, 560 (S.D. 1979). The court does not commit error, however, when it
“refuses to amplify instructions which substantially cover the principle embodied in
the requested instruction.” State v. Klaudt, 2009 S.D. 71, ¶ 20, 772 N.W.2d 117,
123. The instructions given to the jury regarding the duty of loyalty correctly and
adequately explained the fiduciary duty of loyalty as it related to this case.
Consequently, Schultzes’ rejected jury instruction merely amplified instructions
that covered the duty of loyalty. Id. We conclude the circuit court did not err when
it rejected Schultzes’ proposed jury instruction.
Conclusion
[¶36.] Jury Instruction 27, which was worded more broadly than the cited
language in Mueller and incorrectly applied in this case, did not prejudice
Schultzes. The jury instructions, when viewed as a whole, adequately instructed
the jury of Scandretts’ fiduciary duty of care and loyalty. Lastly, the circuit court
did not err in rejecting certain proposed jury instructions by Schultzes where no
________________________
(. . . continued)
events, and surreptitious conduct or communications.” 2002 S.D. 38, ¶ 29,
643 N.W.2d at 67. This language does not support the broad proposition in
Schultzes’ proposed jury instruction that the duty of loyalty “requires that
there be no conflict between the Director’s fiduciary duty and self-interest.”
(Emphasis added.)
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authority was cited in support of the instructions and the instructions merely
amplified other jury instructions. We affirm.
[¶37.] GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and KERN,
Justices, concur.
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Schultz v. Scandrett
Court: South Dakota Supreme Court
Date filed: 2015-06-24
Citations: 2015 SD 52, 866 N.W.2d 128, 2015 S.D. LEXIS 85, 2015 WL 3898035
Copy CitationsCombined Opinion