Central Sales and Services, Inc., Edward J. Kehrer and Ralph A. Deavers v. Mark A. Berg ( 2008 )

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
December 10, 2007 Session
CENTRAL SALES AND SERVICES, INC., EDWARD J. KEHRER and
RALPH A. DEAVER, v. MARK A. BERG
Direct Appeal from the Chancery Court for Humphreys County
No. CH03265 Hon. Robert E. Burch, Judge
No. M2007-00286-COA-R3-CV - Filed on February 27, 2008
Plaintiff corporation and stockholders sued defendant to enforce a Stock Redemption and
Shareholder Agreement signed by defendant, when he refused to comply with the terms of the
Agreement after he was terminated from the company. The Trial Court granted plaintiff partial
summary judgment, finding that the Agreement was enforceable, and defendant has appealed. We
affirm the partial summary judgment of the Trial Court and remand, with instructions.
Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Affirmed and
Remanded.
HERSCHEL PICKENS FRANKS, P.J., delivered the opinion of the court, in which D. MICHAEL SWINEY ,
J., and ANDY D. BENNETT, J., joined.
Thomas R. Meeks, Clarksville, Tennessee, for appellant.
Alan D. Johnson, Nashville, Tennessee, for appellees.
OPINION
Plaintiffs’ Complaint alleged that defendant, Mark Berg was a former employee of
plaintiff, and one of three shareholders in the company, and that the shareholders and plaintiff had
executed a Stock Redemption and Shareholder Agreement, but defendant had refused to comply with
the terms of the Agreement.
Plaintiff asserted that the Agreement required that if any shareholder ceased to be an
employee, that he was required to sell his shares of the stock to the other shareholders, and that the
Agreement provided for two methods of computing the purchase price of the shares, which was to
be the greater of the amounts calculated under the two methods, and sought specific performance of
the Agreement.
A copy of the Agreement was attached, and it states that each of the three
shareholders owns 320 shares of common stock in the company, and that “[i]f any Shareholder
should retire, become disabled or for any reason cease to be an employee of the Company, such
Shareholder shall offer to sell his shares to the Company first and then to all other Shareholders. The
purchase price of such shares of stock shall be determined as set forth in Section C of this
Agreement. Within thirty (30) days after the Shareholder’s retirement, disability or termination as
an employee, the Company may purchase such shares of the Shareholder, and such Shareholder shall
sell the shares to the Company. If the Company does not purchase such shares within thirty (30)
days after such retirement, disability or termination of employment, the other Shareholders may,
within thirty (30) days immediately thereafter, purchase such shares in direct proportion to the
number of shares they already own in the Company . . . .”
Section C of the Agreement provides the method for determining the purchase price
of the shares, and states that the shares shall either be valued using a three-year weighted average of
earnings, or book value, whichever is greater.
Subsequently, plaintiff filed a First Amended Complaint, naming the other two
shareholders as additional plaintiffs.
Defendant’s Answer admitted that the Agreement was executed, and when the other
shareholders expressed a willingness to buy him out, he expressed “a basis upon which he would be
willing to sell” which was unacceptable to the other shareholders, and that when he declined, he was
terminated.
Defendant filed a Counter-Complaint, asserting that his termination was in bad faith,
and without just cause, and was a plan by the other shareholders to acquire his stock at a fraction of
its true value, and that the other shareholders had breached their fiduciary duties to him.
Defendant then moved dismiss, asserting plaintiff had filed a chapter 11 bankruptcy
petition, and that its reorganization plan stated that any executory contract not assumed under the
terms of the plan or separate court order would be deemed rejected. He asserted that the Agreement
was an executory contract, but that it had not been assumed, and the date for doing so had long
passed. On this ground, he asserted the action based on the Agreement should be dismissed.
In response, plaintiffs stated they were not seeking to enforce an executory contract,
but rather were seeking a remedy for defendant’s breach of contract, and relied upon the case of In
re Jolly, 574 F.2d 349 (6th Cir. 1978), wherein the Court held that a contract was no longer executory
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when it was breached before the debtor filed for bankruptcy protection.
Plaintiffs then moved for a Partial Judgment, asking the Court to dismiss defendant’s
claim of wrongful discharge. They asserted that the claim was barred by the one-year statute of
limitations set forth at Tenn. Code Ann. §28-3-104 and §48-18-601. In response, defendant asserted
that he was not claiming that the shareholders breached their fiduciary duties as officers or directors,
but as shareholders, such that Tenn. Code Ann. §48-18-601 would not apply. He stated that Tenn.
Code Ann. §28-3-104 also did not apply because he was not seeking damages for personal injury.
He relied on Mike v. Po Group, Inc., 937 S.W.2d 790 (Tenn. 1996), where the Supreme Court
determined that the applicable statute of limitations for actions alleging breach of fiduciary duty by
a shareholder was the three year statute found at Tenn. Code Ann. §28-3-105.
Plaintiff stockholders answered the Counter-Complaint, setting forth that they were
unable to acquire defendant’s stock within the timetable referenced in the Agreement because
defendant refused to communicate with them, and denied that defendant was terminated because he
refused to sell his stock, or that his termination was done in bad faith, and reasserted the affirmative
defenses of statute of limitations and statute of frauds.
Defendant filed a Response to the Motion for Partial Summary Judgment, along with
his own Statement of Facts, and did not deny that his employment was terminated, but stated that
he was never terminated as an officer and director of the company, so the clause in the Agreement
requiring him to sell his stock had not been triggered. An Affidavit in response, attaching the
minutes of the meeting in 2006, showed that the office of vice-president had been “deleted”.
The Trial Court held a hearing on December 4, 2006, and entered an Order Granting
Plaintiffs’ Motion for Partial Summary Judgment. The Court found that there were no genuine
issues of material fact and defendant’s employment with the company had ceased, and that pursuant
to the terms of the Agreement, his status as a shareholder terminated when his employment ceased.
The Court found that the value of defendant’s share should be determined pursuant to the
Agreement, and that the Agreement controlled what either the company or the individual plaintiffs
had to pay the defendant for his shares. The Court held that this Order would be final pursuant to
Tenn. R. Civ. P. 54.
Defendant has appealed. These issues are raised on appeal:
1. Whether there is a genuine issue of material fact with regard to defendant’s
contractual defense that Deaver and Kehrer breached a duty of good faith and
fair dealing in the performance and enforcement of the shareholder agreement
when they terminated him for their own self-interest?
2. Whether the Trial Court erred in declaring the plaintiffs’ Partial Summary
Judgment to be final pursuant to Tenn. R. Civ. P. 54?
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3. Whether the defendant’s counter-claim for wrongful termination and breach
of fiduciary duty is barred by the statute of limitations, and the Trial Court’s
denial of plaintiffs’ motion for partial judgment on the pleadings should be
reversed?
Defendant asserts that the Trial Court erred in refusing to recognize a genuine issue
of material fact regarding whether the other stockholders had breached their duty of good faith and
fair dealing implicit in the Agreement when they terminated him without just cause. He argues that
he presented facts which would show that Deaver and Kehrer breached their fiduciary duty to him,
which is a ground to void the Agreement.
Since this case involves a grant of partial summary judgment, we must:
review the decision of the trial court de novo with no presumption of correctness on
appeal. We view the evidence in the light most favorable to the non-movant,
allowing all necessary inferences in its favor and discarding all countervailing
evidence, to determine whether a genuine dispute exists as to any of the material
facts. If, upon review, a genuine issue exists or if there is doubt as to whether such
issue exists, the summary judgment is improper and should be reversed.
Madison v. Pickett County Bank and Trust Co., 33 S.W.3d 815, 816 (Tenn. Ct. App. 2000)
Defendant alleged that Deaver and Kehrer knew when they terminated him that the
company was having financial difficulties, and if they terminated him at that time, his stock would
have a lower value. He also alleged that there was no justifiable business purpose for his
termination. Plaintiffs never gave any reason for their action, nor countered any of defendant’s
allegations regarding his termination by affidavit or otherwise.
Plaintiffs argue, however, that defendant has not shown any breach of fiduciary duty,
and that even if he had, that would not be sufficient to constitute a defense to enforcement of the
parties’ Agreement. Corporate officers owe a fiduciary duty to shareholders of the corporation. See
Tenn. Code Ann. §48-18-4031; see also Intertherm Inc., v. Olympic Home Systems, Inc., 569 S.W.2d
467 (Tenn. Ct. App. 1978). The Supreme Court has also established that shareholders in a closely-
held corporation owe a fiduciary duty to one another. Mike v. Po Group, 937 S.W.2d 790 (Tenn.
1996); Hall v. Tennessee Dressed Beef Co., 957 S.W.2d 536 (Tenn. 1997).
We have previously broached the issue that a breach of such fiduciary duty might be
sufficient to set aside a stock purchase agreement, if proven. See Contractors Heating & Cooling,
Inc., v. Devine, 1996 WL 668341 (Tenn. Ct. App. Nov. 20, 1996). There is no controlling authority
on this issue in this State, however, cases from other jurisdictions have held that setting aside a stock
1
The statute of limitations for a claim under Tenn. Code Ann. §48-18-403 is one year from
the date of discovery, or no more than three years. Tenn. Code Ann. §48-18-601.
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purchase agreement would not be the proper remedy for such a breach, but rather, monetary damages
would be the appropriate redress.2 See, e.g., Brandt v. Somerville, 692 N.W.2d 144 (N.D. 2005);
Keating v. Keating, 2003 WL 23213143 (Mass. Super. Ct. Oct. 3, 2003).
In Contractors Heating & Cooling, Inc., we specifically stated:
In a closely held corporation, the logic behind the enforcement of stock redemption
agreements is particularly compelling because a close corporation has a special need
to control both the character and the number of shareholders. In addition, a stock
redemption agreement allows the business to continue without having to pay out
insupportable amounts of money upon the death or retirement of a key shareholder
Id. at p. 3. Similarly, cases from other jurisdictions have held that there was no breach of a fiduciary
duty where a corporation/its shareholders sought to invoke the provisions of a stock purchase
agreement to buy the stock of a shareholder even though the shareholder claimed the deal was to his
detriment. Courts typically enforce such agreements that are freely and voluntarily consented to by
the shareholders, as was the Agreement in this case. Reinhart v. Cendrowski Selecky, PC, 2003 WL
23104222 (Mich. Ct. App. Dec. 30, 2003); Jenkins v. Hayworth, 572 F. Supp. 591 (D.C. Mich.
1983); Gallagher v. Lambert, 549 N.E.2d 136 (N.Y. 1989).
This case involves a partial summary judgment based solely on enforcing the parties’
Agreement as written, and we conclude the defendant has set forth no basis for setting aside or
voiding the Agreement. The Agreement unambiguously provides that upon any shareholder’s
termination from employment with the company, his shares are to be sold to the corporation or the
other shareholders for a price that is provided in the Agreement. Defendant does not question that
his employment with the company was terminated, and thus, as the Trial Court held, the Agreement
should be enforced and defendant’s shares should be transferred to the corporation for the price set
out in the Agreement.
The Trial Court has other issues to resolve, which includes defendant’s claim of
breach of fiduciary duty by the individual plaintiffs. The Trial Court will be required to examine this
claim upon remand to determine its viability, but the remedy for any such breach, if proven, would
not be to set aside the Agreement, and the resolution of that issue would have no bearing on this
appeal.
Defendant contends the Trial Court erred in certifying the partial summary judgment
for the purpose of this appeal, and argues that this issue is “inextricably linked with a remaining issue
not yet decided”. Having determined that these issues are not “inextricably linked”, but that the
Agreement should be enforced irrespective of the other claims, there was clearly no just reason to
delay the resolution of this issue. Plaintiffs have alleged the corporation has been prevented from
2
Research has revealed no case where a stock agreement was set aside based on breach of
fiduciary duty by a shareholder/officer.
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effectively carrying out its financial business, such as procuring loans, due to the fact that defendant
was still listed as a shareholder. The Trial Court correctly certified this judgment so that the
corporation could have a settlement of its ownership and go forward with business. We find this
issue to be without merit.
Finally, plaintiffs raise the issue that the Trial Court erred in failing to grant them
judgment on the pleadings regarding defendant’s counter-claims of wrongful termination and breach
of fiduciary duty, alleging that the applicable statutes of limitations have already run on these claims.
As noted, the applicable statute of limitations for actions of breach of fiduciary duty by a
director/officer is one year from the date of discovery, pursuant to Tenn. Code Ann. §48-18-601.
Defendant has not disputed that he was terminated from his employment in April 2002, and he did
not file his claims until June 2004. It would appear that defendant’s claim of breach of fiduciary
duty of an officer/director is barred by the statute of limitations. However, defendant states in his
brief that he is not asserting such a claim. Similarly, if defendant is claiming wrongful termination
(which is not entirely clear from the pleadings), the statute of limitations applicable to that claim is
also one year, pursuant to Tenn. Code Ann. §28-3-104. Weber v. Moses, 38 S.W.2d 387 (Tenn.
1996).
As we have discussed, defendant is also claiming breach of the fiduciary duty owed
by one shareholder to another, and the Supreme Court has unequivocally stated that the one year
statute of limitations regarding breach of fiduciary duty by officers/directors would not apply. See,
Mike v. Po Group, Inc. In that case, the Court reasoned that this type of action was more similar to
a tortious injury to property, and held that the three year statute of limitations at Tenn. Code Ann.
§28-3-105 would apply. Contrary to plaintiffs’ arguments, the Court did not limit this holding to the
facts of that particular case. Thus, defendant’s claim regarding breach of shareholder fiduciary duty
is not time-barred.
In sum, the Trial Court’s grant of partial summary judgment enforcing the parties’
Agreement as written, is affirmed and the case remanded to determine the price to be paid defendant
pursuant to said Agreement, and for consideration of defendant’s claim of breach of shareholder
fiduciary duty.
The cost of the appeal is assessed to Mark Berg, and the cause remanded.
_________________________
HERSCHEL PICKENS FRANKS, P.J.
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