Marc B. Daniels v. J. Dennis Crocker ( 2017 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2016-CA-00566-SCT
MARC B. DANIELS, SANDRA DANIELS,
CROCKER & ASSOCIATES, INC. f/k/a D & D
ENVIRONMENTAL, INC. AND MAXX
INVESTMENTS, LLC
v.
J. DENNIS CROCKER, GAIL CROCKER,
CROCKER, LTD., A SOUTH CAROLINA
CORPORATION AND GENERATIONAL EQUITY,
LLC
DATE OF JUDGMENT: 04/06/2016
TRIAL JUDGE: HON. JOHN HUEY EMFINGER
TRIAL COURT ATTORNEYS: ROY H. LIDDELL
RICHARD L. FARLEY
STEPHEN HUWE
C. MICHAEL ELLENBURG
ERIC F. HATTEN
COURT FROM WHICH APPEALED: MADISON COUNTY CIRCUIT COURT
ATTORNEY FOR APPELLANTS: ROY H. LIDDELL
ATTORNEYS FOR APPELLEES: ERIC F. HATTEN
CHRISTOPHER D. MEYER
RICHARD L. FARLEY
REBECCA K. LINDAHL
NATURE OF THE CASE: CIVIL - CONTRACT
DISPOSITION: AFFIRMED IN PART; REVERSED IN PART
AND REMANDED - 06/08/2017
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
BEFORE RANDOLPH, P.J., KITCHENS AND CHAMBERLIN, JJ.
CHAMBERLIN, JUSTICE, FOR THE COURT:
¶1. This appeal arises from a breach-of-contract action between Marc Daniels, Sandra
Daniels, Crocker & Associates, Inc., and Maxx Investments, LLC (collectively, “the
Danielses”) and Dennis Crocker, Gail Crocker and Crocker, Ltd. (collectively, “the
Crockers”). The Danielses entered into an Asset Purchase Agreement (the “Agreement”)
with the Crockers to acquire Crocker & Associates, Inc. (“C&A”) on March 31, 2011.1
Within eighteen months of the sale, C&A lost a number of important contracts and its
employees resigned.
¶2. The Danielses then sued the Crockers for failing to disclose all material information
about C&A as required by the Agreement. The Crockers answered the suit and brought
counterclaims against the Danielses. After extensive discovery, the trial court granted the
Crockers’ motion for summary judgment on the Danielses’ claims against them. The
Danielses now appeal the trial court’s grant of summary judgment. After review of the
record, we affirm in part and reverse in part the grant of summary judgment and remand the
case for further proceedings.
STATEMENT OF FACTS AND PROCEDURAL HISTORY
¶3. In 1969, Dennis Crocker cofounded Aqua Aerobic Systems (“Aqua”), an applied
engineering business that provides solutions to municipal and industrial wastewater and
water-treatment customers. In 1977, Dennis left Aqua and founded C&A in Rock Hill, South
Carolina. Despite leaving Aqua, Dennis retained his minority shareholder’s interest in Aqua
as well as a seat on Aqua’s board. C&A was a sales representative firm for manufacturers
of water and wastewater-treatment equipment. It represented Aqua exclusively in several
1
In early 2011, Marc formed D&D Environmental, Inc., to acquire the assets of C&A.
At the time of the sale, D&D changed its name to C&A, and the original C&A changed its
name to Crocker, Ltd. Where these legal distinctions are not relevant, we will refer to C&A
throughout the opinion.
2
territories—Virginia, North Carolina, South Carolina, Georgia, Alabama, and portions of
Florida and Tennessee. Aqua guaranteed these territories to C&A by entering into contracts
for each territory; the contracts were terminable with thirty days’ notice. Since its founding,
C&A was regularly Aqua’s number one representative firm in sales. Aqua represented fifty
to seventy percent of C&A’s revenue, depending on the year.
¶4. C&A’s business model functioned on a long cycle. From the time it booked a project
until it received the commission from the booking was, generally, twelve to eighteen months.
Therefore, it was possible to look at a base year of bookings and project a picture of future
revenue twelve to twenty-four months in the future.
¶5. Dennis retired from C&A in 2003 and turned over the management of C&A to his
wife Gail Crocker; later, in 2010, he gave Gail fifty percent of his interest in C&A. While
Gail testified that she was “scared to death” that Aqua would cancel its contracts with C&A
after Dennis retired, Aqua did not cancel its contracts with C&A until years later after C&A
was sold.
¶6. In 2010, Marc Daniels, a certified public accountant (CPA), reviewed an offering
memorandum for C&A. Generational Equity (“GE”), a business broker, had compiled the
memorandum based on information it had received from the Crockers. After reviewing the
offering memorandum, Marc and his brother Stephen Daniels, met the Crockers in South
Carolina for an initial due-diligence meeting.
¶7. After the initial meeting, the Crockers provided the Danielses with financial
disclosures of past revenue and present bookings at the request of the financial institution
3
that was going to finance a portion of the transaction. Over a period of months, the Crockers
and the Danielses exchanged financial information concerning C&A, negotiated, and settled
on a purchase price of $4,000,000 for C&A. Of this figure, $2,800,000 was financed by a
bank, and the remaining $1,200,000 was owner-financed by the Crockers.
¶8. On March 23, 2011, eight days before the parties signed the Agreement, Dennis
attended an Aqua board meeting at which the sale of Aqua was discussed. Dennis did not
disclose this to the Danielses.
¶9. The Danielses and the Crockers entered into the Agreement on March 31, 2011. On
May 1, 2011, Marc—through Maxx Investments—agreed to pay $365,000 to the Crockers
for Crocker, Ltd.’s goodwill.
¶10. In October 2011—seven months after the sale of C&A and after the possibility of
selling Aqua had dissipated, Dennis requested that Aqua redeem his stock. Aqua redeemed
the stock in December, and Dennis retired from Aqua’s board. In June 2012, Aqua canceled
its representation contract with C&A for North and South Carolina. Soon after this, C&A’s
sales representatives resigned, and C&A lost its remaining contracts with Aqua.
¶11. On October 11, 2012, the Danielses filed suit in Madison County circuit court against
the Crockers, alleging that the Crockers had breached the Agreement by not disclosing “all
material information relating to [(C&A)] or the transactions contemplated by this
Agreement.” The Crockers answered the complaint and alleged counterclaims against the
Danielses. The parties took several depositions and conducted discovery. The Danielses also
designated Robert Cunningham as an expert. Cunningham was deposed and prepared an
4
expert report.
¶12. In December 2014, the Crockers filed a motion for summary judgment on the
Danielses” claims against them. On May 5, 2015, the trial court granted the Crockers’
motion for summary judgment (the “May 5 order”). The Danielses filed a motion for
reconsideration or, in the alternative, to certify the May 5 order under Mississippi Rule of
Civil Procedure 54(b). The trial court denied the motion, specifically denying both the
reconsideration and the certification.
¶13. Next, the Danielses and the Crockers filed competing motions for summary judgment
on the Crocker’s counterclaims. On January 8, 2016, the trial court resolved the motions. On
April 6, 2016, pursuant to the Danielses’ renewed motion, the trial court certified its earlier
May 5 order. The trial court also stayed the proceedings “pending the appeal” of the May
5 order.
¶14. The Danielses now appeal a number of issues that each relate to the trial court’s grant
of summary judgement in favor of the Crockers.2 We will first address where the trial court
erred in granting summary judgment before addressing where the trial court properly granted
summary judgment.
¶15. The Crockers also cross-appealed the trial court’s stay of their claims against C&A.
By order filed March 2, 2017, this Court granted the Crockers’ unopposed motion to dismiss
their cross-appeal for lack of subject-matter jurisdiction. Due to the factually intensive
2
While Generational Equity is listed as an appellee in this appeal, the trial court’s
grant of summary judgment in favor of Generational Equity was not appealed and is
unaffected by our decision.
5
nature of this appeal and the extensive record, additional facts and procedural history will be
related throughout the analysis as necessary.
STANDARD OF REVIEW
¶16. We review a trial court’s grant of summary judgment de novo. Mitchell v. Ridgewood
E. Apartments, LLC, 205 So. 3d 1069, 1073 (Miss. 2016) (citing Borries v. Grand Casino,
Inc. 187 So. 3d 1042, 1045 (Miss. 2016)). Under Rule 56 of the Mississippi Rules of Civil
Procedure, “[t]he judgment sought shall be rendered forthwith if the pleadings, depositions,
answers to interrogatories and admissions on file, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that the moving party is entitled to
a judgment as a matter of law.” Miss. R. Civ. P. 56(c). The burden of demonstrating that
no genuine issue of fact exists is on the moving party and “the non-moving party should be
given the benefit of every reasonable doubt” Borries, 187 So. 3d at 1046. “The evidence is
to be viewed in the light most favorable to the nonmoving party.” Mitchell, 205 So. 3d at
1073 (citing Stribling Inv., LLC v. Mike Rozier Constr. Co., Inc., 189 So. 3d 1216, 1219
(Miss. 2016)).
ANALYSIS
¶17. Due to the Crockers’ argument on the issue, we initially note that Cunningham’s
expert testimony and report is properly before the Court. It was not challenged in the trial
court below other than argument of counsel at the summary judgment hearing.3 We
3
There was no substantive motion to exclude Cunningham’s expert report or any of
his testimony or opinions; there was also no ruling from the trial judge on the issue. We
cannot determine whether the trial judge, in granting summary judgment, considered his
testimony and report insufficient to create a genuine issue of material fact or simply did not
6
consistently have held that we “will not consider issues raised for the first time on appeal.”
Anderson v. LaVere, 136 So. 3d 404, 410 (Miss. 2014) (citing Flagstar Bank, FSB v.
Danos, 46 So. 3d 298, 311 (Miss. 2010)); see Alexander v. Daniel, 904 So. 2d 172, 183
(Miss. 2005) (recognizing “the practical effect of depriving the trial court of the opportunity
to first rule on the issue.”); see also Univ. of Miss. Med. Ctr. v. Peacock, 972 So. 2d 619,
625 (Miss. Ct. App. 2006) (noting the lack of any Daubert4 challenge at the trial level). The
report and testimony is in the record before us. To exclude it would require us to make a
determination as to its admissibility de novo. Our settled review for the admission or
exclusion of expert witnesses, though, is a review for an abuse of discretion. See Patterson
v. Tibbs, 60 So. 3d 742, 748 (Miss. 2011).
¶18. “The law by which a contract is to be governed is that which parties intended or may
fairly be presumed to have intended.” Cox v. Howard, Weil, Labouisse, Friedrichs, Inc.,
619 So. 2d 908, 911 (Miss. 1993). Here, the Agreement’s choice-of-law provision reads:
(d) Law Governing. This Agreement shall be governed by and construed
in accordance with the law of the State of South Carolina without
regard to the choice of law principles of the State of South Carolina.
Given this provision, we will apply South Carolina law to the contract between the Danielses
and the Crockers.
¶19. As a “[c]hoice of law analysis arises only when there is a true conflict between the
laws of two states,” we will apply Mississippi law to the remainder of the Danielses’ claims.
consider the testimony and report at all.
4
Daubert v. Merrell Dow Pharm., Inc., 509 U.S. 579, 113 S. Ct. 2786, 125 L. Ed.
2d 469 (1993).
7
Zurich Am. Ins. Co. v. Goodwin, 920 So. 2d 427, 432 (Miss. 2006). There is no “true
conflict between the laws of” Mississippi and South Carolina on any of the Danielses’
noncontractual claims. Id.I. The trial court erred in granting summary judgment on the
Danielses’ contract, negligent and fraudulent misrepresentation,
and punitive damages claims.
¶20. Because the record contains a genuine issue as to material fact concerning the
Danielses’ contract claims and negligent and fraudulent misrepresentation claims, the trial
court erred in granting summary judgment on these claims. Further, because we are
remanding claims to be tried by a jury to determine if the Danielses are entitled to
compensation, we reverse the trial court’s grant of summary judgment on the punitive
damages claim.
A. Contract
¶21. In South Carolina, “[a]n action for breach of contract is an action at law.” Lee v.
Univ. of S.C., 757 S.E.2d 394, 397 (S.C. 2014). “To recover for a breach of contract, the
plaintiff must prove: (1) a binding contract; (2) a breach of contract; and (3) damages
proximately resulting from the breach.” Hennes v. Shaw, 725 S.E.2d 501, 506 (S.C. Ct.
App. 2012) (citing Fuller v. E. Fire & Cas. Ins. Co., 124 S.E.2d 602, 610 (S.C. 1962)).
Under South Carolina law, “[t]he primary concern of the court interpreting a contract is to
give effect to the intent of the parties.” N. Am. Rescue Prod., Inc. v. Richardson, 769
S.E.2d 237, 240 (S.C. 2015). “A contract is ambiguous when it is capable of more than one
meaning or when its meaning is unclear.” Id. “If a contract’s language is unambiguous, the
plain language will determine the contract’s force and effect.” Id.8
¶22. The warranty provision at issue here governed the Crockers’ duty to disclose material
information to the Danielses. The warranty stated:
8. Representations and Warranties of the Seller. To induce the Buyer to enter
into this Agreement, the Seller and the Crockers make the following
representations and warranties:
...
(m) Material Fact. No representation or warranty by the seller contained in
this Agreement, and no statement contained in the schedules or any
other document, certificate or other instrument delivered or to be
delivered by or on behalf of the Seller, pursuant to this Agreement,
contains or will contain any untrue statement of a material fact or omits
or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements herein or therein not misleading. The Seller has disclosed
to the Buyer all material information relating to the Business or the
transactions contemplated by this Agreement. . . .
(Emphasis added.) The terms “material fact” and “material information” are not defined
within the Agreement. The Agreement, though, is not ambiguous.
¶23. Therefore, we look to the plain language of the words to interpret the Agreement. A
“fact” is “[s]omething that actually exists . . . . Facts include not just tangible things . . . but
also states of mind such as intentions . . . .” Fact, Blacks Law Dictionary (10th ed. 2014).
A “material fact” is one “that is significant or essential to the issue or matter at hand; esp.,
a fact that makes a difference in the result to be reached in a given case.” Id. “Material
information” is “[i]nformation that would be important to a reasonable investor in making
an investment decision.” Id.
1. 2010 Drop in Bookings
¶24. The Danielses claim the Crockers failed to disclose a forty-two-percent drop in
C&A’s bookings in 2010. The Crockers claim that their disclosures to the Danielses were
9
sufficient; they argue that the Danielses knew the number of projects that had been booked
in 2010 and could extrapolate the amount of expected future revenue from those bookings.
We find, though, that there are genuine issues of material fact as to whether the Crockers
disclosed “all material information” concerning C&A’s drop in bookings.
¶25. The offering memorandum—compiled from information GE received from the
Crockers—discussed C&A, its financial history, and its industry. The memorandum also
included past revenue numbers for C&A as well as revenue predictions. The offering
memorandum showed a 26.5 percent decrease in revenue for 2010 but predicted a 17.9
percent growth for 2011. In her deposition, Gail admitted that “the Offering Memorandum
was prepared based primarily upon information that Dennis and I provided to Generational
Equity. The Offering Memorandum contains historical income figures of [C&A] and also
projected future performance. I provided the projected future performance numbers.” A
genuine issue of material fact remains as to whether the Danielses could have been aware of
a drop in bookings in 2010 from the information in the offering memorandum.
¶26. Marc’s and Gail’s affidavits demonstrate multiple genuine issues of material fact as
to whether Marc was aware of C&A’s drop in bookings in 2010. Marc denied that Gail and
Dennis had told him about a drop in bookings at C&A. He claimed, “Neither Gail nor
Dennis disclosed that bookings in 2010 had dropped precipitously—by over 40%—either at
the [October 2010 due diligence] meeting in Rock Hill or at any other time before the sale
of [C&A].” Gail claimed to have told Marc that bookings had dropped in 2010. In her
affidavit, she alleged, “At this meeting, we also told Marc that 2010 sales or bookings were
lower than usual, and I explained to him the reasons for that. Marc clearly understood that
10
2010 was a down year in sales for [C&A].”
¶27. As part of the documents requested by the lender, the Crockers sent an outstanding
commissions report, dated November 30, 2010, that showed the number of bookings that
were booked and uncollected by C&A. In his affidavit, Marc addressed the November 2010
report provided by the Crockers:
Th[e] report . . . does not–and did not–convey to me the decline in bookings
from 2009 to 2010 or the alarming trajectory of [C&A’s] prospects, as it was
only a snapshot of bookings as a point in November before year end and, in the
absence of any disclosures[] of any history of orders in prior years, no context
was provided even for the limited information that was provided. Nor was this
raw November 2010 orders data supplied with any explanation that would
have led me to look critically or more closely at 2010 bookings and their
impact on revenues in the next two years.
¶28. Thus, it is undisputed that the Crockers did disclose some information concerning
C&A’s actual bookings in 2010. However, factual questions are evident in the record that
must be resolved by a jury as to whether the disclosures revealed 2010’s actual drop in
bookings and its severity.
¶29. Further, correspondence that Gail did not disclose to the Danielses, which she had sent
to the C&A staff, evidences knowledge of both a drop in 2010 bookings and its severe effect
on the business. On September 1, 2010, to the C&A sales representatives, Gail wrote,
I regret to have to inform you that Melissa is no longer with us. The decision
was strictly an economic one and did not come easy. As a result of the slump
in bookings this year, I found it necessary to start preparing for a potential cash
flow problem next year.
(Emphasis added.) The next day, on September 2, 2010, again, to the sales representatives,
Gail wrote, “It’s not a secret that our 2010 year to date is very slim (understatement);” On
January 19, 2011—months before the sale to the Danielses, Gail sent a year-end
11
memorandum to the sales force. In the memorandum, Gail wrote, “As we are all aware, our
2010 bookings were pretty sad, however, without belaboring the point, let’s just all breathe
a sigh of relief that 2010 is now over.”
¶30. Gail acknowledged that the drop in bookings from 2009 to 2010—more than forty
percent—was “fairly dramatic.” When questioned about whether she told the Danielses
about the effect that yearend 2010 bookings would have on revenues, she responded, “No,
nor did he ask.”
¶31. The Danielses also offer evidence concerning the materiality of the failure to disclose
the 2010 drop in bookings. Brandy Hefner, a credit analyst who assisted in underwriting the
Danielses’ loans to purchase C&A, testified that no one informed her that there had been a
slump in bookings at C&A. She further testified that a decline in bookings would be the type
of information that she would expect a seller to disclose, and if it had been disclosed, she
would have disclosed it to the financial institution issuing the loan for its consideration.
¶32. Lastly, Cunningham’s testimony and report demonstrated that (1) the Danielses’ due
diligence was sufficient and (2) the Danielses suffered damages due to the Crockers’ failure
to disclose material information about the 2010 drop in bookings. Cunningham testified that
the Crockers “could have been . . . more forthcoming.” Overall, Cunningham felt that Marc
had “performed reasonable due diligence.” Further, Cunningham’s report showed that the
Danielses had paid $2,915,000 in excess of the estimated fair market value of C&A.
¶33. The trial court’s reliance on Gardner v. Little, 755 So. 2d 1273 (Miss. Ct. App. 2000),
for the proposition that the Danielses had ample time “to investigate the financial status” of
C&A was error. In Gardner, the addendum to the purchase agreement provided: “Sellers do
12
not warrant the absolute accuracy of any financial statements, and Purchasers are not relying
on any of same to consummate this transaction.” Id. at 1274. Here, though, “to induce the
[Danielses] to enter into this Agreement,” the Crockers specifically warranted that “[n]o
representation or warranty . . . in this Agreement . . . omits or will omit to state any material
fact necessary, in light of the circumstances under which it was or will be made, in order to
make the statements herein or therein not misleading.” The Crockers also warranted that
they had “disclosed to the Buyer all material information relating to the Business or the
transactions contemplated by this Agreement.” In Gardner, the sellers included a disclaimer
concerning the accuracy of the information. Id. Gardner is distinguishable here where the
Crockers claimed both that the information disclosed was accurate and that they had
disclosed all material information.
¶34. Gail and Dennis assumed a contractual duty to disclose the 2010 drop in bookings.
The evidence in the record demonstrates a factual dispute for the jury to resolve as to whether
the actual 2010 drop in bookings and Gail’s communication with the sales staff (or at least
the substance of its contents) were material information under the agreement that should have
been disclosed. We reverse the trial court’s grant of summary judgment on the issue of
whether or not the Crockers complied with their duty to disclose all material information.
2. Aqua’s Decision to Solicit Purchase
Offers
¶35. The Danielses claim that the Crockers failed to disclose the fact that Aqua’s board had
approved a valuation exercise eight days before C&A was sold. Dennis admits that he did
not disclose the valuation but argues that it was not material information related to C&A’s
13
value, especially since Aqua never sold. We find that the evidence in the record
demonstrates a genuine issue of material fact both as to value and causation and as to C&A’s
demise.
¶36. Dennis knew that Aqua was accepting purchase offers as a means of valuation and
gauging the possibility of a future sale. Answering when he first became aware of an
“ownership transition plan,” Dennis stated, “That was March 23rd, 2011, in the board
meeting.” This was eight days before the Crockers sold C&A to the Daniels. Dennis
described the meeting: “There was a discussion about . . . go[ing] to five or six different
companies . . . to ascertain what value [Aqua] might have and based on the valuations as to
whether or not [Aqua] might be interested in selling.” Aqua received board approval to
proceed. The record does not indicate that any board member either abstained or voted
against the decision. It is undisputed that Dennis considered his obligations to the Danielses:
I did consider the position that it put me in, and I wondered what I could do
about it, but I was in a fiduciary responsibility and a secrecy agreement with
[Aqua] that I could not violate, and if I did so, it would be at the risk of even
a lawsuit from them back at me.
Dennis stated that he did not consult a lawyer about his obligation to the Danielses. He did
state, however, that he spoke with Robert Wimmer, Aqua’s chief executive officer, about
possibly informing the Danielses of Aqua’s valuation. Recounting his conversation with
Wimmer, Dennis stated,
He told me I had a fiduciary responsibility to [Aqua] that superceded any other
responsibility, that I was sworn to secrecy, and that if I divulged the
information I had and that it ultimately damaged him with his rep force in the
field, that I could expect legal action from him.
¶37. However, Wimmer did not remember the conversation that Dennis claimed to have
14
had with him. Also, Wimmer testified that he was not sure when he found out that Dennis
was selling C&A and did not believe that he “knew anything about it” on March 23, 2011.
Wimmer testified in his deposition that “in[] executive session . . . the shareholders and
directors that were present [were told] that [Aqua] might entertain selling the business.” He
acknowledged that Dennis was present at the meeting. He also testified that Dennis “[f]rom
that day on” was privy to the discussion about ownership transition decisions.
¶38. We find a genuine issue of material fact exists as to whether the Crockers’ failure to
disclose Aqua’s valuation caused or contributed to the demise of C&A and subsequently
damaged the Danielses. In his affidavit, Marc claims that he would not have gone through
with the transaction had he known about Aqua’s marketing. He avers that news of Aqua’s
marketing destabilized C&A’s sales representatives when they heard about it from a
competitor. According to Marc, C&A’s sales representatives were worried about whether
Aqua would continue its contracts with C&A if it was bought by an investor with allegiances
to other representative firms. Many of Marc’s claims are disputed, but, as with all disputes
of fact, that is a determination for the jury.
¶39. A genuine issue of material fact also exists as to whether the failure to disclose Aqua’s
decision to solicit purchase offers was material. Throughout the record, the parties agree that
Aqua represented fifty to seventy percent of C&A’s annual revenue. Further, Cunningham
testified that the actions of Aqua’s board at the March 23 meeting “change[d] everything”
and “change[d] the valuation substantially.” Also, he testified that the decision to sell Aqua
was a “material event.” He found the decision to sell Aqua “extremely relevant” and could
not “see how anyone [could] argue that it was not a material fact that [Aqua] had been put
15
up for sale.” Also, Hefner testified that the decision of Aqua’s board to market Aqua “would
have been information that I would have needed to provide to the loan officer.”
¶40. Cunningham’s report and testimony also demonstrated a genuine issue of material fact
as to whether or not the Danielses suffered damages. Cunningham’s report concluded that
the Danielses paid $2,915,000 in excess of the estimated fair market value. Also,
Cunningham’s testimony reaffirmed Marc’s claim that he would not have purchased C&A
had he known Aqua’s leadership was considering selling.
¶41. We acknowledge that Dennis was in a difficult position within the bounds of
corporate law, but it was of his own making. He willingly warranted that he had disclosed
all material information related to C&A to the Danielses despite not disclosing the
information subject to the duty of confidentiality to Aqua he had assumed eight days earlier.
¶42. A director of a corporation owes duties to the corporation that he serves and,
equitably, to its shareholders. Among these duties, a director owes a duty of care and a duty
of loyalty. Derouen v. Murray, 604 So. 2d 1086, 1092 (Miss. 1992); Omnibank of Mantee
v. United S. Bank, 607 So. 2d 76, 84, 90 (Miss. 1992). The duty of care is
a duty to perform the officer’s or director’s functions in good faith, in a
manner that he or she reasonably believe to be in the best interest of the
corporation, and with the care that an ordinarily prudent person would
reasonably be expected to exercise in a like position and under similar
circumstances.
Derouen, 604 So. 2d at 1092.
¶43. The duty of loyalty—the duty at issue here—“arises in that the officer or director
stands in a fiduciary relationship to his corporation and shareholders.” Id. Fiduciaries must
be “held to something stricter than the morals of the market place.” Meinhard v. Salmon,
16
164 N.E. 545, 546 (N.Y. 1928). Further, the duty of loyalty “imports proscriptions on
conflicts of interest.” Derouen, 604 So. 2d at 1092. One such proscription is the duty to
maintain the confidentiality of corporate information. See Brophy v. Cities Serv. Co., 70
A.2d 5, 7–8 (Del. Ch. 1949) (“A fiduciary is . . . not to use on his own account information
confidentially given him by the beneficiary or acquired by him during the course . . . of the
fiduciary relation or in violation of his duties as fiduciary . . . unless the information is a
matter of general knowledge.”); Oberly v. Kirby, 592 A.2d 445, 463 (Del. 1991) (“It is an act
of disloyalty for a fiduciary to profit personally from the use of information secured in a
confidential relationship.”).
¶44. Thus, Dennis was correct that he had a fiduciary duty to Aqua not to disclose the
impending sale. Dennis assumed this duty to Aqua on March 23, 2011, at the board meeting.
Eight days later, on March 31, 2011, he signed the Agreement with the Danielses that
included the warranty that he had disclosed all material information relating to C&A.
¶45. There is enough evidence in the record to create a genuine issue of material fact as to
whether Dennis breached the Agreement by assuming a duty to Aqua and then warrantying
to the Danielses that he had disclosed all material information to them. Dennis cannot use
his duty to Aqua to shield himself from liability where he learned of material information due
to his fiduciary relationship and eight days later warranted to a third party that he had
disclosed all material information—despite withholding the confidential corporate
information.
¶46. To be clear, the Danielses were not entitled—at any point—to Aqua’s confidential
corporate information, but Dennis cannot now avoid all liability where he voluntarily
17
assumed two conflicting duties.5 Indeed, per the Agreement, his warranty to the Danielses
served to induce the Danielses to purchase C&A. Dennis cannot mislead the Danielses,
either affirmatively or through silence, and then attempt to avoid personal liability because
of a pre-existing obligation to Aqua not to disclose certain information. As a fiduciary,
Dennis was obligated to Aqua before he voluntarily assumed a conflicting duty of disclosure
to the Danielses.
¶47. This is not to say, though, that Dennis assumed any fiduciary duties to the Danielses;
we merely hold Dennis to his assumed contractual duty. Dennis’s testimony was clear that
he weighed the threat of legal action by Aqua against not disclosing the information to the
Danielses. In essence, Dennis chose his lawsuit. To be clear, he had options. He could have
simply not warranted that he had disclosed all material information to the Danielses or
warranted that he had disclosed only to the extent permitted by his fiduciary duties to Aqua.
However, this obviously would have raised red flags and potentially affected the deal. This
possibility does not relieve Dennis of his legal responsibility.
¶48. Dennis assumed a contractual duty to the Danielses to disclose all material
information relating to C&A to the Danielses. A genuine issue of material fact existed as to
whether or not Aqua’s decision to solicit purchase offers was material. Thus, the genuine
issue of material fact precludes summary judgment here as well.
5
It is well-known that “one cannot serve two masters.” As the pioneering rock group
AC/DC recognized, “He’s double dealing with your best friend / That’s when the tear drops
start.”
18
3. Dennis Crocker’s Intent to Sell His Stock
¶49. The Danielses also claim that the Crockers failed to disclose Dennis’s intent at the
time of selling C&A to sell or redeem his stock in Aqua. The Crockers point out that Dennis
did not seek to redeem his stock until seven months after the sale of C&A. Wimmer testified
that the ownership transition decision, presented to Aqua’s board on March 23, 2010,
included the sale of at least some of Aqua’s shares. Further, Dennis testified, “Heretofore,
we had always presumed the only way that we would ever get the value for our stock would
be to die and our estate would get it.” He also testified that he had “really gotten anxious
hoping that we would sell” Aqua because “[t]hat would represent quite a piece of money.”
It is undisputed that Dennis did raise the issue of Aqua redeeming his stock once he was
informed in October 2011 that Aqua was not going to be sold; Aqua redeemed Dennis’s
stock in 2011. Thus, a genuine issue as of material fact exists in the record as to whether
Dennis planned to sell his stock as part of the Aqua transaction or otherwise, before he sold
C&A to the Daniels.
¶50. Further, Marc’s affidavit precludes summary judgment as to materiality. In his
affidavit, Marc stated that, at the October meeting, “The Crockers touted the longstanding
relationship Dennis had (and continued to have) with Aqua as founder, director and
shareholder.” According to Stephen, Dennis represented that Aqua would not cancel its
contracts as long as Dennis held his stock in Aqua. Stephen testified that Dennis, in response
to a question as to whether or not Aqua would stop using C&A, said, “not as long as I own
stock in it.” Regarding this representation, Cunningham testified that Dennis “implied . . .
that there was no intention of selling the company.” In his affidavit, Marc alleged that he
19
would not have gone through with the purchase of C&A had the sale of Dennis’s stock been
discussed. Regarding the materiality of Dennis’s failure to disclose to C&A his plans to sell
or redeem his stock, Marc claimed that “no other principal cancelled [C&A]. It was limited
to Aqua. And the only thing that had changed was that there was no longer a Crocker
connection.”
¶51. The Danielses assert that the Crockers’ words to the Danielses after the sale of C&A
provided further evidence of genuine issues of material fact as to whether or not Dennis’s
intent to sell his stock was material information under the Agreement. In a letter to Marc on
January 26, 2012, after the sale of C&A, Dennis wrote:
First, I have sold all of my stock in Aqua . . . . I no longer sit on the Board of
directors . . . . I am no longer an asset for you there. The bond between
[C&A] and [Aqua] no longer exists, I.e. [sic] C&A is no longer a sacred cow.
So you want to make sure that you are in their good grace. . . . Without
AQUA, YOU ARE DEAD !! Don’t ever lose sight of that.
(Emphasis added.) The fact that Dennis had viewed himself at Aqua as an asset to the
Danielses is some evidence of a genuine issue of material fact that should have precluded
summary judgment.
¶52. Dennis must have had the intention to sell his stock before entering into the
Agreement with the Danielses before signing the Agreement on March 31, 2011, for the
Danielses to prevail on this issue. The evidence in the record demonstrates a genuine issue
of material fact on this point. There is evidence that Dennis knew that the original transition
plan included the sale of his own stock. Once the transition plan fell through, Dennis
pursued redemption of his stock, and Aqua redeemed his stock. There is also evidence that
he communicated to the Danielses that his stock ownership in Aqua was significant to
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C&A’s success.
B. Negligent and Fraudulent Misrepresentation6
¶53. The elements of a negligent misrepresentation claim are:
(1) a misrepresentation or omission of a fact; (2) that the representation or
omission is material or significant; (3) that the person/entity charged with the
negligence failed to exercise that degree of diligence and expertise the public
is entitled to expect of such persons/entities; (4) that the plaintiff reasonably
relied upon the misrepresentation or omission; and (5) that the plaintiff
suffered damages as a direct and proximate result of such reasonable reliance.
Saucier v. Peoples Bank of Biloxi, 150 So. 3d 719, 731 (Miss. Ct. App. 2014) (quoting
Hazlehurst Lumber Co. v. Miss. Forestry Comm’n, 983 So. 2d 309, 313 (Miss. 2008)).
These “elements must be proven by a preponderance of the evidence.” Holland v. Peoples
Bank & Trust Co., 3 So. 3d 94, 101 (Miss. 2008).
¶54. The elements of a fraudulent misrepresentation claim are:
(1) a representation, (2) its falsity, (3) its materiality, (4) the speaker’s
knowledge of its falsity or ignorance of its truth, (5) his intent that it should be
acted on by the hearer and in the manner reasonably contemplated, (6) the
hearer’s ignorance of its falsity, (7) his reliance on its truth, (8) his right to rely
thereon, and (9) his consequent and proximate injury.
Virginia Coll., LLC v. Blackmon, 109 So. 3d 1050, 1054-55 (Miss. 2013) (quoting Schmidt
v. Catholic Diocese of Biloxi, 18 So. 3d 814, 831 (Miss. 2009)). These elements “must be
proven by clear and convincing evidence.” Levens v. Campbell, 733 So. 2d 753, 761 (Miss.
1999).
¶55. We have long recognized the principle that a party is liable for its silence where its
6
The facts relevant to this issue that were discussed under the Contract analysis, in
(I)(A) above, are incorporated by reference into this analysis.
21
silence “relate[s] to material fact or matter known to the party and . . . it is [the party’s] legal
duty to communicate to the other contracting party.” Guastella v. Wardell, 198 So. 2d 227,
230 (Miss. 1967). Further, “the duty to disclose is based upon a theory of fraud that
recognizes that the failure of a party to a business transaction to speak may amount to
suppression of a material fact which should have been disclosed and is, in effect, fraud.”
Green Realty Mgmt. Corp. v. Mississippi Transp. Comm’n, 4 So. 3d 347, 350 (Miss. 2009).
Also, the Restatement (Second) of Torts provides that a “party to a business transaction is
under a duty to exercise reasonable care to disclose to the other before the transaction is
consummated . . . matters known to him that he knows to be necessary to prevent his partial
or ambiguous statement of the facts from being misleading.” Restatement (Second) of Torts
§ 551(2)(b) (1977).
¶56. The record contains no evidence that the alleged fraud by the Crockers was overt in
nature. However, the record contains enough evidence to reverse the grant of summary
judgment on the Danielses’ fraudulent-misrepresentation claims due to the factual question
of whether or not the Crockers’ silence about material facts was fraudulent.
1. 2010 Drop in Bookings
¶57. As set forth supra, a factual dispute exists as to whether or not the Crockers disclosed
the previous history of C&A’s bookings that would have allowed the Danielses to discover
the drop in bookings in 2010 and whether the Crockers knew that 2010’s low bookings
would affect C&A’s future.
¶58. Sufficient evidence exists to establish a genuine issue as to whether or not the
Crockers knew the drop in bookings would affect C&A’s finances, whether they failed to
22
disclose their knowledge of the impact and whether this silence amounted to fraud.
¶59. Under Mississippi law, silence concerning a material fact may amount to fraudulent
suppression of that fact where the silent party knows that its silence will be relied on by the
other party. See Green, 4 So. 3d at 350. Therefore, a genuine issue of material fact exists
as to both negligent and fraudulent misrepresentation on this issue.
2. Aqua’s Decision to Solicit Purchase
Offers and Dennis Crocker’s Intent to
Sell His Stock
¶60. Sufficient evidence is present in the record to create a genuine issue of material fact
concerning whether or not the Crockers are liable for misrepresentation on the issues of
Dennis’s knowledge, the materiality of Aqua’s decision to solicit purchase offers, and
Dennis’s intent to sell his stock. While the evidence on the issue does not indicate fraud of
an overt nature, the record demonstrates enough evidence to create a question for a jury as
to whether the Crockers’ silence was, in fact, fraudulent. Dennis knew that Aqua had
decided to solicit purchase offers when he signed the Agreement with the Danielses. There
also is evidence that he knew any potential sale of Aqua would include his stock in Aqua.
While Wimmer testified that the board of directors was “very surprised” by the proposal to
sell Aqua, surprise is not enough to relieve Dennis and the Crockers of their legal duty to
disclose once they knew of the proposed sale of Aqua and Dennis’s stock in Aqua. The
Crockers had a duty to disclose “matters . . . that [they] kn[ew] to be necessary to prevent
[their] partial or ambiguous statement of the facts from being misleading.” Therefore, a
genuine issue of material fact exists as to both negligent and fraudulent misrepresentation on
this issue.
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C. Punitive Damages
¶61. In their amended complaint, the Danielses plead a claim for punitive damages. We
find that the trial court erred in granting summary judgment on this claim. To prevail on a
claim for punitive damages, “the plaintiff ‘must prove that the breach was the result of an
intentional wrong or that a defendant acted maliciously or with reckless disregard of the
plaintiff’s rights.’” T.C.B. Constr. Co. v. W.C. Fore Trucking, Inc., 134 So. 3d 701, 704
(Miss. 2013) (quoting Pursue Energy Corp. v. Abernathy, 77 So. 3d 1094, 1101 (Miss.
2011)) (“An award of punitive damages is an extraordinary remedy, reserved for the most
egregious cases, and designed to discourage similar misconduct.”); see also Miss. Code Ann.
§ 11-1-65(1)(a) (Rev. 2014) (recognizing that punitive damages are proper only in cases of
“actual malice, gross negligence which evidences a willful, wanton or reckless disregard for
the safety of others, or . . . actual fraud.”).
¶62. Section 11-1-65(1)(b) provides that “[i]n any action in which the claimant seeks an
award of punitive damages, the trier of fact shall first determine whether compensatory
damages are to be awarded and in what amount, before addressing any issues related to
punitive damages.” Miss. Code Ann. § 11-1-65 (1)(b) (Rev. 2014). As we are remanding
several of the Danielses’ claims to be tried, it is appropriate here to reverse the grant of
summary judgment on punitive damages. The issue of punitive damages should be addressed
by the trial judge in accordance with Section 11-1-65(1)(b) after it is determined whether or
not the Danielses are entitled to an award for compensatory damages.
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II. The trial court properly granted summary judgment on the
Danielses’ indemnity and rescission claims as well as Marc’s and
Sandra Daniels’ claims, individually.
¶63. The trial court properly granted summary judgment to the Crockers on the Danielses’
indemnity and rescission claims. Further, Marc’s and Sandra’s claims, as individuals, fail
as a matter of law.
A. Indemnity
¶64. The Danielses claim that they are entitled to indemnification by the Crockers pursuant
to the Agreement. As already discussed, we will apply South Carolina law to the issues
governed by the Agreement. See Miller, 481 So. 2d at 262.
¶65. “Contractual indemnity involves a transfer of risk for consideration, and the contract
itself establishes the relationship between the parties.” Rock Hill Tel. Co. v. Globe
Commc’ns, Inc., 611 S.E.2d 235, 237 (S.C. 2005). The provision at issue states:
(a) Indemnification by the Seller. . . . The Seller and the Crockers, jointly
and severally, shall indemnify, defend, and hold Buyer harmless from,
and reimburse the Buyer for, any losses, fees, costs, expenses, damages,
liabilities, or claims (including, without limitation reasonable attorneys’
fees and costs) arising out of, based upon, or resulting from . . .
misrepresentations or inaccuracy contained in any representation or
warranty of the Seller in this Agreement. . . .
(b) Notice of Claims. The Buyer shall promptly give written notice of its
claim to the Seller and the Crockers (collectively, the “Indemnifying
Party”) whenever the Buyer shall have determined that there are facts
or circumstances which render the Indemnifying Party liable for
indemnification under this Section . . . . Such notice . . . shall set forth
in reasonable detail the basis for the claim, the nature of the liabilities
and the amount thereof, to the extent known.
(Emphasis added.) In their amended complaint, the Danielses did not allege that they
“promptly g[a]ve written notice” of their claim to the Crockers. After a review of the record,
25
we are convinced that the Danielses did not comply with this condition in the Agreement.
Thus, the trial court did not err in granting summary judgment on the Danielses’ indemnity
claims against the Crockers.
B. Rescission
¶66. The Danielses also asked the trial court to rescind the sale of C&A. “Rescission of
a contract is allowed in cases of fraud, mistake, or material breach.” Jackson Motor
Speedway, Inc. v. Ford, 914 So. 2d 779, 783 (Miss. Ct. App. 2005) (citing Cenac v. Murry,
609 So. 2d 1257, 1273 (Miss. 1992)). To prevail on a claim for rescission of a contract, a
party must “pro[ve] . . . fraud by clear and convincing evidence.” Ezell v. Robbins, 533 So.
2d 457, 461 (Miss. 1988). Further, “[u]pon discovery []of [the fraud], the one defrauded
must act promptly and finally to repudiate the agreement.” Turner v. Wakefield, 481 So. 2d
846, 849 (Miss. 1985) (citing Stoner v. Marshall, 358 P.2d 1021, 1022-23 (Colo. 1961)); see
also Gardner, 755 So. 2d at 1276 (recognizing a party’s duty, upon discovery of fraud, “to
either promptly rescind the contract or affirm the contract and maintain an action in
damages.”).
¶67. The Danielses’ claim for rescission fails as a matter of law. The Danielses did not
“act promptly and finally to repudiate the agreement” when they discovered the actions that
they believed were fraudulent. By January 26 2012, the Danielses knew about the 2010 drop
in bookings, Aqua’s decision to solicit purchase offers and Dennis’s selling of his stock.
However, the Danielses waited until October 2012 to attempt a rescission of the Agreement.
While the delay does not affect their other claims, a claim of rescission requires “prompt”
action. Therefore, the trial court did not err in granting summary judgment to the Crockers
26
on the Danielses’ rescission claim because there was no genuine issue as to material fact as
a matter of law.
C. Marc and Sandra Daniels’s Claims, Individually
¶68. Lastly, the trial court properly granted summary judgment on Marc and Sandra
Daniels’s claims as individuals. In Mississippi, “a corporation is a separate, distinct entity
from its stockholders.” Durham v. Univ. of Miss., 966 So. 2d 832, 835 (Miss. Ct. App.
2007). Further, “an individual shareholder of [a company] does not have standing to pursue
[a] claim for damages from an alleged breach” of contract. Id. These governing principles
hold true in cases of fraud as well. See Schiff v. Mao, Inc., 31 So. 3d 650, 652 (Miss. Ct.
App. 2010) (“[Plaintiff] was never a party to the agreement that forms the basis of his fraud
claim.”). Therefore, the trial court’s grant of summary judgment was proper.
CONCLUSION
¶69. Because the record demonstrates genuine issues of material fact as to the Danielses’
contract, negligent and fraudulent misrepresentation, and punitive damages claims, we
reverse in part the grant of summary judgment. Since the trial court properly granted
summary judgment on the Daniels’s rescission and indemnity claims as well as Marc and
Sandra Daniels’s claims as individuals, we also affirm in part the grant of summary
judgment. We remand this case to the trial court for further proceedings consistent with this
opinion.
¶70. AFFIRMED IN PART; REVERSED IN PART AND REMANDED.
WALLER, C.J., RANDOLPH, P.J., KITCHENS, KING, COLEMAN,
MAXWELL AND BEAM, JJ., CONCUR. DICKINSON, P.J., NOT
PARTICIPATING.
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