Kreischer v. Kerrison Dry Goods ( 1999 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
JANE P. KREISCHER; CHARLES F.
KREISCHER; EDWIN F. KREISCHER;
BARBARA W. KREISCHER,
Plaintiffs-Appellants,
v.
No. 97-1230
THE KERRISON DRY GOODS COMPANY;
EDWIN H. POULNOT, III; DALE
WIDMAN; GENE POULNOT RIGGS;
DAVID LAWRENCE POULNOT; JOAN
HUTCHINSON POULNOT,
Defendants-Appellees.
JANE P. KREISCHER; CHARLES F.
KREISCHER; EDWIN F. KREISCHER;
BARBARA W. KREISCHER,
Plaintiffs-Appellees,
v.
No. 97-1800
THE KERRISON DRY GOODS COMPANY;
EDWIN H. POULNOT, III; DALE
WIDMAN; GENE POULNOT RIGGS;
DAVID LAWRENCE POULNOT; JOAN
HUTCHINSON POULNOT,
Defendants-Appellants.
Appeals from the United States District Court
for the District of South Carolina, at Charleston.
C. Weston Houck, Chief District Judge.
(CA-91-3255-2-12)
Argued: September 25, 1998
Decided: January 26, 1999
Before MURNAGHAN, WILKINS, and LUTTIG, Circuit Judges.
_________________________________________________________________
Affirmed in part and remanded with instructions by unpublished per
curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: J. Robert Howard, NALL, MILLER, OWENS, HOCUTT
& HOWARD, Atlanta, Georgia, for Appellants. Robert Buford Wal-
lace, WALLACE & TINKLER, Charleston, South Carolina, for
Appellees. ON BRIEF: Jan Pontrelli, NALL, MILLER, OWENS,
HOCUTT & HOWARD, Atlanta, Georgia; J. Rutledge Young, Jr.,
Stephen P. Groves, Sr., YOUNG, CLEMENT, RIVERS & TISDALE,
Charleston, South Carolina, for Appellants. Paul E. Tinkler, WAL-
LACE & TINKLER, Charleston, South Carolina; T. Alexander
Beard, BEARD LAW OFFICES, Charleston, South Carolina, for
Appellees.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
The instant case is an appeal by the plaintiffs, Jane Poulnot Kreis-
cher, Charles F. Kreischer, Edwin F. Kreischer, and Barbara W.
Kreischer (collectively "the Kreischers"), who were minority stock-
holders of The Kerrison Dry Goods Company, Inc. ("Kerrisons" or
"the Company"). The stock of Kerrisons was largely owned by Edwin
H. Poulnot, III, Dale Poulnot Widman, Gene Poulnot Riggs, David
Lawrence Poulnot, and Joan Hutchinson Poulnot (collectively "the
Poulnots"). The Kreischers contended that there were erroneous legal
2
conclusions of the district court, including its holding that the defen-
dants, the Poulnots, did not violate their fiduciary duties as majority
stockholders in a close corporation and by ordering by the Poulnots
of a relatively low amount at which to purchase the Kreischer stock.
The Poulnots filed a cross appeal, claiming that the court erred in fail-
ing to apply minority and marketability discounts in evaluating the
minority interest at the valuation phase of the trial. The Kreischers
seek more than $3,000,000 as the value of the stock that they own and
desire for the corporation to repurchase from them. Because the
Kreischers appeared to suffer no individual injuries, we affirm the
decision of the district court.
The factual background, as found by the district court at the liabil-
ity phase of the trial, is as follows:
The Kreischers seek to have the corporate defendant, Kerrisons,
judicially dissolved pursuant to S.C. CODE ANN. § 33-14-300 (Law.
Co-op. 1990). The Kreischers contend that the Poulnots have engaged
in a series of oppressive, illegal, and fraudulent acts all in an effort
to squeeze the Kreischers out of their minority interest in Kerrisons.
Alternatively, they claim that the Poulnots have wasted and misap-
plied the corporate assets of Kerrisons to such an extent that dissolu-
tion is warranted.
The Kreischers are minority shareholders who own approximately
28% of the stock in Kerrisons. The defendants are Kerrisons, a
department store and three small women's specialty shops including
substantial real estate holdings, and the majority shareholders, "the
Poulnots," who own approximately 72% of the stock in the Company.
The Poulnots are members of the board of directors and also hold var-
ious positions as officers.
The Kreischers' complaint was filed on October 28, 1991. The six
causes of action alleged by the Kreischers are as follows: breach of
fiduciary duties by the directors of the Company (Count One); breach
of fiduciary duties by the officers of the Company (Count Two); fraud
(Count Three); conspiracy (Count Four); oppression (Count Five);
and negligence, mismanagement, waste, and misapplication of corpo-
rate assets (Count Six).
3
The Kreischers brought the suit in their individual capacities and
not as a derivative action on behalf of the corporation. They did so
because they assert that "squeeze-out" suits are not derivative actions.
On that basis, the Poulnots moved for and were granted partial
summary judgment as to counts one through four on the ground that
the Kreischers suffered no individual damages as a result of the
events of which they complained.1 Counts five and six were permitted
to proceed to trial, because individual shareholders may maintain such
actions under S.C. CODE ANN. § 33-14-300.
The district court bifurcated the trial into liability and valuation
phases. A jury was selected and began hearing evidence in the liabil-
ity phase, but the court dismissed the jury on July 28, 1993. It did so
because it concluded that judicial dissolution proceedings under § 33-
14-300 are equitable, not legal, and thus it must decide whether to
grant the requested relief.
The district court found that the Kreischers' allegations fell into the
following categories: (a) common law oppression; (b) stock fraud and
manipulation; (c) the Poulnots' desire to control the entire company;
(d) inadequate dividend return to the 28% minority shareholders;
(e) using corporate funds personally to benefit the Poulnot majority
shareholders and officers; (f) failure to disclose true financial infor-
mation involving officers of the Company; (g) willful hostility toward
the minority shareholders and outside directors; (h) conscious disre-
gard for the rights of minority shareholders and outside directors;
(i) failure to abide by the corporate bylaws; (j) failure to reveal to the
minority shareholders the true financial state of the Company when
attempting to purchase their minority interest; (k) large financial ben-
efits to the Poulnots in terms of salaries, bonuses, and other compen-
sation; (l) violations of the IRS Code; (m) dishonest and deceitful
management; (n) falsifying documents; (o) misrepresentations to the
court concerning the use of corporate assets and the state of corporate
affairs; (p) continuing to allow operating losses; (q) allowing con-
structive loss in shareholder equity; (r) allowing loss in constructive
rental income; (s) allowing estimated tax liability from the failure to
_________________________________________________________________
1 The Poulnots' Motion for Partial Summary Judgment was granted on
July 23, 1993.
4
reinvest Hurricane Hugo proceeds properly; (t) lack of any business
plan for the future of the company; (u) the failure to exercise reason-
able corporate business practices, including the failure to hire quali-
fied managers to run and operate the company, from a sales,
marketing, and financial standpoint; and (v) the failure to deal in fair
terms with outside directors and minority shareholders.
The district court concluded that dissolution was not warranted, but
that a court-ordered buyout of the shares was an equitable and appro-
priate solution to the matter. It therefore ordered such a buyout, and
proceeded to the valuation phase of the trial in July 1995. During the
first valuation trial, the court heard evidence from the Kreischers as
to wrongful conduct by the Poulnots. The court later decided to
reopen the record and hold a second valuation trial in September 1996
to address more of the Kreischers' allegations of wrongful conduct.
Following the second valuation trial, the court finally concluded that
the Kreischers' shares were worth $704,306.31. The Kreischers filed
a timely appeal.
DISCUSSION
We review findings of fact by the district court under the clearly
erroneous standard. See FED. R. CIV. P. 52(b); United States v. St.
Paul Fire & Marine Ins. Co., 86 F.3d 332, 334 (4th Cir. 1996). A
finding of fact is clearly erroneous if the reviewing court "on the
entire evidence is left with a definite and firm conviction that a mis-
take has been committed," although there may be evidence in the
record supporting the finding. United States v. United States Gypsum
Co., 333 U.S. 364, 395 (1948). Conclusions of law are reviewed de
novo. See St. Paul Fire, 86 F.3d at 334. Since the district court sat in
diversity -- the Kreischers are residents of Georgia and Tennessee,
while all of the Poulnots and other defendants are residents of South
Carolina -- the rule of Erie Railroad Co. v. Thompkins, 304 U.S. 64,
78 (1938), requires the application of the law of South Carolina, the
forum state.
I.
First, we must determine whether the district judge should have
recused himself. The Kreischers contend that for a number of reasons,
5
he should have recused himself from the bench in the instant case.
Among their complaints against him are the following: (1) failure to
address briefs on points of law that the Poulnots did not oppose;
(2) the "perception that no fact or law could move the court"; (3) the
court's conclusion that the Poulnots' conduct was"probably legal,"
despite the Kreischers' protests; (4) the court's application of the
business judgment rule; (5) "harboring a closed mind"; (6) prejudice
against their Atlanta counsel; and (7) oppression by delay in issuing
its Order.
The standards for determining whether a judge must be disqualified
from a matter are set out in 28 U.S.C. § 455 (Supp. 1998). Under the
relevant provisions of that statute, a judge must disqualify himself or
herself if: (1) his or her "impartiality might reasonably be ques-
tioned," id. at (a); or (2) he or she is biased against one of the parties
or has personal knowledge of disputed facts. See id. at (b)(1). How-
ever, judicial rulings, by themselves, "almost never constitute valid
bases for a bias or partiality motion." Liteky v. United States, 510 U.S.
540, 555 (1994). Moreover, "litigants may not make the trial judge
into an issue simply because they dislike the court's approach or
because they disagree with the ultimate outcome of their case."
United States v. Gordon, 61 F.3d 263, 268 (4th Cir. 1995). The Kreis-
chers appear to have alleged that to the extent that the court did not
rule in their favor given the facts they presented, the court must be
biased.
The Kreischers' argument is unpersuasive. The court ruled against
the Kreischers on the issues of fraud, oppression and breach of duty
because the Kreischers did not establish any injury to themselves.
Since each of those causes of action requires that the plaintiff suffer
an injury, the district court's decision was not based on prejudice but
on sound legal principles. Moreover, the judge permitted the Kreis-
chers a second opportunity after the initial valuation hearing to pre-
sent evidence of the Poulnots' fraud. Thus, contrary to the Kreischers'
assertions, the judge was open to adjudicating their claims. As a
result, grounds 1-5 and seven are without merit.
Moreover, the judge did not appear to be biased against attorneys
from Atlanta. While the judge did reference them, ("[B]ut when I see
these reams of paper continue to come forward, then I assume the
6
attorney meter is still running in Atlanta"), nothing in the record sug-
gests that the judge harbored any ill feelings toward the attorneys for
the Kreischers. When the judge would not allow one of the Atlanta
attorneys to argue a portion of the case, he explained that he had "a
lot of respect for [the other plaintiff's attorney] and I figured that,
through [that attorney], we may be able to get the Plaintiffs' position
properly articulated. With that, I'll be glad to hear from Mr. Howard
if he has anything to say." The Atlanta attorney (Mr. Howard), then
proceeded to make his argument. The judge's reasoning here appears
to have less to do with where Mr. Howard is from than it does his
opinion of the other lawyer. Thus, the plaintiffs have not demon-
strated that the district judge should have recused himself.
II.
The Kreischers contest the district court's application of the law to
the facts that it found. The court granted summary judgment to the
Poulnots on Claims I-IV of the Complaint, which alleged that the
Poulnots: (1) breached the duties of loyalty and care they owed to the
corporation as officers, directors, and majority shareholders;
(2) oppressed the Kreischers; and (3) defrauded the Kreischers. The
district court found that the Kreischers suffered no actionable injury.
In contesting the finding that there was no breach of fiduciary duties,
the Kreischers contend that the district court misconstrued the stan-
dard for examining the breach of the duty of care owed to the corpo-
ration. These allegations will be addressed in turn.
South Carolina's statutory law imposes on directors, officers and
majority shareholders the duties of loyalty and care, specifically
requiring them to act "(1) in good faith; (2) with the care an ordinarily
prudent person in a like position would exercise under similar circum-
stances; and (3) in a manner he reasonably believes to be in the best
interests of the corporation and its shareholders." S.C. CODE ANN. §
33-8-300 (Law. Co-op. 1990); S.C. CODE ANN. § 33-8-420(a) (Law.
Co-op. 1990) (using the same language to describe officers' duties);
Jacobson v. Yaschik, 155 S.E.2d 601, 604-05 (S.C. 1967) (holding
that controlling shareholders are also fiduciaries who owe the duties
of loyalty and care to the other shareholders).
7
A.
First we must address whether the business judgment rule controls.2
Although the Kreischers challenge the district court's ruling, the court
did not err in applying the business judgment rule. The Kreischers
have argued that the business judgment rule has been superseded by
South Carolina statutory law, which employs a "reasonably prudent
person" standard. South Carolina statutory law explicitly refers to the
standard by which a director's behavior is to be judged as the reason-
ably prudent person under the circumstances. See S.C. CODE ANN.
§ 33-8-300 (Law. Co-op. 1990). The statute became effective after
Dockside (the case that the district court cited) was decided.
The Kreischers have argued that the statute's plain language clearly
mandates the use of the reasonably prudent person standard. They
bolster their argument by pointing out that we have compared the
Model Business Corporations Act, which uses language nearly identi-
cal to that in the South Carolina statute, with the business judgment
rule and have concluded that the two rules are different. See WLR
Foods, Inc. v. Tyson Foods, Inc., 65 F.3d 1172, 1185 (4th Cir. 1995).
Thus, the Kreischers have argued, to the extent that the South Caro-
lina statute requires an examination of what the"ordinary prudent
person" would do, the business judgment rule cannot apply.
While the statute is silent as to its effect on the business judgment
rule, a review of the legislative history of S.C. C ODE ANN. § 33-8-300
reveals that the legislature intended for the courts to decide that ques-
tion. In the commentary accompanying § 33-8-300, the legislature
expressly recognized that the statute could affect the application of
the business judgment rule, and specifically left that matter to the
courts to determine. See Comment to S.C. C ODE ANN. § 33-8-300.
Later in the history, the legislators stated that the business judgment
rule is not necessary where the relevant parties have complied with
the statute. Id. at n.4. The rule is used appropriately only where the
parties have not complied with § 33-8-300. Id. As a result, courts
_________________________________________________________________
2 The business judgment rule as applied in South Carolina does not per-
mit the board of directors' decisions to be overturned by judicial action
absent proof of bad faith, dishonesty or incompetence. See Dockside
Association, Inc. v. Deytens, 362 S.E.2d 874, 876 (S.C. 1987).
8
have continued to apply the business judgment rule. See, e.g.,
Goddard v. Fairways Dev. Gen. Partnership, 426 S.E.2d 828, 832
(S.C. App. 1993). Since § 33-8-300 does not categorically preclude
the application of the business judgment rule, the district court did not
err.
B.
Next we address whether the Poulnots breached their fiduciary
duties.
1. Hurricane Hugo Insurance Proceeds
The Kreischers have asserted and the district court has concluded
that such duties require the fiduciaries to disclose all material infor-
mation to the shareholders. See Jacobson, 155 S.E.2d at 604-05. The
district court found as a fact that the Hurricane Hugo insurance pro-
ceeds that the corporation received were material ("Hurricane Hugo
was a momentous event in the financial life of s."). Thus, the Kreis-
chers have argued, the willful failure to disclose all information relat-
ing to the insurance negotiations violated the duties of loyalty and fair
dealing, particularly in light of the Poulnots' offer to exchange the
Kreischers' stock.3
The district court properly concluded that the Poulnots did not
breach the duty of loyalty. Although it found that the Poulnots did not
advise the Kreischers of important information in a timely manner,
the Kreischers cannot prevail because they were not injured or preju-
diced by the Poulnots' failure to share the information.
As the Kreischers concede, they did not actually accept the stock
swap offer from the Poulnots. Therefore, the Kreischers still owned
the same amount of stock today as they owned before the purchase
offer. That fact distinguishes the Kreischers' claims from the cases
they cite because the plaintiffs in those cases actually sold their shares
or were otherwise prejudiced. See Jacobson, 155 S.E.2d at 603 (stat-
_________________________________________________________________
3 The Poulnots offered to exchange the Kreischers' common stock to
nonvoting stock. The exchange would be tax-free, the Kreischers would
remain on the board, and would be paid $20,000 per year.
9
ing that stockholder actually sold the shares); Talbot v. James, 190
S.E.2d 759, 761-63 (S.C. 1972) (noting that the shareholders signed
certain agreements to permit the interested director to pursue a mort-
gage loan).
Moreover, Mr. Kreischer4 admitted on cross-examination that at the
May 10, 1990 board meeting, the board: (1) rejected a $1 million
offer from the insurance company and (2) had an estimate of $3.5
million as a proper insurance award.5 Kreischer was reasonably aware
of where the corporation was in the process, because the board dis-
cussed the matter at this meeting.
Finally, the Poulnots made their original stock offer in May 1990,
before Kerrisons knew what the actual award would be. Although
negotiations with the insurance company were ongoing, the final
insurance award of more than four million dollars was not made until
February 1991. In the interim, a lower amount had been awarded by
an arbitrator in November 1990 -- an award that the insurance com-
pany contested. By that time, the Kreischers had rejected the stock
offer and made a counteroffer of their own. Since the Kreischers did
not consummate the transaction with the Poulnots, and in any event,
were aware of the potential settlement value, they cannot sustain their
breach of loyalty claim.
2. Compensation
The Kreischers also complain that the Poulnots robbed the corpora-
tion to the extent that they withdrew funds from the corporation on
a number of occasions. The Poulnots contend that the disbursements
in question were not loans but compensation for services rendered and
expenses reasonably incurred in the course of operating the business.
The district court found that the drawing of consultants' fees and
other stipends for some of the Poulnots was not a breach of their fidu-
_________________________________________________________________
4 References in the opinion to"Mr. Kreischer" are to Charles Kreischer.
5 The district court found that during the insurance settlement negotia-
tions, the Poulnots led the Kreischers to believe that the award would be
between $2 million and $2.5 million. However, as is shown from Mr.
Kreischer's testimony above, it is also clear that the Plaintiffs were aware
that higher figures were possible.
10
ciary duties. South Carolina corporate law forbids a corporation to
"lend money to or guarantee the obligation of a director" unless the
board -- other than the interested director[s] -- approves the loan or
the board determines that the loan benefits the corporation and either
approves the loan or a "general plan authorizing loans and guaran-
tees." S.C. CODE ANN.§ 33-8-320 (Law. Co-op. 1990). More gener-
ally, a conflict of interest transaction in which a director is involved
is valid if: (1) the board knows the material facts or a committee of
the board approved (or ratified) the transaction; or (2) the sharehold-
ers knew the material facts and they by vote approved (or ratified) the
transaction; or (3) the transaction is fair to the corporation. See S.C.
CODE ANN. § 33-8-310 (Law. Co-op. 1990).
The record provides substantial support for the district court's con-
clusions. First, some of the Poulnots, such as Jane H. Poulnot, never
received any compensation from the company. Much of the other
compensation was paid for business advice. Still other "compensa-
tion" took the form of commonplace company perquisites, such as the
use of company cars, reimbursement for travel, food and lodging, and
gasoline and credit cards. None of the compensation appeared to be
loans to the Poulnots, and the district court did not find them to be
such. The district court did find that although the cars are sometimes
used for personal reasons, the defendants pay some of the mainte-
nance expenses of the cars. Moreover, any personal charges to the
company gasoline or credit cards were either reimbursed or charged
to the Poulnots' personal accounts.
Second, the IRS audited Kerrisons in 1987 and 1988 and found no
wrongdoing with respect to the compensation arrangements. In addi-
tion, the company has been audited by several accounting firms --
including accountants whom the Kreischers helped select and with
whom they have had conversations -- over the past two decades, and
no wrongdoing has been uncovered.
Third, the district court found that the Kreischers themselves "also
enjoyed certain benefits [at the corporation's expense] on a smaller
scale."6 Although the Poulnots clearly availed themselves of company
_________________________________________________________________
6 For example, Jane and Charles Kreischers' son was employed by Ker-
risons while he attended school, and the company paid his automobile
insurance and allowed him telephone calling card calls. The Kreischers
themselves also availed themselves of the calling card.
11
resources to a greater extent, the Kreischers complaint that any such
use of company property is fraudulent is disingenuous in light of their
own usage.
Finally, the Kreischers were members of the board of directors who
were under the same fiduciary duties as the Poulnots. They also are
responsible for ensuring the financial health of the company and
investigating matters that concern the corporation. Yet the record sug-
gests that they had knowledge of the practices at issue here, if not the
extent,7 but undertook little or no action until they wanted to exit the
company. Based on those facts, the district court did not err in finding
that the Poulnots did not breach their fiduciary duties.
C. Fraud And Oppression
The Kreischers also have maintained that the above actions have
resulted in fraud and that the stock offer was oppressive. Under South
Carolina law, a plaintiff cannot successfully establish fraud without
demonstrating that he or she suffered an injury. See First State Sav-
ings & Loan v. Phelps, 385 S.E.2d 821, 824 (S.C. 1989) (stating the
elements of fraud). Since the Kreischers demonstrated no injury to
themselves, there can be no fraud with respect to those issues.
The Kreischers also have contended that the court's findings that:
(1) the Poulnots' attitude evinced a desire not to provide an economic
return; and (2) the stock exchange plan was "unreasonably low" are
evidence of oppression. Moreover, the Kreischers complain that the
Poulnots never offered them any exit.
However, the record offers abundant evidence that establishes that
there was no oppression. First, Mr. Kreischer admitted that the Poul-
nots always voted to include the Kreischers on the board, and have
never made any effort to remove them from the board. In fact, meet-
ing times were altered to accommodate the Kreischers, who do not
live in South Carolina. Second, Mr. Kreischer testified that his rela-
tionship with Mr. Edwin Poulnot, Jr. -- who ran the company until
his death in 1987 -- was "excellent." Third, the Kreischers' requests
_________________________________________________________________
7 The district court specifically found that the accountants, in perform-
ing their audits, accounted for the practices in question.
12
to review the minutes of meetings had never been refused prior to the
instant litigation. Fourth, the Kreischers admit that they never
objected to how board meetings were conducted. Finally, the Kreis-
chers also admit that they "normally received" financial statements.
The offer, even if "unreasonably low," does not constitute oppres-
sion, either. First, the Kreischers: (1) did not initially feel "squeezed
out," (2) felt that the Poulnots had a right to make the offer, and
(3) thought that the offer was "interesting." Second, while the pro-
posal would strip the Kreischers of their votes as shareholders, they
would have been lifetime members of the board and would retain
their voting powers as members of the board. Third, the proposal also
guaranteed the Kreischers $20,000 a year. Finally the Kreischers only
owned approximately 28% of the outstanding shares. They would
always be outvoted anyway to the extent that the Poulnots disagreed
with them.
Finally, the Kreischers point to no authority establishing that South
Carolina law mandated that the Poulnots offer to buy their shares or
otherwise help them out of the corporation. While S.C. CODE ANN.
§ 33-14-310 permits the court to order a buyout of a shareholder's
shares, see id. at (d)(4), the statute says nothing about requiring con-
trolling shareholders to offer a buyout on their own. Thus, on balance,
there were sufficient facts for the district court to conclude that there
was no oppression.
III.
In an attempt to avoid summary judgment on Counts I-IV, the
Kreischers also argue that they may redress injuries to the corporation
via their direct suit because Kerrisons is a close corporation. As stated
above, the Kreischers did not prove individual damages for their
claims of breach of fiduciary duties, fraud and oppression.
As a general matter, suits to recover assets or vindicate other rights
of the corporation must be brought as derivative actions, not direct
actions. See Johnson v. Baldwin, 69 S.E.2d 585, 588 (S.C. 1952).
Shareholders bringing direct suits must establish injuries to them-
selves as individuals. See Todd v. Aldo, 403 S.E.2d 666, 668 (S.C.
13
App. 1991) (stating that an individual shareholder may bring suit only
when his "loss [is] personal and not a loss of the corporation").
Some courts have recognized that where there is a close corpora-
tion, a derivative action is not necessary. See Dresden v. Willock, 518
F.2d 281, 288 (3d Cir. 1975); Watson v. Button , 235 F.2d 235, 237
(9th Cir. 1935) (applying Oregon law); Thomas v. Dickson, 301
S.E.2d 49, 51 (Ga. 1983). The Kreischers argue that South Carolina
has also adopted the rule.
However, when the issue was raised before the South Carolina
Supreme Court, the court "recognized that there has been an evolution
in the concept of minority rights," but did not formally adopt those
principles. Davis v. Hamm, 387 S.E.2d 678, 680 (S.C. Ct. App. 1989).
The court noted that cases advocating direct suits for shareholders in
close corporations treated the parties like "joint venturers or partners."
Id.; see, e.g., Dresden, 518 F.2d at 288. Moreover, the court noted
that in Watson, the circuit court acknowledged that, among other
things, the parties had agreed to be jointly responsible for the corpora-
tions' debts and the new owners of the corporation waived any right
to bring a corporate cause of action against the malfeasant share-
holder. See Davis, 387 S.E.2d at 679 (citing Watson, 235 F.2d at 237).
In a later case, the South Carolina Court of Appeals distinguished
the Dickson case from the case before it after assuming (but not
deciding) for the purposes of that case that those principles applied.
See Babb v. Rothrock, 401 S.E.2d 418, 419-20 (S.C. 1991). There-
fore, South Carolina's courts have not expressly adopted the policy
of allowing minority shareholders in close corporations to bring direct
suits and we decline to do so here.
As a result, we conclude that there can be no liability unless the
duties breached flowed to the plaintiff, "such as in the types of suits
typified in Jacobson v. Yaschik [citation omitted] and in actions
brought by minority stockholders pursuant to . . . Sections 33-14-300
to 33-14-330." See Davis, 387 S.E.2d at 680. As stated above, the
Kreischers cannot avail themselves of the Jacobson rule because there
was no transfer of shares or other transaction. Their claims under
§§ 33-14-300 to 33-14-330 were permitted to go forward, and
resulted in a court-ordered buyout pursuant to S.C. CODE ANN. § 33-
14
14-310 (d)(4) (Law. Co-op. 1990). Thus, as to claims I-IV of the
Complaint, summary judgment was appropriate.
IV.
Next we must find whether the court granted appropriate relief to
the Kreischers.
A. Substantive Relief Granted
The district court found that no breach of fiduciary duties, fraud,
oppression occurred. It therefore declined to order judicial dissolution
pursuant to § 33-14-300. However, it did order the Poulnots to buy
out the Kreischers' shares, pursuant to § 33-14-310 (d)(4).
Section § 33-14-310, which provides the procedural requirements
for judicial dissolution, also provides for buyouts and other relief
where the conduct at issue does not warrant dissolution, but does
require an equitable solution terminating the parties' relationship. See
S.C. CODE ANN. § 33-14-310 (d)(4). In light of the court's findings --
no fraud, oppression or breach of duty -- the relief is appropriate. See
S.C. CODE ANN. § 33-14-300(2)(ii) (stating that the court may dissolve
a corporation in a shareholder action "if it is established that" the
directors have acted fraudulently, breached fiduciary duties or
oppressed the other shareholders). A buyout achieves both the Kreis-
chers' goal of exiting the company and the Poulnots' goal of continu-
ing the business. See Hendley v. Lee, 676 F. Supp. 1317, 1327 (D.S.C.
1987) (ordering a buyout of a shareholder's shares where the court
found that the defendant shareholder had not acted wrongfully). As
a result, the relief granted will not be disturbed.
B. Attorneys' Fees
The Kreischers' motion for the awarding of attorneys' fees was
properly denied. The district court determined that the request for
attorneys fees was not ripe, because the judgment ordering a buyout
had not been affirmed on appeal. Under DIST. CT. R. 54.02, the local
rule in South Carolina's federal district courts governing attorneys'
fees, a motion for fees is timely if filed within thirty (30) days of the
15
entry of the final judgment of the district court or when that judgment
is affirmed on appeal. However, the rule states that it applies
"[e]xcept as otherwise provided by statute or order of the [c]ourt." In
the instant case, the district court declined to consider the Kreischers'
motion until judgment for them had been affirmed on appeal. As the
rule permits the district court to refuse to consider the Kreischers'
motion when it was raised, its decision will not be disturbed.
V.
Next we must address whether the district court's valuation of Ker-
risons was clearly erroneous. The Kreischers contend that the proper
date for valuation is January 31, 1991, and that the court erred in not
using this date. They also contend that they are entitled to
$3,512,979.48 rather than the $704,306.31 value that the court placed
on their shares. The Poulnots also appeal the valuation, claiming that
the court erred in failing to apply minority discounts and failing to
dispose of the ten shares owned by Edwin Poulnot II at his death. As
the court had a substantial basis to conclude as it did, its findings as
to the valuation date and value should remain undisturbed. However,
it should have ordered the purchase of the remaining ten shares.
A. Valuation Date
The Kreischers have challenged the date of valuation selected by
the district court, which was May 1, 1995 (the date of its Order). The
Kreischers argue that January 31, 1991 was the appropriate date of
valuation,8 because that date: (1) was close to the period when the
Kreischers first objected to the Poulnots' activities; (2) was close to
when the Kreischers filed their complaint (October 28, 1991); (3) was
midway between 1986 -- when the losses first began-- and 1995;
(4) was in harmony with the 1988 and 1990 appraisals; and (5) was
before the Poulnots spent much of the corporate funds on their legal
fees.
_________________________________________________________________
8 There appears to be a bit of confusion on this point. The Kreischers
assert in their brief that January 31, 1991 is the appropriate date of valua-
tion, but at various times in the proceedings below they assert both Janu-
ary 31 and October 31, 1991.
16
While January 31, 1991 or October 31, 1991 would have been an
appropriate date, the court's selection of May 1, 1995 was not clear
error. The Kreischers do not cite any authority (nor have we found
any) that would require that, in the absence of fraud or oppression, the
date closest to the date on which the conduct was first complained of
be set as the date of valuation. As it did not find fraud or oppression,
the district court considered several dates, noting that the authority in
those types of cases is scant.
Finally, it looked to Hendley, 676 F. Supp. at 1327, for guidance.9
In Hendley, the parties sought judicial dissolution of a South Carolina
corporation because the board was at an impasse and saw no hope for
resolution.10 After deciding that a forced buyout, not dissolution, was
the appropriate relief, the court was faced with valuation issues. Id.
at 1326-27. It reasoned that in dissenters' rights cases, the date of
ouster is the appropriate date for valuation. Id. at 1327. However,
since there was no ouster in that case, it selected the date of the hear-
ing as the fairest date for all parties. Id.The district court in the instant case followed that reasoning and
reached the same result, a result we find acceptable here. The district
court concluded that it would look to "what is fair between the par-
ties." As stated above, the court found that there were no fraudulent
or oppressive events that mandated that it select a particular date.
Since any date would be inherently unfair to one of the parties, it rea-
soned, the most equitable date was May 1, 1995, the date of its Order.
The Kreischers' argument is unpersuasive. At bottom, their argu-
ment is premised upon findings of fraud and oppression and other
wrongful conduct that would essentially entitle them to dissenters'
_________________________________________________________________
9 We recognize that the corporation at issue in Hendley was still profit-
able at the time of litigation while Kerrisons was losing money. How-
ever, in light of the district court's findings as to the Poulnots' alleged
misbehavior and the Poulnots' desire to continue the business, Hendley
is sufficiently analogous to provide support for the district court's deci-
sion.
10 The district court in Hendley notes that the parties shifted positions
several times, alternatively requesting dissolution or a forced buyout by
the other party.
17
rights. However, the Poulnots' conduct, although distasteful, did not
rise to that level. As stated above, we affirm the findings of the dis-
trict court as to those issues. Moreover, equity requires fairness to the
Poulnots, although it is their conduct of which the Kreischers com-
plain. Finally, the date selected is consistent with the reasoning of
other courts in this circuit addressing a similar issue. Therefore, the
district court's selection of May 1, 1995 as the valuation date in the
instant case was not clear error.
B. Valuation Amount
The Kreischers challenge the approximately $704,000 valuation of
their interest, a figure the district court reached after two valuation tri-
als. In determining the fair value of stock, the court should consider,
where applicable, the market value and investment value of the stock
and the net asset value of the corporation. See Morrow v. Martschink,
922 F. Supp. 1093, 1103 (D.S.C. 1995) (citations omitted). Specifi-
cally, the Kreischers claim that in computing the net asset value of the
corporation, the court erred in failing to consider certain factors, such
as $1.76 million in Hurricane Hugo insurance proceeds and offers to
purchase or lease corporation-owned property.11 They claim that the
failure to include these items is clear error.
After the two valuation hearings, the district court concluded that
the company's book value was $2,518,703, based on the appraisal of
a CPA, Francis Humphries. Although the Kreischers also introduced
expert testimony (Dr. Oliver Wood, an economist, appraised Kerri-
sons value at $2,715,477), the court found that appraisal less compre-
hensive because the appraiser had not adjusted the valuation amount
for tax liability. Based on Mr. Humphries' appraisal, the Kreischers,
who own 27.9% of the shares of stock, were entitled to $704,306.31.
The district court's findings as to the value of the company were
not clearly erroneous. The court reviewed the parties' submissions on
the value of Kerrisons' real estate holdings, and then the company's
overall book value. The parties' real estate appraisers disagreed on the
_________________________________________________________________
11 The property in question is the property located at 260 King Street
in Charleston, South Carolina.
18
value of the property on 260 King Street in Charleston.12 The Kreis-
chers' expert, Frank Batten, found that 260 King Street was worth
$2,998,149. The Kreischers further contend that there are several
offers that indicate certain prospective buyers' willingness to pay
even higher amounts. By contrast, the Poulnots' appraiser, Stephen
Attaway, valued 260 King Street at $1,850,000.13
However, the court did not err in accepting Mr. Attaway's
appraisal over Mr. Batten's. Mr. Batten is not an appraiser, but a realtor.14
Moreover, Mr. Batten never even inspected the inside of the property.
By contrast, the Poulnots' appraiser, Stephen Attaway, is an MAI
appraiser who inspected the entire building. Given that the appraisal
the court accepted was performed by a professional who used appro-
priate methods of valuation while the rejected appraisal was not per-
formed by a professional -- who in any event did not evaluate the
entire building -- the court's acceptance of the $1,850,000 for the
value of 260 King Street was not clear error. As the value of the 260
King Street property was the only real estate appraisal challenged by
the Kreischers, the other values stand and the district court's accep-
tance of the overall real estate value as $3.8 million will not be dis-
turbed.
_________________________________________________________________
12 The Kreischers also had an MAI appraiser, Charles Middleton, value
the property. He appraised the property at $3.3 million, which is higher
than both the Kreischers' other expert and the Poulnots' MAI appraiser.
However, the Kreischers' attorney stated that Mr. Middleton's testimony
was offered to establish that one of the proposals offered to Kerrisons
should not be accepted, not the valuation of the property. Therefore, the
Poulnots did not cross-examine Mr. Middleton as to his valuation. As a
result, the district court did not consider Middleton's appraisal. As the
Kreischers indicated that Mr. Middleton's testimony was not being
offered to prove value, we will not consider his appraisal, either.
13 Mr. Attaway used three approaches in valuing the property, which
were: the cost approach (resulting in a value of $1,750,000); the market
approach (resulting in a value of $1,860,000); and the income approach
(resulting in a value of $1,780,000). He relied mostly on the market
approach.
14 Batten testified that he had done appraisals before, but that he was
not and never has been a licensed appraiser.
19
Moreover, the court's acceptance of the Poulnots' expert's
appraisal of the overall book value is also not clear error. The district
court relied on the appraisal of the Poulnots' expert regarding the
overall book value, because he considered the tax liabilities. See
Santee Oil Co., Inc. v. Cox, 217 S.E.2d 789, 792 (S.C. 1975) (listing
taxation issues among the appropriate factors to consider during the
valuation of a company). After accounting for the appropriate tax
adjustments and losses the company suffered, Ms. Humphries con-
cluded that the book value was slightly more than $2.5 million. As
there is sufficient support in the law and the record for that evalua-
tion, the finding will not be disturbed.
The Kreischers also contend that some of the Hurricane Hugo pro-
ceeds were not calculated into the appraisal. However, they are basing
their appraisal on the value as of January 31, 1991, the date that they
urge should be used for valuation purposes. As stated above, May 1,
1995 is the date of valuation, not January 31, 1991. As the Hurricane
Hugo proceeds were paid in February, 1991 -- which is, of course,
after the date selected by the Kreischers -- the Kreischers' argument
fails because the additional money could not have been accounted for
before the final award was known and in any event, there are no facts
suggesting that the proceeds had not since been included for the pur-
poses of the May 1, 1995 valuation date.
Finally, the Kreischers argue that the valuation did not properly
reflect the true value of the company because various offers to pur-
chase or lease Kerrisons' properties were not considered. That argu-
ment is not tenable. One of the offers upon which the Kreischers rely
in their argument was an offer by Mr. Michael Bisciotti, to either
lease or purchase Kerrisons' property, including the 260 King Street
property.15 That offer was the second such offer by Bisciotti. The first
offer, which was significantly lower, essentially was considered
fraudulent by the Kreischers. The Kreischers wanted the district court
to consider his next offer, which was several million dollars higher,
because the Poulnots indicated some willingness to accept it. How-
ever, as the Kreischers admit, the second offer by Bisciotti is "sub-
stantially higher than any appraisal," including their own. Moreover,
_________________________________________________________________
15 Some of Bisciotti's proposals included lease arrangements, but he
apparently was also interested in purchasing the property outright.
20
Bisciotti's proposal was to lease the property over a twelve-year
period. Therefore, inclusion of the full contract value of the lease to
Kerrisons for the purposes of valuation would be inappropriate.16 Sev-
eral of the other offers that the Kreischers contend should be used are
also lease arrangements and are above the value as appraised by both
the Poulnots' and the Kreischers' experts. Like Bisciotti's offer, there
were no appraisals. In light of those facts, the district court's decision
to accept the appraisal of the only MAI appraiser was appropriate.
C. Minority Discounts
The Poulnots have claimed that the court erred in failing to apply
minority discounts in valuing the Kreischers' shares. As the district
court noted, there is support for granting minority discounts when
there is a sale of the stock of close corporations. See, e.g., South Car-
olina Nat'l v. McLeod, 256 F. Supp. 913, 928 (D.S.C. 1966). Such
discounts are considered appropriate because there generally is no
ready market for the shares and it is unlikely that the minority share-
holder will ever be able to obtain sufficient stock to control the com-
pany. See id. However, the district court reasoned that the instant case
was more analogous to dissenters' rights cases, where such discounts
are not awarded because such an award would reward the majority
stockholders for their wrongful conduct. Id.The Poulnots contend that they are entitled to the discounts because
the district court found that they did not commit fraud, breach any
fiduciary duties or oppress the Kreischers, and that the relief the
Kreischers requested (dissolution) was not warranted. Moreover, they
argue, Morrow v. Martschink, 922 F. Supp. 1093 (D.S.C. 1995), upon
which the district court relied, is distinguishable because: (1) the par-
ties in that case wanted the plaintiffs out while the Poulnots fought
the buyout in the instant case; (2) the Morrow court had not made a
finding one way or the other as to fraudulent or oppressive conduct,
while the district court in the instant case made a finding that no such
_________________________________________________________________
16 Bisciotti did not actually compute, nor is there evidence that anyone
computed, the discounted present value. He did opine that the discounted
value of his offer would be at least $6.5 million, but that figure is specu-
lative.
21
conduct occurred; and (3) there was no majority shareholder in
Morrow, while there is one (Edwin Poulnot III) here.
While we recognize those differences between Morrow and the
instant case, the Poulnots' argument fails nevertheless. First, there is
authority supporting the proposition that discounts are not appropriate
in forced buy-out cases. See Hendley, 676 F. Supp. at 1330 (stating
that although discounts are appropriate where the parties are willing
participants in the sale, they are not appropriate where the sale is not
voluntary and "the transaction is between insiders") (citation omitted).
Second, as the Morrow court stated in that case, families who run
businesses often do not desire outside ownership interests in those
businesses. See id. at 1105 (citation omitted). Therefore, the rationale
behind discounts -- the lack of marketability-- is inapplicable when
the transfer results in ownership by one family because it is that
absence of marketability that makes the shares valuable to the family.
Id.
Finally, the Poulnots' claim of complete innocence in light of the
district court's findings is misleading. They correctly assert that the
district court concluded that no fraud, oppression or breach of duty
occurred. However, the district court concluded that no fraud or
oppression occurred because the Kreischers could not prove injury or
prejudice, not necessarily because the Poulnots behaved properly. The
court noted that the Poulnots failed to share material information
relating to the insurance proceeds, found the Poulnots' actions suspi-
cious, and the Kreischers suffered a "wrong." While the conduct did
not warrant judicial dissolution, it did warrant the less drastic measure
of a forced buy-out of the Kreischers' shares at fair market value. As
a result, it was not clear error to fail to apply discounts.
D. The 10 shares owned by Edwin Poulnot, III
The Poulnots claim that the court failed to dispose of the ten shares
owned by Edwin Poulnot at his death. The court found that the 10
shares remained in the estate, a fact that the Kreischers concede.
Later, the district court recognized that it had not disposed of the
shares, that the Kreischers were entitled to the benefit of them under
Edwin Poulnot, III's will and contemplated ordering the corporation
to purchase them along with the other shares.
22
To the extent that the court did not dispose of the shares, it erred.
Under S.C. CODE ANN. § 33-14-310, the court may in its discretion
order the corporation to purchase the shares of a shareholder. See id.
at (d)(4). In the instant case, the district court exercised that discretion
to order the purchase of the Kreischers' shares by the corporation.
However, its failure to order the purchase of all of the shares defeats
entirely the purpose of the relief already granted to the Kreischers --
a complete exit from the company. Failure to order the sale of the
remaining shares forces the parties to relitigate matters that have
already been litigated at considerable expense of time and resources
in the district court. The district court acknowledged that it "made a
mistake" by failing to include the stock, but took no action to com-
plete the Kreischers' exit from the company. Thus, ordering the sale
of the beneficial interest by the Kreischers to the company is appro-
priate. The district court should therefore order the company to pur-
chase the remaining shares beneficially owned by the Kreischers.
CONCLUSION
In conclusion, we affirm the district court's orders of May 1, 1995
and January 29, 1997, as to the Poulnots' liability, the relief granted,
and the value placed on the company. We remand the cause to the dis-
trict court to order the purchase of the remaining ten shares benefi-
cially owned by the Kreischers.
AFFIRMED IN PART AND REMANDED WITH INSTRUCTIONS
23