Bowman v. SP Pharmaceuticals ( 2000 )

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
DEC 5 2000
TENTH CIRCUIT
PATRICK FISHER
Clerk
MATTHEW BOWMAN,
Plaintiff - Appellant, No. 99-2317
v. D. New Mexico
SP PHARMACEUTICALS, L.L.C., (D.C. No. CIV-98-415-LH/RLP)
a New Mexico company; SP
ASSOCIATES, INC., a New Mexico
corporation; H. JOSEPH LARSEN;
DONALD E. HAGMAN; and
FERNANDO A. CORREA da COSTA,
Defendants - Appellees.
ORDER AND JUDGMENT *
Before TACHA , ANDERSON , and BALDOCK , Circuit Judges.
Appellant Matthew F. Bowman brought this diversity action against SP
Pharmaceuticals, L.L.C. (“SPLLC”), SP Associates, Inc. (“SPINC”), H. Joseph
Larsen, Donald E. Hagman, and Fernando A. Correa da Costa after the individual
defendants expelled him from a management buyout partnership (the “MBO
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. The court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
Partnership”). Appellant’s complaint asserted breach of fiduciary duty, fraud,
prima facie tort, derivative usurpation of corporate opportunity and constructive
trust claims. The district court granted Defendants’ motion for summary
judgment on all claims, holding that (1) because Appellant and the individual
defendants agreed to abandon SPINC, Appellant may not assert claims on its
behalf, and (2) since any opportunity enjoyed by Appellant was contingent on
obtaining financing, the bank’s independent decision not to finance a transaction
involving Appellant requires that summary judgment be granted as to the breach
of fiduciary duty and constructive trust claims.
On appeal, Appellant contends that the district court erred in granting
summary judgment in favor of Defendants on the breach of fiduciary duty, fraud,
derivative and constructive trust claims because: (1) regardless of the bank’s
position, genuine issues of material fact exist as to whether the individual
defendants breached their fiduciary duties to Appellant; (2) triable issues of fact
exist regarding the individual defendants’ motives and state of mind when they
represented to Appellant that he was a partner; (3) the court failed to take into
consideration that the Letter of Intent (“LOI”) between SPINC and Pharmacia &
Upjohn, Inc. (“P&U”) was never formally transferred to SPLLC; and (4) a
constructive trust may arise because there are triable issues of fact as to whether
-2-
the individual defendants breached their fiduciary duties to Appellant. We
exercise jurisdiction pursuant to 18 U.S.C. § 1291, and affirm.
I. BACKGROUND
In early 1996, the individual defendants formed the MBO Partnership to
pursue the acquisition of a sterile injectable pharmaceuticals facility (the
“Facility”) from P&U. Appellant agreed to become the fourth partner in the MBO
Partnership in April of 1996. He was to be the vice president of sales and
marketing of the acquiring entity and was to hold an equity share in that entity
equal to that of each individual defendant. The partners agreed that Appellant
would relocate from Ohio to New Mexico after the transaction closed in order to
devote his full attention to the new venture.
On May 21, 1996, the four partners incorporated SPINC. Appellant and the
individual defendants were SPINC’s sole directors, officers and shareholders. 1
In
December of 1996, SPINC entered into the LOI with P&U. The LOI referred to
Appellant as an officer and director of SPINC and stated that the LOI
memorialized recent negotiations for the purchase of the Facility by “SP
Associates, or its assignee, which will be controlled by the current owners of SP
Associates, Inc.” Appellant’s App. at 280. The LOI provided that P&U would
1
The SPINC shares apparently were never issued.
-3-
sell the Facility to SPINC for $20,550,000 and that P&U would not, until the
termination of the LOI, negotiate a sale of the Facility with any other buyer. The
LOI was contingent on SPINC obtaining adequate financing.
In January of 1997, the four partners met to discuss the transaction. The
results of those discussions are found in a letter from da Costa to Appellant,
Larsen and Hagman dated January 28, 1997 (the “da Costa Letter”). The da Costa
Letter states that the partners agreed to use NationsBank (“NB”) to finance the
transaction. Id. at 290. In addition, the da Costa Letter states that the partners,
who were SPINC’s sole directors, officers and shareholders, unanimously agreed
to abandon that entity and use a limited liability company (“LLC”) as the
acquisition vehicle. Id. at 291.
On January 31, 1997, NB sent a letter to Larsen and Hagman formally
proposing to finance the acquisition of the Facility. The proposed equity and
ownership split was 40% for NB and 60% for the partners. NB’s proposal also
recognized that an LLC would be used to acquire the Facility. On March 28,
1997, Larsen, on behalf of the MBO Partnership, formed SPLLC. Larsen and
Hagman were the initial members, and Larsen the manager, of SPLLC. The
Organizing Operating Agreement authorized Larsen to execute a Membership
Subscription Agreement between SPLLC and NB and a new operating agreement
between SPLLC, NB, da Costa, Larsen, Hagman and others.
-4-
After receiving data indicating a decrease in the Facility’s projected
financial performance, NB revised the equity and ownership split in its financing
proposal such that its share was increased to 70% and the partners’ share was
decreased to 30%. However, the partners would retain 60% voting control. The
partners attempted in vain to obtain more equity from NB.
Once it became clear that NB would not increase the partners’ equity
position, Appellant apparently became unsettled about the transaction. It was
Appellant’s opinion that he had more at stake in the venture than the other three
partners because he was the only partner relocating his family and incurring
significant additional debt. Id. at 334. In an attempt to make up for his reduction
in equity, Appellant made various written proposals to the other partners on May
27, 1997. Appellant suggested that SPLLC pay him performance bonuses
potentially worth millions of dollars, increase his bonus from $35,000 to $45,000
payable immediately, reimburse him for his daughter’s private school tuition, pay
him a $700 a month car allowance, reimburse him for relocation costs, guarantee
a minimum selling price for his home in Ohio and execute an employment
contract guaranteeing his salary and bonus for at least two years. Id. at 513-18.
The individual defendants reacted negatively to Appellant’s proposals.
Aside from being unwilling to give Appellant a package worth millions of dollars
more than their own, they feared that Appellant’s attempt to renegotiate his deal
-5-
would jeopardize the MBO Partnership’s ability to finance the acquisition. On
May 28, 1997, da Costa wrote to Larsen and Hagman stating that they should give
Appellant written notice that he was expelled from the MBO Partnership. Larsen
drafted a memo dated May 29, 1997, informing Appellant that he was no longer a
partner in the MBO Partnership. However, the memo was never delivered.
Rather, at the urging of Walker Poole of NB, the partners met and reconciled.
The individual defendants agreed to provide Appellant with a relocation package
and Appellant withdrew his other proposals. On June 2, 1997, shortly after the
partners had resolved their differences, da Costa sent Appellant an e-mail stating,
“I’m delighted you are on board.” Id. at 522. A June 5, 1997, draft of the
Subscription Agreement and Representation Letter lists Appellant among the
purchasers of membership interests in SPLLC. Id. at 577-80.
In early June 1997, the partners received a draft of the SPLLC operating
agreement from NB. It contained a provision allowing NB to force a sale of
SPLLC. The forced sale provision intensified Appellant’s concerns about the
transaction. As a result, on June 10, 1997, Appellant made two alternative
proposals to Larsen and NB. First, Appellant proposed to commute from Ohio to
New Mexico each week, spending Monday through Thursday at SPLLC’s offices
in Albuquerque and Friday through Sunday at home with his family in Ohio.
Appellant offered to stay in New Mexico any weekend that he was needed and
-6-
suggested that the company pay for most of his commuting expenses. In the
alternative, he proposed to take a four week leave of absence from his present
employer to assist with the transition and startup of SPLLC, help recruit a
replacement for himself, return to work for his present employer and participate
in SPLLC only as a board member and passive investor.
Both of Appellant’s June 10, 1997, proposals were unacceptable to the
other partners and to NB. On June 11, 1997, Walker Poole of NB informed
Larsen that the bank would not finance any transaction in which Appellant was a
participant. Larsen Dep. at 130, id. at 625. The individual defendants decided to
expel Appellant from the MBO partnership that day as well. Id. On June 14,
1997, Larsen told Appellant that NB would not fund the transaction if he were
involved and that the other partners had decided to proceed without him. Larsen
Dep. at 135-36, id. at 628-29. Appellant continued to stress that he would go
forward with his investment in the Facility even if he was not involved in
management. However, the other partners would not allow him to participate in
the deal in any way. SPLLC’s purchase of the Facility closed on June 30, 1997.
Appellant was not included as an equity member or manager of SPLLC. This
action followed.
-7-
II. DISCUSSION
A. Fiduciary Duty Claim
It is a well-settled principle of law that partners owe each other a fiduciary
duty. See GCM, Inc. v. Kentucky Cent. Life Ins. Co. , 947 P.2d 143, 149 (N.M.
1997); Levy v. Disharoon , 749 P.2d 84, 89 (N.M. 1988); Citizens Bank of Clovis
v. Williams , 630 P.2d 1228, 1230 (N.M. 1981); and N.M. Stat. Ann. § 54-1-21
(effective until July 1, 1997). This fiduciary relationship between partners
“imposes upon all the participants the obligation of loyalty to the joint concern
and of the utmost good faith, fairness, and honesty in their dealings with each
other with respect to matters pertaining to the enterprise.” Bohatch v. Butler &
Binion , 977 S.W.2d 543, 545 (Tex. 1998). Accordingly, “a partner is not allowed
to gain any advantage over a co-partner by fraud, misrepresentation or
concealment, and for any advantage so obtained he must account to the
co-partner.” Levy , 749 P.2d at 89.
The fiduciary duty among partners, however, “applies only to activities
where a partner will take advantage of his position in the partnership for his own
profit or gain.” Leigh v. Crescent Square, Ltd. , 608 N.E.2d 1166, 1170 (Ohio Ct.
App. 1992). Partners may, without violating the fiduciary duty among them,
expel a partner for business reasons. See St. Joseph’s Reg’l Health Ctr. v.
Munos , 934 S.W.2d 192, 197-98 (Ark. 1996); Lawlis v. Kightlinger & Gray , 562
-8-
N.E.2d 435, 442 (Ind. Ct. App. 1990); Waite v. Sylvester , 560 A.2d 619, 622-23
(N.H. 1989); Leigh , 608 N.E.2d at 1170; Bohatch , 977 S.W.2d at 546; Holman v.
Coie , 522 P.2d 515, 523 (Wash. Ct. App. 1974).
The district court granted Defendants’ motion for summary judgment on the
fiduciary duty claim due to the fact that NB decided that it would not finance a
transaction in which Appellant was involved. Appellant contends that the district
court erred in focusing on NB’s position because genuine issues of material fact
remain as to whether the individual defendants discharged the fiduciary duties
they owed to him. We review a grant of summary judgment de novo, applying the
same legal standard used by the district court. Simms v. Oklahoma ex rel . Dep’t
of Mental Health & Substance Abuse Servs. , 165 F.3d 1321, 1326 (10th Cir.),
cert. denied , 120 S. Ct. 53 (1999). Summary judgment is appropriate if the
pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, show that there is no genuine issue as to any material
fact and that the movant is entitled to a judgment as a matter of law. Fed. R. Civ.
P. 56(c).
There is ample evidence in the record that NB came to an independent
conclusion that it would not fund the transaction if Appellant participated. NB
adopted this position after Appellant made his alternative commuting and passive
investor proposals. Appellant claims that it may still have been possible to obtain
-9-
NB financing with him as a partner and points to Walker Poole’s deposition as
evidence of that possibility. Poole stated that he did not know what his response
would have been had the other partners accepted Appellant’s commuting
proposal. Poole Dep. at 208, Appellant’s App. at 642. However, Poole also
stated that he had concerns about Appellant’s stability and was concerned about
Appellant’s commitment to the transaction. Poole Dep. at 169-70, id. at 387-88.
Poole further declared that “it was clear that this was a management team that was
not going to work,” Poole Dep. at 175, id. at 391, and that he and his colleagues
at NB “decided that we certainly weren’t willing to commit the kind of capital
that we were going to commit to this opportunity with Mr. Bowman as one of the
four partners.” Poole Dep. at 171, id. at 389. We conclude that the district
court’s finding that NB independently decided to exclude Appellant from the deal
is clearly supported by the record.
Given NB’s position, it appears that had the individual defendants decided
to include Appellant in the transaction after his second round of proposals, they
would have lost their financing for the deal and it would not have happened.
Appellant hints that other financing might have been procured, but provides no
evidence that other financing was available. Moreover, the record indicates that
there was no time to obtain alternative financing. Larsen stated in his affidavit
that “I knew that P&U would not provide management additional time to find
-10-
acquisition financing other than that being offered by NationsBank. If the
transaction did not close promptly, P&U would simply close the facility.” Larsen
Aff. ¶ 45, id. at 378-79.
Because of NB’s position regarding Appellant and the MBO Partnership’s
inability to raise alternative acquisition financing, the individual defendants were
faced with a choice of retaining Appellant as a partner and losing the opportunity
to acquire the Facility or expelling Appellant from the MBO Partnership and
preserving some chance of completing the acquisition. The fiduciary duties the
other partners owed Appellant did not require them to keep him as a partner
where doing so meant frustrating the purpose of the MBO Partnership.
Once it was determined that Appellant would be expelled, he was promptly
informed. Larsen told Appellant on June 14, 1997, that NB would not fund the
transaction if he were involved and that the other three partners were going ahead
without him. Larsen Aff. ¶ 44, id. at 378. Appellant understood this
communication because he stated in a June 20, 1997, e-mail to da Costa that “Joe
and Don want me out.” Id. at 524. Appellant’s expulsion was again
communicated to him on June 27, 1997, and June 30, 1997, in e-mails from
da Costa. Id. at 336-43. These communications show that the other partners did
not deceive Appellant, but were honest and open about their decision and the
reasons therefor. That candor was sufficient to discharge their fiduciary duties to
-11-
Appellant under these circumstances. For the foregoing reasons, we conclude that
the district court did not err in granting summary judgment in favor of Defendants
as to the breach of fiduciary duty claim.
B. Fraud Claim
“Actionable fraud consists of misrepresentation of a fact, known to be
untrue by the maker, and made with an intent to deceive and to induce the other
party to act in reliance thereon to his detriment.” Cargill v. Sherrod , 631 P.2d
726, 727-28 (N.M. 1981). Appellant claims that he was defrauded by the
individual defendants. As evidence thereof, he points to a series of
communications beginning with da Costa’s letter to Larsen and Hagman, dated
May 28, 1997, in which da Costa states:
The position and requests of our estranged partner, as defined in his
handwritten note to us dated 5/27 are, in my opinion, totally
unacceptable. . . . My suggestion would be to draft a letter to him
stating that his positions cannot be accepted by the other partners (or
the bank) and that, therefore, we (the three of us) have decide[d] that
we will proceed with a partnership of three.
Appellant’s App. at 519. The following day, Larsen drafted a memo to Appellant
stating, “[a]fter due consideration, we feel that it is in the best interests of all
team members involved to release you from the SP Associates and SP
Pharmaceuticals LLC team.” Id. at 520.
-12-
Larsen’s memo to Appellant, however, was never delivered. When the
individual defendants informed NB that they were going to expel Appellant,
Walker Poole told them that doing so may jeopardize NB’s willingness to finance
the transaction since Appellant was the only partner with marketing expertise.
Poole suggested that the individual defendants meet with Appellant to see if they
could work out their differences and keep the management team together. The
partners met and were able to resolve their differences. Shortly after this
reconciliation, da Costa sent Appellant an e-mail stating, “Dear Matt: I’m
delighted you are on board.” Id. at 522.
This reconciliation was short-lived. After Appellant made his alternative
commuting and passive investor proposals, both the partners and NB decided that
he must go. After his expulsion from the partnership and his initiation of this
action, Appellant discovered the May 28, 1997, letter from da Costa to Larsen and
Hagman and the draft expulsion memo dated May 29, 1997. Appellant had been
unaware that his first round of proposals had nearly cost him his partnership. As
a result of this discovery, Appellant alleges that the individual defendants
intended to expel him from the MBO Partnership all along and that their
communications to the contrary, especially da Costa’s June 2, 1997, e-mail,
intentionally misled him to believe in, and detrimentally rely on, his status as a
partner in the MBO Partnership.
-13-
The district court granted Defendant’s motion for summary judgment on
this claim at the summary judgment hearing. Appellant contends that the district
court erred in so doing because the aforementioned communications between the
individual defendants establish genuine issues of material fact as to their motives
and state of mind at the time those communications were made.
The record shows that all parties understood that Appellant was a partner in
the MBO Partnership until at least June 10, 1997. It is clear that the individual
defendants intended to expel Appellant from the MBO Partnership on May 29,
1997. However, they changed their minds after meeting with Appellant and
working out their differences. There is nothing in the record to indicate that the
reconciliation between the partners was other than genuine. Moreover, there is
nothing in the record that suggests that the individual defendants intended to
expel Appellant as of June 2, 1997. As a result, da Costa’s June 2, 1997, e-mail
to Appellant was not misleading. Rather, it confirmed the recent reconciliation of
the partners. It was not until Appellant made further demands that both the
partners and NB decided to proceed without him. Because we find that Appellant
has failed to demonstrate the existence of any genuine issues of material fact as to
the elements of fraud, we conclude that the district court did not err in granting
summary judgment on the fraud claim in favor of Defendants.
-14-
C. Derivative Usurpation of Corporate Opportunity Claim
Shareholders of New Mexico corporations may bring derivative actions on
behalf of the corporation in order to assert the unenforced rights of the
corporation. See Petty v. Bank of N.M. Holding Co. , 787 P.2d 443, 446 (N.M.
1990). Appellant contends that the individual defendants breached their fiduciary
duties to SPINC by usurping a corporate opportunity that rightfully belonged to
SPINC, namely the acquisition of the Facility. SPINC has never sought to
enforce its alleged rights with respect to the purchase of the Facility and
Appellant purports to bring his derivative claim in order to vindicate those rights. 2
As indicated in the da Costa Letter, Appellant and the individual
defendants, the sole directors, officers and shareholders of SPINC, unanimously
decided in January of 1997 to use an LLC as the acquisition vehicle for the
Facility. Their decision was based on legitimate business reasons. The partners
wanted to use a flow through entity for the acquisition and they could not qualify
as a Subchapter S corporation under the Internal Revenue Code because one of
SPINC’s shareholders, da Costa, was not a U.S. citizen. In addition, there were
potential tax advantages to an LLC. Appellant’s App. at 291, Larsen Aff. ¶ 28,
It appears that Appellant’s derivative action is improperly brought under
2
New Mexico law as it fails to meet the requirements of N.M. Stat. Ann. § 53-11-
47. We need not address this issue, however, since we reach the merits of
Appellant’s derivative claim.
-15-
id. at 373. Although the partners agreed to abandon SPINC, they never caused
SPINC formally to transfer the LOI to SPLLC.
The district court granted summary judgment in favor of Defendants on
Appellant’s derivative claim holding that because Appellant was among those
who agreed to abandon SPINC in favor of an LLC, he could assert no claims on
its behalf in connection with that action. Appellant argues that the district court
erred in its holding because the fact that the LOI was never formally transferred
to SPLLC establishes that SPLLC and its members, three of whom are directors
and officers of SPINC, illegally usurped SPINC’s corporate opportunity to
purchase the Facility. We disagree.
The decision to abandon SPINC was legal. Aside from its sound business
purpose, the decision was made by all of SPINC’s directors, officers and
shareholders. There was no dissent at the time the decision was made and we will
not now allow Appellant to recast himself as a dissenting minority shareholder.
The only complication in our analysis is the existence of the LOI.
However, that is easily dispensed with. The LOI itself states that with the
exception of the confidentiality and exclusivity provisions, the LOI “does not
bind and will not result in any liability o [sic] the part of either party.” Id. at 478.
The LOI did not bind SPINC to purchase the Facility. When SPINC’s directors,
officers and shareholders unanimously decided to abandon that entity in favor of
-16-
an LLC, SPINC effectively backed out of the deal. As a result, the provisions of
the LOI, other than the confidentiality provision, no longer had any effect. For
the foregoing reasons, we conclude that the district court did not err in granting
summary judgment in favor of Defendants as to Appellant’s derivative claim.
D. Constructive Trust Claim
Appellant argues that because, as he alleges, the individual defendants
evicted him from the MBO Partnership thereby wrongfully appropriating his
portion of the buyout opportunity to themselves, he is entitled to a constructive
trust. He asserts that “genuine issues of material fact remain as to whether
Defendants breached their fiduciary duties, which would entitle Bowman to a
constructive trust.” Appellant’s Br. at 45. “A constructive trust arises where a
person who holds title to property is subject to an equitable duty to convey it to
another on the ground that he would be unjustly enriched if he were permitted to
retain it.” Bassett v. Bassett , 798 P.2d 160, 167 (N.M. 1990). The district court
granted summary judgment for Defendants on this claim for the same reasons it
granted summary judgment on the fiduciary duty claims, namely that the
opportunity for an entity partly owned by Appellant to purchase the Facility was
prospective and evaporated when NB decided it would not finance a transaction in
which Appellant was involved.
-17-
We have already determined that Appellant was legally expelled from the
MBO Partnership for legitimate business reasons. In the alternative, Appellant
claims that he had a contractual entitlement to participate in the transaction
pursuant to the LOI. As discussed above, the only binding provisions of the LOI
were the confidentiality and exclusivity provisions. When Appellant and SPINC’s
other directors, officers and shareholders decided to abandon that entity for
purposes of the acquisition, the LOI lost its buyer and the parties started over.
Even if the LOI had been in effect in June of 1997, it would have
terminated on June 11, 1997, upon NB’s decision not to extend financing for any
acquisition in which Appellant was involved. The LOI did not require NB
financing, but the record indicates that there was no time to find alternative
financing in June of 1997. Larsen Aff. ¶ 45, Appellant’s App. at 378-79. As a
result, the LOI was terminated since the buyer, an entity involving Appellant,
could not obtain financing for the acquisition.
Appellant was not the victim of either a breach of fiduciary duties or a
breach of contract. In order for there to be a constructive trust, there must be
some underlying wrong giving rise to the equitable duty of the owner of the
property to convey it to the party from whom it was wrongfully taken. Because
the record shows that the actions taken by the individual defendants were legal,
no constructive trust arises. Accordingly, we conclude that the district court did
-18-
not err in granting Defendants’ summary judgment motion as to Appellant’s
constructive trust claim.
III. CONCLUSION
Based on the foregoing, we conclude that the district court did not err in
granting Defendant’s motion for summary judgment. We therefore AFFIRM the
district court in all respects.
ENTERED FOR THE COURT
Stephen H. Anderson
Circuit Judge
-19-