Kulko v. Davail, Inc. ( 2015 )

December 8 2015
DA 15-0112
IN THE SUPREME COURT OF THE STATE OF MONTANA Case Number: DA 15-0112
2015 MT 340DAVID KULKO,
Plaintiff and Appellant,
v.
DAVAIL, INC.; ILSA KAY; MICHAEL HORN;
and John and Jane Doe Defendants 1-10,
Defendants and Appellees.
APPEAL FROM: District Court of the First Judicial District,
In and For the County of Lewis and Clark, Cause No. ADV 2013-0882
Honorable Mike Menahan, Presiding Judge
COUNSEL OF RECORD:
For Appellant:
Robert K. Baldwin, Jeffrey J. Tierney, Goetz, Baldwin & Geddes P.C.;
Bozeman, Montana
For Appellees:
Richard J. Samson, Christian, Samson & Jones PLLC, Missoula, Montana
(for Davail, Inc.)
Ilsa Kaye, self-represented; Michael Horn, self-represented, New York,
New York
Submitted on Briefs: October 21, 2015
Decided: December 8, 2015
Filed:
__________________________________________
Clerk
Justice Patricia Cotter delivered the Opinion of the Court.
¶1 David Kulko (Kulko), his sister Ilsa Kaye (Kaye), and their half-brother Michael
Horn (Horn) are the sole shareholders, directors, and officers of Davail, Inc. (Davail).
Following a period of estrangement from his family, Kulko sued Kaye, Horn, and Davail
for dissolution of Davail, shareholder oppression, fraudulent conduct, and breach of
fiduciary duties. The parties eventually agreed to dissolution of Davail, and the District
Court entered an order granting dissolution and appointing a receiver. The District Court
then concluded that dissolution is an exclusive remedy, and granted the defendants’
motion to dismiss Kulko’s complaint for lack of a continuing case or controversy. We
reverse and remand to the District Court for reinstatement of the case.
ISSUES
¶2 We restate the issues on appeal as follows:
¶3 Did the District Court err in concluding that § 35-1-939, MCA, authorizes
corporate dissolution or other equitable remedies, but not both?
¶4 Did the District Court err in dismissing Kulko’s claims for lack of subject matter
jurisdiction on the grounds that the dissolution of Davail eliminated the case or
controversy?
FACTUAL AND PROCEDURAL BACKGROUND
¶5 Alex and Sharon Horn incorporated Davail, Inc. in Montana in 1982 for estate
planning purposes to benefit their children. Their children, David Kulko, Ilsa Kaye, and
Michael Horn, are the sole shareholders, officers, and directors of Davail. Kulko owns
46% of Davail’s shares and is also a director and vice-president of the corporation. Kaye
owns 46% of the shares and is a director and president of the corporation. Horn owns the
2
remaining 8% of the shares. Davail’s principal asset is a recreational property near
Condon, Montana called the Falls Creek Ranch. The family used the property as a
vacation property during the summer months, and according to Kaye, Sharon Horn and
Kulko also used the property to host retreats for a group with which they were involved.
Kulko’s distancing himself from this group is the impetus of this case.
¶6 Alex and Sharon Horn founded the Odyssey Study Group, a secretive spiritual
organization characterized by some as a cult. Kulko was affiliated with the group until
approximately 2000, when he left the organization and became estranged from his family.
Kulko maintains that during the period of his estrangement, he was excluded from
Davail’s director and shareholder meetings, denied access to corporate records, and
denied all monetary and non-monetary benefits of his ownership interest.
¶7 In November 2013, Kulko sued Davail and his siblings for dissolution of the
corporation and damages for what he characterized as Kaye’s and Horn’s fraudulent
behavior and breach of fiduciary duties. According to Kulko, his siblings
misappropriated corporate assets and used them to support the operations of the Odyssey
Study Group. Kaye contends that she has never been involved with the group, and that
any claim Kulko has for financial mismanagement of Davail should be made against their
mother. Kaye also asserts that Davail was never intended to operate as a business for
profit, and it has not paid a dividend to its shareholders or compensated its officers or
directors in its more than thirty years of existence as a corporation. Kaye and Horn
initially objected to Kulko’s petition for dissolution of Davail, but the parties eventually
3
agreed to the dissolution. The District Court dissolved Davail and appointed a receiver.
The process of liquidating and distributing assets is ongoing.
¶8 On July 23, 2014, Kulko filed a motion seeking leave to amend his complaint in
order to assert a punitive damage claim and to clarify his request for compensatory
damages in addition to dissolution of the corporation. Kaye and Horn responded that
because they agreed to dissolve the corporation and distribute its assets, Kulko has
received the remedy he sought, and there is no longer a case or controversy. The District
Court concluded that § 35-1-939, MCA, authorizes either dissolution of a corporation or
other equitable remedies, but not both, and agreed that dissolution eliminated the case or
controversy. As a result, the District Court dismissed Kulko’s complaint for lack of
subject matter jurisdiction, denied Kulko’s motion for leave to file an amended
complaint, and declined to rule on Kulko’s pending discovery motions. Kulko appeals
both the District Court’s interpretation of § 35-1-939, MCA, and its failure to rule on the
merits of his pending motions on the basis of a lack of subject matter jurisdiction. We
reverse.
STANDARD OF REVIEW
¶9 The District Court’s interpretation of a statute is a question of law that we review
de novo for correctness. Mont. Dep’t of Revenue v. Priceline.com, Inc., 2015 MT 241,
¶ 6, 380 Mont. 352, 354 P.3d 631 (citing City of Missoula v. Iosefo, 2014 MT 209, ¶ 8,
376 Mont. 161, 330 P.3d 1180). “The District Court’s determination that it did not have
jurisdiction over this case is [also] a conclusion of law,” Kingston v. Ameritrade, Inc.,
2000 MT 269, ¶ 9, 302 Mont. 90, 12 P.3d 929 (citing Hilands Golf Club v. Ashmore,
4
277 Mont. 324, 328, 922 P.2d 469, 472 (1996)), and it too is reviewed de novo for
correctness, BNSF Ry. Co. v. Cringle, 2010 MT 290, ¶ 11, 359 Mont. 20, 247 P.3d 706(citing Koeplin v. Crandall, 2010 MT 70, ¶ 7, 355 Mont. 510, 230 P.3d 797).
DISCUSSION
¶10 Did the District Court err in concluding that § 35-1-939, MCA, authorizes
corporate dissolution or other equitable remedies, but not both?
¶11 The District Court dissolved Davail under § 35-1-938, MCA, on December 19,
2014. Because the parties agreed to dissolution, the District Court made no findings that
would ordinarily support a dissolution, such as findings of illegal, oppressive, or
fraudulent conduct, or corporate waste. See § 35-1-938(2), MCA. In its January 22,
2015 order granting the defendants’ motion to dismiss Kulko’s complaint, the District
Court noted that “[p]ursuant to Section 35-1-939, MCA, a shareholder or director seeking
to dissolve a corporation is entitled to judicial dissolution or other equitable remedies, but
not both,” and that “[u]pon the dissolution of Davail, Inc., . . . Kulko will obtain the relief
he seeks in his complaint.” However, the District Court erroneously read into
§ 35-1-939, MCA, a limitation that does not exist.
¶12 Section 35-1-938, MCA, is entitled “Grounds for judicial dissolution.” Section
35-1-939, MCA, is entitled “Discretion of court to grant relief other than dissolution.”
While § 35-1-938, MCA, authorizes corporate dissolution, § 35-1-939, MCA, authorizes
“less drastic” alternatives. Specifically,
the court may make any order to grant the relief other than dissolution as, in
its discretion, it considers appropriate, including, without limitation, an
order:
5
(a) canceling or altering any provision contained in the articles of
incorporation, in any amendment of the articles of incorporation, or in the
bylaws of the corporation;
(b) canceling, altering, or enjoining any resolution or other act of the
corporation;
(c) directing or prohibiting any act of the corporation or of shareholders,
directors, officers, or other persons party to the action; or
(d) providing for the purchase at fair value of shares of any shareholder,
either by the corporation or by other shareholders.
Section 35-1-939(1), MCA. This alternative relief statute is a codification of our holding
in Maddox v. Norman, 206 Mont. 1, 669 P.2d 230 (1983). According to the Official
Comments to § 35-1-939, MCA, “[t]his provision properly recognized that the liquidation
remedy is a draconian remedy. It allows a minority shareholder to hold a sword over the
head of the majority. In [Maddox], the Montana Supreme Court recognized this problem
and fashioned a less drastic remedy.” Tit. 35, ch. 1, Mont. Code Ann., Annotations,
Official Comments at 633 (2012). Thus, § 35-1-939, MCA, allows a court to fashion a
remedy appropriate in the circumstances, even if a shareholder is seeking only
dissolution.
¶13 Section 35-1-939(2), MCA, provides that “[r]elief under subsection (1) may be
granted as an alternative to a decree of dissolution or may be granted whenever, under the
circumstances of the case, relief but not dissolution would be appropriate.” This
subsection seems to be the source of the District Court’s conclusion that § 35-1-939,
MCA, authorizes dissolution or other equitable remedies, but not both. However, the
other equitable remedy Kulko was seeking in this case was not a remedy authorized by
§ 35-1-939(1), MCA. Rather, Kulko was seeking money damages for what he alleges
was his siblings’ misappropriation of corporate funds and breach of fiduciary duties. In
6
other words, Kulko was seeking a traditional remedy as an injured shareholder, and not
judicial intervention to correct corporate misbehavior or malfunction.1
¶14 Our case law interpreting § 35-1-939, MCA, has addressed factual situations in
which one or some shareholders seek judicial remedies for alleged oppression and the
courts fashion remedies under § 35-1-939, MCA, that are less drastic than forced
dissolution. See Maddox, 206 Mont. 1, 669 P.2d 230; Whitehorn v. Whitehorn Farms,
Inc., 2008 MT 361, 346 Mont. 394, 195 P.3d 836; Wyo-Ben, Inc. v. Bixby, 2014 MT 334,
377 Mont. 318, 339 P.3d 1255. The only time we acknowledged the availability of both
dissolution and traditional remedies for shareholder misconduct, we did so implicitly.
¶15 In Sartori v. S & S Trucking, Inc., 2006 MT 164, 332 Mont. 503, 139 P.3d 806,
Justin Sartori sued his business partner and their corporation, S & S Trucking, for
dissolution and breach of fiduciary duty. Sartori, ¶ 9. Sartori’s business partner argued
that rather than dissolving the corporation, the District Court should use its power under
§ 35-1-939, MCA, to remove Sartori as a shareholder and director of the corporation.
Sartori, ¶ 15. The District Court ultimately found that Sartori himself had damaged the
corporation and ordered dissolution of S & S Trucking. Sartori, ¶ 9. Sartori’s business
partner argued on appeal that the corporation was entitled to damages from Sartori in
addition to dissolution. Sartori, ¶ 22. We agreed, and we affirmed the District Court’s
order of dissolution but remanded for a determination of damages to be paid by Sartori to
S & S Trucking. Sartori, ¶¶ 19, 22. Thus, we implicitly acknowledged that while
1
Actions against directors and officers for breach of fiduciary duties may be brought under
§ 35-1-418, MCA, and § 35-1-443, MCA, respectively. See e.g. Warren v. Campbell Farming
Corp., 2011 MT 324, 363 Mont. 190, 271 P.3d 36.
7
dissolution under § 35-1-938, MCA, or the imposition of other corporate remedies under
§ 35-1-939, MCA, may be mutually exclusive, a remedy under either statute does not
foreclose the possibility of seeking damages against individual shareholders or officers or
directors for breach of fiduciary duties.
¶16 Such a finding is consistent with the ABA Official Comments to the Model
Business Corporation Act, upon which our Montana Business Corporation Act,
§ 35-1-112, MCA, et seq., is based. According to the model act, in addition to
dissolution, dissatisfied shareholders “may seek traditional remedies for breach of
fiduciary duty.” Model Bus. Corp. Act § 14.30 cmt. 2 (2013). We therefore conclude
that neither dissolution under § 35-1-938, MCA, nor the alternative remedies provided
under § 35-1-939, MCA, preclude a shareholder from pursuing traditional remedies for
breach of fiduciary duties. The District Court erred in its interpretation of § 35-1-939,
MCA, when it concluded that Kulko could not pursue punitive or compensatory damage
claims against Davail’s other shareholders because he had already sought and obtained
dissolution of the corporation.
¶17 Did the District Court err in dismissing Kulko’s claims for lack of subject matter
jurisdiction on the grounds that the dissolution of Davail eliminated the case or
controversy?
¶18 Davail moved the District Court to dismiss the case pursuant to Mont. R. Civ.
P. 12(b)(1) for lack of subject matter jurisdiction. Davail argued that there was no longer
a case or controversy before the court once Davail and Kaye and Horn agreed to
dissolution. Kulko opposed the motion, arguing that because he was seeking money
damages in addition to dissolution, a case or controversy was still present. Relying on its
8
interpretation of § 35-1-939, MCA, the District Court found that the dissolution of Davail
resolved the case or controversy, and it dismissed the case without reaching the merits of
Kulko’s pending discovery motions or motion for leave to file an amended complaint.
The District Court erred when it dismissed Kulko’s claim for lack of subject matter
jurisdiction.
¶19 In Plan Helena, Inc. v. Helena Reg’l Airport Auth. Bd., 2010 MT 26, 355 Mont.
142, 226 P.3d 567, we outlined the requirements for subject matter jurisdiction:
The judicial power of Montana’s courts, like the federal courts, is limited to
“justiciable controversies.” See Greater Missoula Area Fedn. v. Child Start,
Inc., 2009 MT 362, ¶ 22, 353 Mont. 201, 219 P.3d 881. Article III of the
United States Constitution restricts the judicial power of the federal courts
to “cases” and “controversies.” See U.S. Const. art. III, § 2, cl. 1. Likewise,
Article VII, Section 4 of the Montana Constitution, in relevant part, confers
original jurisdiction on district courts in “all civil matters and cases at law
and in equity.” Mont. Const. art. VII, § 4(1). . . .
“A justiciable controversy is one upon which a court’s judgment will
effectively operate, as distinguished from a dispute invoking a purely
political, administrative, philosophical or academic conclusion.” Clark v.
Roosevelt County, 2007 MT 44, ¶ 11, 336 Mont. 118, 154 P.3d 48; accord
Seubert, ¶ 20; Gryczan v. State, 283 Mont. 433, 442, 942 P.2d 112, 117
(1997). The central concepts of justiciability have been elaborated into
more specific categories or doctrines—namely, advisory opinions, feigned
and collusive cases, standing, ripeness, mootness, political questions, and
administrative questions—each of which is governed by its own set of
substantive rules. Greater Missoula, ¶ 23.
Plan Helena, Inc., ¶¶ 6, 8. The doctrine of mootness is implicated in this case.
Under [the mootness] doctrine, the requisite personal interest that must
exist at the commencement of the litigation (standing) must continue
throughout its existence (mootness). Greater Missoula, ¶ 23; Havre Daily
News, LLC v. City of Havre, 2006 MT 215, ¶ 31, 333 Mont. 331, 142 P.3d
864. If the issue presented at the outset of the action has ceased to exist or
is no longer “live,” or if the court is unable due to an intervening event or
change in circumstances to grant effective relief or to restore the parties to
9
their original position, then the issue before the court is moot. Greater
Missoula, ¶ 23.
Plan Helena, Inc., ¶¶ 10-11.
¶20 In order for the District Court to have maintained subject matter jurisdiction over
this case, Kulko’s personal interest that existed at the beginning of the case must have
continued to exist throughout the case. One of Kulko’s interests—dissolution—was
indeed resolved while the case was pending. But Kulko sought compensatory damages
and leave to amend his complaint to claim punitive damages for his siblings’ alleged
breach of fiduciary duties. As stated above, this traditional remedy is not precluded by
§ 35-1-939, MCA. Thus, Kulko’s personal interest in the case and the court’s ability to
grant effective relief continued even after Davail’s dissolution. The District Court did not
lose subject matter jurisdiction over the case upon entering the dissolution order, and it
erred in dismissing Kulko’s claim under Rule 12(b)(1).
¶21 Finally, Davail argues that the District Court did not abuse its discretion in
dismissing Kulko’s complaint without leave to amend because the only relief Kulko
sought in his complaint was dissolution of the corporation. Davail protests that Kulko
did not plead a claim for damages with any specificity, but simply included it in a laundry
list of alternative relief in the event that he failed to obtain the requested dissolution.
Davail argues that when dissolution was granted by stipulation, Kulko received all of the
relief he had requested. But this is not the theory on which Davail sought dismissal in the
District Court, which dismissed the case for lack of jurisdiction. The District Court will
10
have the opportunity to consider on remand whether to grant Kulko leave to amend his
complaint.
CONCLUSION
¶22 For the foregoing reasons, we reverse the District Court’s January 22, 2015 Order
granting Davail’s motion to dismiss for lack of subject matter jurisdiction. We remand
for reinstatement of the case, and direct the District Court to proceed to consider Kulko’s
motion for leave to amend his complaint, as well as outstanding discovery matters.
/S/ PATRICIA COTTER
We concur:
/S/ MIKE McGRATH
/S/ JAMES JEREMIAH SHEA
/S/ BETH BAKER
/S/ MICHAEL E WHEAT
/S/ LAURIE McKINNON
/S/ JIM RICE
11