Mike v. Po Group, Inc.

September 3, 1996
FOR PUBLICATION

IN THE SUPREME COURT OF TENNESSEE

AT NASHVILLE
FILED
September 3, 1996
ELI MIKE, AN INDIVIDUAL; (
JAMES A. SCHRAMPFER, AN (
INDIVIDUAL; AND JANE N. ( Cecil W. Crowson
FORBES, AS TRUSTEE IN ( Appellate Court Clerk
BANKRUPTCY FOR THE ESTATE OF (
DAVID L. OSBORN, (
(
Plaintiffs-Appellants, (
(
( Davidson Chancery
(
v. ( Hon. C. Allen High, Chancellor
(
( Appeal No. 01S01-9508-CH-00137
PO GROUP, INC., A TENNESSEE (
CORPORATION; JAMES W. (BILL) (
ANDERSON III, AN INDIVIDUAL; (
AND THE ESTATE OF HAROLD L. (
JENKINS, (
(
Defendants-Appellees. (

For Plaintiffs-Appellants: For Defendants-Appellees:

Gary M. Brown William L. Harbison
Matthew J. Sweeney, III L. Webb Campbell, II
John C. Tishler Andrew J. Pulliam
Tuke, Yopp & Sweeney Sherrard & Roe, P.L.C.
Nashville Nashville

Denty Cheatham
Cheatham & Palermo
Nashville

OPINION

JUDGMENTS OF TRIAL COURT
AND COURT OF APPEALS REVERSED;
CASE REMANDED. REID, J.
 This case presents for review the decision of the Court of

Appeals, affirming an award of summary judgment in favor of the

defendants. The Court of Appeals held that the plaintiffs' suit charging the

breach by a ma jority shareh older of a fid uciary du ty owed to minority

shareholde rs is barred by the o ne year statute o f limitations. This Cou rt

concludes that the applicable period of limitations is three years and

remands the case to the trial court to determine whether plaintiffs' action

was time-barred.

THE CASE

All the individual and co rporate parties in this ca se were

involved in the operation of Po Folks restaurants. The plaintiffs are Eli Mike,

Jam es A. S chram pfer, an d Jan e N. F orbes , trustee in ban kruptc y for Da vid

Osborn. Mike, Schrampfer, and Osborn were minority shareholders in one

or more of the following corporations: Po Louisville, Inc., which operated

restaurants in Louisville, Kentucky; Po Memphis, Inc., which operated

restaurants in Memphis; and Po Jackson, Inc., which operated a restaurant

in Jackson, Tennessee. The majority shareholder in each of these three

corporations was the defendant Po Group, Inc. The defendants James W .

(Bill) Anderson and Harold L. Jenkins (now deceased) owned equally all the

shares of stock in Po Group, Inc. Anderson and Jenkins also owned shares

of stock in Po Combination, Inc., which owned all the stock in four other

corpora tions whic h opera ted Po F olks resta urants in o ther locatio ns.

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Anderson and Jenkins were officers and directors in Po Louisville, Inc.; Po

Memphis, Inc.; Po Jackson, Inc.; Po Group, Inc.; and Po Combination, Inc.

In 1984, Po Combination, Inc. borrowed $2.3 million from

Nashville City Bank. Anderson and Jenkins personally guaranteed a portion

of the loan . In early 198 5, the ban k declare d the loan in default. P ursuan t to

a new financing arrangement, the bank agreed to forebear collection of the

$2.3 million loan and to extend an additional $900,000 line of credit to be

used by Po Combination, Inc., Po Louisville, Inc., Po Memphis, Inc., and Po

Jackso n, Inc. as o perating capital. Po Group , Inc. was fo rmed in order to

facilitate the new financing arrangement. All of the shares in Po

Com bination, In c. and all the shares in Po Lo uisville, Inc., Po Mem phis, Inc.,

and Po Jackso n, Inc. own ed by A nderso n and J enkins w ere trans ferred to

Po Group, Inc. Unlimited guaranty agreements were executed by all the

subsidiaries of Po Combination, Inc., and Po Louisville, Inc., Po Memphis,

Inc., and Po Jackson, Inc. pledged all of their assets and also executed

unlimited guaran ty agreem ents to se cure the $900,0 00 line of c redit.

Ande rson an d Jenk ins also e xecuted guaran ty agreem ents for the $2.3

million an d the $9 00,000 loans.

In Dece mber 1 985, Po Group , Inc. finalized an agre emen t to

sell the ass ets of all its sub sidiary corp orations, in cluding P o Louisv ille, Inc.,

Po Memphis, Inc., and Po Jackson, Inc., to DineLite Corporation. The

consideration for the sale was the release of all guaranty agreements made

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to Nashville City Bank, including those executed by Anderson and Jenkins,

and the receipt of stock in DineLite. The shareholder resolutions required

for the approval of the sale were adopted by the vote of Po Group, Inc., the

majority shareholder. The proposal was approved, and the transaction

closed o n June 30, 198 6.

In September 1986, the plaintiffs filed suit, pursuant to Tenn.

Code Ann. § 4 8-1-909 (repeale d by Acts 1986, ch . 887, § 17 .05 and Acts

1987, c h. 242, § 1 8.05) to e nforce th eir dissen ters' rights a s mino rity

shareh olders an d obtain p ayme nt for the fair m arket valu e of their sto ck. In

that suit, the court determined the fair market value of the shares held by

each to be as follows: Mike $325,865.60, Schrampfer $98,341.76, and

Osborn $260,685.48. No payment was made to the plaintiffs because the

corporations h ad no ass ets with which to m ake the paym ents. There were

no insolvency proceedings, and there was no suit by or on behalf of the

corpora tions to se cure pa ymen ts to the pla intiffs.

In the present suit, the plaintiffs allege that Po Group, Inc. as

majority shareholder, breached a fiduciary duty owed to the plaintiffs as

minority shareholders. They contend that the sale of the assets owned by

Po Louisville, Inc., Po Memphis, Inc., and Po Jackson, Inc., approved by the

vote of Po Group, Inc. as the majority shareholder in each of those

corporations, and the disposition of the consideration received, rendered the

corporations unable to pay the plaintiffs the value of their stock as

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determ ined b y the co urt in the 1986 proce eding . They conte nd tha t the on ly

consideration of value received in exchange for the corporations' assets was

the release of Anderson's and Jenkins' guaranty agreements. They allege,

in conclusion, tha t by their action, Po G roup, Inc., as ma jority shareholder,

breach ed a fiduc iary duty ow ed to the p laintiffs as m inority share holders .

The plaintiffs also contend that they should be allowed to pierce the

corpo rate ve il of Po G roup, In c. and collect a ny judg men ts rend ered in their

favor from Ander son an d Jenk ins perso nally.

After the completion of discovery, the defendants Po Group,

Inc., Anderson, and Jenkins filed motions for summary judgment, on several

grounds: they claimed that the suit was barred by the one year statute of

limitations governing breach of fiduciary duties by directors and officers,

Tenn. Code Ann. § 48-18-601; that, in the alternative, the suit was barred by

the three year statute of limitations governing claims for property damage,

Tenn. Code Ann. § 28-3-105; and that there was no material evidence

justifying the piercing of Po Group, Inc.'s corporate veil. The trial court found

that the plaintiffs' claims were barred by the one year statute of limitations

set forth in Tenn. Code Ann. § 48-18-601 and granted the defendants'

motion s for sum mary jud gmen t on this ba sis.

The C ourt of Ap peals affirm ed. Tha t court held that the sta tute

of limitations on all of the claims expired on January 1, 1989, one year after

the effe ctive da te of T enn. C ode A nn. § 4 8-18- 601. T he Co urt of A ppea ls

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rejected the plaintiffs' contention that Tenn. Code Ann. § 48-18-601 does not

apply, with the conclusion: "Regardless of how plaintiffs choose to couch

their claim, they are alleging breach of fiduciary duties by officers and

directors, a nd their su it is barred b y the one -year statu te of limitation s."

STANDARD OF REVIEW

In determining whether or not a genuine issue
of material fact exists for pu rposes of sum mary
judgment, courts in this state have indicated that
the question should be considered in the same
manner as a motion for directed verdict made at
the close of the p laintiff's proof, i.e., the trial court
must take the strongest legitimate view of the
eviden ce in fa vor of th e non -mov ing pa rty, allow all
reasonable inferences in favor of that party, and
discard all counte rvailing evidence. Th en, if there
is a dispute as to any material fact or any doubt as
to the conclusions to be drawn from that fact, the
motion must b e denie d. The c ourt is not to
"weigh" the evidence when evaluating a motion for
summ ary judgm ent. The court is sim ply to
overrule th e motio n where a genu ine dispu te
exists as to any material fact. The phrase
"genuin e issue" c ontaine d in Rule 56.03 re fers to
genuine factual issues and does not include issues
involving legal conclusions to be drawn from the
facts. The critical focus is limited to facts deemed
"material," which is to say those facts that must be
decid ed in o rder to resolve the su bstan tive claim
or defense at which the motion is directed.

Byrd v. H all, 847 S.W .2d 208 , 210-11 (Tenn . 1993) (c itations om itted).

ANALY SIS

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 I

Since summary judgment was granted on the ground that the

plaintiffs' causes of action were barred by the one year statute of limitations,

the Court must determine which statute of limitations applies to the plaintiffs'

suit, which depends upon the nature of the cause of action alleged. The

gravamen of a complaint and the injury alleged determine which statute of

limitations a pplies. Vance v. Schulder, 547 S.W .2d 927 , 931 (T enn. 19 77).

To ascertain the gravamen of the action, the Court must look to the basis for

which d amag es are so ught. Bland v. S mith, 197 Tenn. 683, 277 S.W.2d

377, 37 9 (1955 ).

The complaint alleges that the majority shareholder, Po Group,

Inc., breached a fiduciary duty owed to them as minority shareholders.1

Tenne ssee courts h ave stated that m ajority shareholders owe a fiduciary

duty to m inority share holders . See Nelms v. Weaver, 681 S.W.2d 547, 549

(Tenn . 1984); Dale v. Thomas H. Temple Co., 186 Tenn. 69, 208 S.W.2d

344, 35 2 (1948 ); McCampbell v. Fountain Head R.R. Co., 111 Tenn. 55, 77

S.W . 1070, 10 73 (190 3); John s v. Ca ldwell, 601 S.W .2d 37, 41 (Tenn . Ct.

App. 1980). However, those cases are significantly different from the

present case in the substance of the allegations. In the present case, the

plaintiffs allege that the proce eds from the sale of corporate assets were

1
T h e p l e a d i n g s d o n o t p u t a t i s s u e w h e t h e r t h e c o m p l a i n t s t a t e s a
c a u s e o f a c t i o n u p o n w h i c h t h e p l a i n t i f f s a r e e n t i t l e d t o r e l i e f .

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unfairly distribu ted by the defend ant Po G roup, Inc . to the defe ndants

Anderson and Jenkins. The complaint does not otherwise define the duty or

the wrong. The allegations do not indicate clearly the "gravamen of the

action." The legal wrong of which the plaintiffs complain is uncertain. The

complaint does not charge fraud; however, there is found in the complaint

the statement that the breach of fiduciary duty by the defend ants included

"the divers ion and /or misa ppropria tion" of ass ets. Even then, the le gal duty

that was violated is no t entirely clear.

The plaintiffs seek no judgment of liability for wrongdoing

against Anderson and Jenkins. The complaint against Anderson and

Jenkins is that their relationship with the majority shareholder, Po Group,

Inc., was s uch tha t the plaintiffs sh ould be allowed to pierce the corpora te

veil and collect from the individual defendants the value of their shares of

stock.

II

The re app ears to be no Ten ness ee sta tute or d ecisio n direc tly

addressing the period of limitations for the breach of a fiduc iary duty by a

majority shareholder. The statute which the trial court and the Court of

Appeals found applicable, Tenn. Code Ann. § 48-18-601, is part of the

Tenn essee Busine ss Corp oration A ct which w as ena cted in 19 86. The Act,

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by its terms, became effective on January 1, 1988. Section 48-18-601

provides:

Any action alleging breach of fiduciary duties
by directors or officers, including alleged violations
of the standards established in § 48-18-301 [for
directors], § 48-18-302 [for directors] or § 48-18-
403 [for officers], must be brought within one (1)
year from the date of such breach or violation;
provided, that in the event the alleged breach or
violation is not dis cover ed no r reaso nably s hould
have been discovered within the one-year period,
the period of limitation shall be one (1) year from
the da te suc h was discov ered o r reaso nably
shou ld have been discov ered. In no eve nt sha ll
any such action be brought more than three (3)
years after the date on which the breach or
violation occu rred, e xcept w here th ere is
fraudulent concealment on the part of the
defendant, in which case the action shall be
commenced within one (1) year after the alleged
breach or violation is, or should have been,
discovered.

In American Network G roup, Inc. v. Kostyk, 804 S.W.2d 447

(Tenn. Ct. App. 1990), the Court of Appeals applied Section 48-18-601 to a

cause of action against a corporate officer for breach of fiduciary duties that

had a risen p rior to the effective date o f the sta tute. T he Co urt of A ppea ls

held that the application of Section 48-18-601 to a cause of action that arose

prior to January 1 , 1988 resulted in the former limitation p eriod of six years

being shortened to one year, beginning on the effective date of the statute,

Janua ry 1, 1988 , and en ding on Janua ry 1, 1989 .

Under the rule set forth in Kostyk, any right the plaintiffs may

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have had to recover from A nderson o r Jenkins for brea ch of their fiduciary

duties as officers or directors of any of the three subsidiary corporations or

Po Group, Inc. expired on January 1, 1989, prior to the date on which the

present suit was filed, June 30, 1989. The plaintiffs acknowledge that

Section 48-18-601 bars recovery from Anderson or Jenkins for any breach

of fiduciary duties as officers or directors.

However, the plaintiffs dispute the applicability of Section 48-

18-601 to the corporate defendant Po Group, Inc., the majority shareholder

of each of the three subsidiary corporations in which the plaintiffs owned

stock. When this transaction was consummated on June 30, 1986, Tenn.

Cod e Ann . § 48-1 -907 (1 984) (r epea led Ja n. 1, 19 88) pro vided th at any s ale

by a corporation of all or substantially all of its property must have the prior

approval of shareholders owning at least two-thirds (2/3) of the stock of the

corpo ration. T hus, th e actio n of Po Grou p, as th e ma jority sha rehold er in

the three subsidiary corporations, was essential to the consummation of the

sale.

In this case, the allegation of wrongdoing is directed at Po

Group, Inc., wh ich was not an officer or director of the sub sidiary

corpo rations . In its inte rpreta tion of S ection 48-18 -601, th e Cou rt of Ap peals

failed to distinguish between breach of fiduciary duty by officers and

directors and b reach of fiduciary du ty by majority shareh olders. The C ourt

of Appeals' interpretation of Section 48-18-601 to include shareholders is not

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supported by prior cases dealing with statutes of limitations. In Lawma n v.

Barne tt, 177 S.W.2d 121, 124 (Tenn. 1944), the Court held that a statute of

limitatio ns wh ich, by its terms , barre d reco very un der a p romis sory no te did

not prevent the holder of the note from foreclosing on a mortgage that

secured the note. The Court noted that a statute of limitations should not be

applied if a strained c onstruc tion of the s tatute is ne cessar y. Id. at 128. In

Resolution Trust Corp. v. Wood, 870 F. S upp. 79 7 (W .D. Ten n. 1994 ), a

federal case applying Tennessee law, the amended complaint alleged that

the directors and officers of a failed bank were liable for breach of implied

contract, breach of fiduciary duty, gross negligence, negligence, and

negligence per se. In holding that Tenn. Code Ann. § 48-18-601 applied

only to the cause of action that was covered by the express terms of the

statute, the court stated:

As an initial matter, the Court must note that
the defendants' attempt to lump all five causes of
action under Tenn. Code Ann. § 48-18-601, the
statute regard ing bre ache s of fidu ciary du ty, is
inappro priate. Th e statute a pplies exp ressly to
breaches of fiduciary duty. Tenn Code Ann. § 48-
18-601. Hence, for the Court to include other
causes of action which were not addressed by the
state legislature, the Court would be operating in a
legislative posture as opposed to its judicial role.

Id. at 806.

"[I]t is a rule of statutory construction that . . . the mention of

one subject in a statute means the exclusion of other subjects that are not

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mentio ned." State v. Harkins, 811 S.W.2d 79, 82 (Tenn. 1991). When a

statute expressly mentions certain categories and not others, the "omission

is signific ant, an d it wou ld be in appro priate fo r this Co urt to im ply an e ntirely

new top ic into a statu te that doe s not see k to addr ess it in the first in stance ."

Id. On this point, it is significant that Te nn. Code Ann. § 48-1 8-601 app ears

in Chapter 18 of Title 48, a chapter dealing exclusively with directors and

officers. Th ere is no c orrespo nding p rovision in C hapter 1 7 which relates to

the sha reholde rs.

Since, by its express terms, Section 48-18-601 applies to the

breach of fiduciary d uties by "dire ctors or offic ers," and not to m ajority

shareholders, its one year limitations period does not apply to the actions of

Po Grou p, Inc. in its capacity as m ajority shareholder o f the three subsid iary

corporations.

III

The allegations of the complaint in this case perhaps approach

the common law action of deceit. In Vance v. Schulder, 547 S.W.2d 927,

933 (Tenn. 1977), the Court held that the applicable statute of limitations

was th ree ye ars in a suit ba sed o n the c laim th at the s ale of th e plain tiff's

stock for less than its full value was induced by the fraudulent

representations of the defendant. In that case, a minority shareholder sued

the directors of the company alleging that the directors' misrepresentations

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of the value of the plaintiff's stock induced the plaintiff to sell his stock at less

than its fair value. The Court held that the claim was grounded in the tort of

deceit for w hich the s tatute of lim itations is thre e years. Id. at 932. In a

federal ca se interpre ting Ten nesse e law, Cumberland & Ohio Co. of Texas,

Inc. v. First Am. Nat'l Bank, 936 F.2 d 846, 8 48 (6th C ir. 1991), cert. denied,

502 U .S. 103 4, 112 S. Ct. 8 78 (19 92), the Sixth C ircuit C ourt of A ppea ls

held that the three year statute applied in a suit for damages incurred

because the plaintiff was forced by the defendant bank, pursuant to a

financing agre ement, to se ll property for less than its fair value. Th e court

found that the substance of the alleged wrong, economic duress, was

indistinguishable from deceit, and that the suit was barred by the three year

statute of lim itations. Id. at 849. Other jurisdictions which have considered

the limitations period applicable to actions by minority shareholders against

majority shareholders alleging breach of fiduciary duty have held that such

actions a re govern ed by the statute of lim itations for tortio us injury to

property. See, e.g., Kirley v. Kirley, 521 N.E.2d 1041, 1042 (Mass. Ct. App.

1988); Crosby v. Beam, 615 N.E .2d 294 , 300 (O hio Ct. Ap p. 1992 ); Russ ell

v. Cam pbell, 725 S.W.2d 739, 744 (Tex. Ct. App. 1987). There is a

"growing common law trend to declare 'that a breach of fiduciary duty is a

tort.'" Kirley, 521 N .E.2d at 104 3. The conc lusion is that th e app licable

limitations p eriod is thre e years a s provide d in Ten n. Cod e Ann. § 28-3-10 5.

IV

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 The plaintiffs contend that the limitations period started to run

when the sale to DineLite was closed, which was less than three years prior

to the date the suit was filed, and that, therefore, the suit is not barred by the

three year statute. The defendants' position is that the period began when

the plaintiffs were furnished disclosure statements regarding the sale and

that, therefore, the suit is barred by the statute.

The trial c ourt, in ruling on the m otion for su mm ary judgm ent,

did no t rule on when the lim itations period com men ced. C onse quen tly, this

issue m ust be de termine d on rem and.

V

In its order denying the defendants' motion to dismiss, the trial

court h eld tha t "there are su fficient a llegatio ns in p laintiffs' c omp laint tha t, if

proven, w ould pe rmit them to pierce th e corpo rate veil and sue de fendan ts

in their individual capacities." Because the trial court later concluded, after

the defendants filed motions for summary judgment, that all of the plaintiffs'

claims are barred by the one-year statute of limitations, it did not address

that issue further.

Ordina rily, a determ ination of w hether to pierce the corpora te

veil is not appropriate for summary judgment. In Electric Power Bd. of

Chattanooga v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522,

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526 (Tenn. 1985), the Court stated:

The c onditions under w hich the c orporate
entity will be disregarded vary according to the
circumstances present in each case and the
matter is particularly within the province of the trial
court. Moreover, a determination of whether or not
a corporation is a mere instrumentality of an
individual or a paren t corporation is ordina rily a
question of fact for the jury.

In the present case, there are genuine issues of material fact

which preclude summary judgment on the plaintiffs' attempt to pierce the

corporate veil of Po Group and hold Anderson and Jenkins personally liable.

CONCLUSION

The period of limita tions a pplica ble to th e alleg ations stated in

the complaint is three years. Because the record presents genuine issues of

materia l fact which preclude summ ary judgm ent on w hether th e plaintiffs

may p ierce th e corp orate v eil of Po Grou p, Inc., A nders on an d Jen kins sh all

remain as defendants.

The judgm ent of th e Cou rt of Ap peals affirmin g the tria l court's

grant of summary judgment in favor of the defendants is reversed, and the

case is re mand ed to the tria l court for furth er proce edings .

Because the case is reversed and remanded for trial, the

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discretionary costs judgment against the plaintiffs is vacated.

Costs of this appeal are taxed to the appellees.

_________________________
REID, J.

Concur:

Birch, C.J., Drowota, Anderson,
and W hite, JJ.

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