DocketNumber： 02-1527WA
Judges： Bye, Arnold, Beam
Filed Date： 5/29/2003
Status： Precedential
Modified Date： 11/5/2024
DHC Resort, LLC, brought this action against Razorback Entertainment Corporation and Jake Prince, its principal shareholder. DHC sued as assignee of Melvin Robinson, co-founder of Razorback with Mr. Prince. The principal relief requested is that Razorback and Prince be ordered to issue to DHC 49 per cent, of the stock in Razorback, stock that DHC contends that Mr. Robinson, its assignor, was entitled to. The District Court dismissed the complaint, holding that Robinson, because of his prior material breach of the contract between himself and Prince, had forfeited any rights in Razorback. He therefore had nothing to assign to DHC. We agree with the District Court that Robinson failed to perform his contractual obligations fully, and that this fact should be taken into account in fashioning any relief that DHC might receive. We cannot agree, however, that Robinson’s actions, which took place after the formation of Razorback as a corporation, worked a complete forfeiture of his property interest in Razorback stock. Accordingly, the judgment of the District Court, dismissing the
I.
The District Court’s opinion clearly and fully sets out the facts. No one claims these findings are clearly erroneous. We therefore accept all of them.
Some time in 1999, Mel Robinson, the plaintiffs assignor, and Jake Prince, one of the defendants, made an oral agreement to purchase Belvedere Country Club from Telcor, Inc. The agreement included the following terms, among others. Prince and Robinson would form a corporation, Razorback Entertainment Corp., to make the purchase of Belvedere. Prince would own 51 per cent, of the stock of Razorback, and Robinson would own 49 per cent. The two men “would ... share equally in the responsibility for the costs and expenses to be incurred in the ownership and operation of Razorback and Belvedere.” Dist. Ct. Op., App. 22. It was agreed, in addition, that Robinson and Prince would pay in, as an initial contribution of capital, $2,500.00 each. These payments were made.
On July 22, 1999, Prince and Robinson, acting for Razorback, the corporation they had agreed to form, entered into a written contract with Telcor for purchase of the Belvedere Country Club, including 620 acres, more or less, with a clubhouse, an eighteen-hole golf course, and other appurtenances. The corporation was legally constituted in August, 1999. Razorback was incorporated in Nevada on August 6, and received authority to do business in Arkansas on August 27, 1999. No stock in Razorback was ever issued, either to Prince or to Robinson, “but both men from time to time represented orally and through documents ... that they were acting for the corporate entity, as either an owner, officer or authorized agent thereof.” Id. at 23. On July 23, 1999, Prince and Robinson took over the management of Belvedere. They operated the Club, carried out renovations, solicited membership, and attempted to locate financing for the purchase.
During the remainder of 1999, both Prince and Robinson put money into club operations at Belvedere — Prince contributed $91,353.24, and Robinson contributed $30,953.98. Problems arose with the financing of the purchase of Belvedere by Razorback from Telcor. The relationship between Robinson and Prince began to decline. On December 31, 1999, some sort of altercation occurred between Prince and the construction manager supervising renovations to the Belvedere clubhouse. After that, Robinson never returned to the Club. Prince, left in possession, has operated the Club since that time.
II.
Plaintiffs principal claim for relief — that defendants should be ordered to issue to it 49 per cent, of the stock of Razorback — depends upon the efficacy of Robinson’s assignment to the plaintiff DHC of his interest in Razorback, whatever it was. The District Court held for defendants on the ground that Robinson never had any stock in Razorback to begin with, nor did he ever have a right to the issuance of stock. Whatever rights Robinson might ultimately have achieved, in the District Court’s view, were extinguished when he committed a material breach of the oral agreement. Robinson’s capital contributions became depleted through operating losses, and he refused to continue funding the project. Prince was left alone, saddled with the continuing burden of capital infusion as a result of Robinson’s abandonment. Applying Arkansas law, the District Court noted that “[t]he party who first breaches a contract is in no position to take advantage of a later breach by the other party,” Stocker v. Hall, 269 Ark. 468, 472, 602 S.W.2d 662, 664-65 (1980), if the breach is material and sufficiently serious. TXO Corp. v. Page Farms, Inc., 287 Ark. 304, 307, 698 S.W.2d 791, 793 (1985). “The Restatement of Contracts declares that an influential circumstance in the determination of the materiality of a failure fully to perform a contract is the extent to which the injured party ... will obtain the substantial benefit that [he] reasonably anticipated.” Id. at 308, 698 S.W.2d at 793; Restatement (2d) Contracts § 241 (1981). Because of Robinson’s default, the Court reasoned, Prince never obtained the benefit that he reasonably anticipated, that is, equal participation by Robinson in the funding of the business. Accordingly, Prince was relieved of any obligation to Robinson, including the obligation to see that stock in Razorback was issued.
We respectfully disagree with this line of reasoning. In the first place, as we analyze the sequence of events, the first breach was committed by Razorback and Prince, not by Robinson. Once Robinson had made his initial contribution of capital, as agreed, he became entitled to the issuance of 49 per cent, of the stock. Razorback and Prince never fulfilled this obligation. There is no dispute between the parties that Razorback attained formal existence as a corporation. “Razorback Entertainment Corp.” is a named defendant. The complaint alleges, in ¶ 2, App. 7:
Defendant Razorback is a Nevada corporation having its principal place of business in Nevada but also doing business in Arkansas managing Belvedere Country Club.
The complaint also alleges, ¶ 9, App. 8, that “[defendant Razorback became a Subchapter S corporation .... ” The answer filed by Razorback and Prince admits these allegations.
It is true that Razorback had not yet achieved formal existence at the time of the contract for sale executed by Telcor and by Prince and Robinson on Razorback’s behalf. This fact, it seems to us, is immaterial. Parties may agree to form a corporation and to contribute a certain sum as initial capital. They may further agree that this corporation will take title to property which they, on behalf of the future corporation, have agreed to purchase. That is what happened here. Prince and Robinson agreed to form Razorback, to contribute $2,500.00 each as an initial capital investment, and to cause the issuance of stock 49 per cent, to Robinson and 51 per cent, to Prince (the difference, appar
Thus, when Robinson made his initial contribution of capital, he became the owner of 49 per cent, of the shares in Razorback. Thereafter, Razorback, acting through Prince and Robinson, took possession of the Club and began managing it. In this way, Razorback ratified the contract for the purchase of the Country Club. See, e.g., Brace v. Oil Fields Corp., 173 Ark. 1128, 1131, 293 S.W. 1041, 1043 (1927) (indicating that a company becomes bound by a contract made by its promoters by ratifying the contract.) As further evidence of this ratification, we note that Razorback has sued the previous owner of the Club for the performance of the sale contract.
Certainly it is true that Prince and Robinson, in their initial agreement, undertook further obligations; in particular, they agreed that they would “share equally in the responsibility for the costs and expenses to be incurred in the ownership and operation of Razorback and Belvedere.” Dist. Ct. Op., App. 22. The issuance of the stock, however, was never conditioned on the parties’ performance of this separate undertaking. Prince may well have an action against Robinson for breach of this portion of the contract, but we do not see how this breach can have the legal effect of destroying Robinson’s previously acquired property interest in Razorback stock. We do not even know whether these additional contributions were to be in the form of debt or equity.
Perhaps, given the vagueness of the parties’ arrangements, it would have been open to the District Court to hold that Robinson’s proportional ownership in Razorback should be reduced on account of his failure to make the additional contemplated contributions. The District Court, however, did not take this path. It did not even give Robinson any credit for the approximately $30,000.00 that he did contribute.
III.
In our view, DHC, as assignee of Robinson, was entitled to an order requiring Razorback to issue to it 49 per cent, of Razorback’s stock, and requiring Prince to do everything necessary to cause Razorback to take this action. That would not
The judgment of the District Court is affirmed in part and reversed in part, and this case is remanded to that Court for further proceedings consistent with this opinion.
. In two respects, however, we agree with the District Court's order of dismissal. The claims for fraud, complaint ¶ 17, Appendix of Appellant (App.) 10, and for violation of federal and state securities laws, id. at ¶ 19, are deficient on their face. We do not believe these claims require extended discussion. Insofar as the District Court dismissed them, the judgment of that Court is affirmed.
. This statement speaks, of course, as of the time of the District Court's opinion, which was filed on February 6, 2002. What has happened after decision of the case by the District Court, we do not know.
. In their briefs to this Court, the parties assume that Arkansas corporation law applies. We have made the same assumption in this opinion, but we question its validity. Razorback was incorporated in Nevada. It seems, therefore, that matters of corporate existence and the issuance of stock should be governed by Nevada law. It does not appear, however, that Nevada law differs from Arkansas law in any respect material to the present case. See Nev.Rev.Stat. § 78.235 (2002) ("every stockholder is entitled to have a certificate, signed by officers or agents designated by the corporation for the purpose, certifying the number of shares owned by him in the corporation”); § 78.030 (2002) (describing the formalities necessary to create a corporation).