Randall Patton v. Leann Morris (mem. dec.)

FILED
MEMORANDUM DECISION Jun 14 2019, 9:18 am
CLERK
Pursuant to Ind. Appellate Rule 65(D), Indiana Supreme Court
Court of Appeals
this Memorandum Decision shall not be and Tax Court
regarded as precedent or cited before any
court except for the purpose of establishing
the defense of res judicata, collateral
estoppel, or the law of the case.
ATTORNEY FOR APPELLANT ATTORNEY FOR APPELLEE
Mark E. Miller Shawn M. Sullivan
Evansville, Indiana Evansville, Indiana
IN THE
COURT OF APPEALS OF INDIANA
Randall Patton, June 14, 2019
Appellant-Defendant, Court of Appeals Case No.
18A-PL-2087
v. Appeal from the Vanderburgh
Superior Court
Leann Morris, The Honorable Leslie C. Shively,
Appellee-Plaintiff. Judge
Trial Court Cause No.
82D01-1804-PL-2471
Tavitas, Judge.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 1 of 16
Case Summary
[1] In this interlocutory appeal, Randall Patton appeals the trial court’s grant of a
complaint for declaratory judgment filed by Leann Morris. We affirm.
Issues
[2] Patton raises four issues, which we restate as:
I. Whether the parties’ agreements were unenforceable
because there was no meeting of the minds.
II. Whether the parties’ agreements were unenforceable
because they were unconscionable.
III. Whether the parties’ agreements were unenforceable on
grounds of fraud and misrepresentation.
IV. Whether the parties’ agreements were unenforceable on
grounds of ultra vires.
Facts
[3] Patton is the sole shareholder of Patton Heating & Air Conditioning Company,
Inc. (“Company”), in Evansville. In 2017, the Company hired Morris as a
service technician. Morris soon noticed serious mismanagement at the
Company. Patton was not actively involved in the management of the
Company and was allowing others to make business decisions. Later in 2017,
Morris approached Patton about Patton giving Morris an ownership interest in
the Company in exchange for Morris helping Patton manage the Company.
Patton was interested, and Morris retained an attorney to draft documents
regarding the transaction.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 2 of 16
[4] Morris delivered drafts of the documents to Patton on November 3, 2017.
Patton reviewed the documents, and they negotiated certain changes. Morris’
attorney made revisions to the documents, and Morris delivered the revised
documents to Patton on November 12, 2017. Patton did not have an attorney
review the documents. Morris and Patton then signed a Stock Purchase
Agreement, a Stockholders’ Agreement, an Additional Agreement, 1 and a
handwritten Patton Heating Agreement 2 (collectively, “the Agreements”) on
November 16, 2017.
[5] The Stock Purchase Agreement noted that Patton owned 250 shares of the
Company and provided in relevant part:
The Shareholder desires to sell up to half of his respective shares
of stock in the Company to Buyer and Buyer desires to acquire
said shares from the Shareholder on the terms and conditions set
forth herein.
Upon acquisition of the shares of stock of the Company, Buyer,
through her ownership and operation of the Company, will be
1
The Additional Agreement provided:
Title of my position with [sic] be: Chief Executive Officer
Compensation will be an [sic] reasonable amount by law for position obtained and to be
assessed upon determination of business records, financial status and ability.
Also, if there would be any tax implication for shares purchased the corporation will agree to
cover.
Exhibit Vol. I p. 142.
2
The handwritten agreement provided: “Written agreement for purchase states as is with stipulations
understood by purchaser that both parties that land & building is not included therefore agreed upon.” Id. at
159.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 3 of 16
able to expand and strengthen Company’s services and facilitate
the provision of needed services to the community.
*****
1.2 Purchase and Sale of Phase I Shares.
(a) Subject to the terms and conditions herein stated, the
Shareholder hereby agrees to sell and transfer to Buyer, and
Buyer hereby agrees to purchase from Shareholder, eighty-three
(83) of the issued and outstanding shares of the Company (the
“Phase I Shares”).
(b) The aggregate purchase price for the Phase I Shares (the
“Phase I Purchase Price”) shall be One and 00/100 Dollar
($1.00). The Phase I Purchase Price shall be payable pro rata to
the Shareholder at the Phase I Closing.
(c) The closing of this transaction for Phase I Shares shall take
place on or before the 16th day of November, 2017 at the offices
of the Shareholder, located at 517 Ingle St, Evansville, Indiana
47708, or at such other time and place as the parties may
mutually agree (“Phase I Closing”).
(d) Upon compliance with the terms of this Agreement, at Phase
I Closing, Shareholder shall deliver to Buyer, free and clear of all
debts, mortgages, pledges, liens, encumbrances, security interests,
charges, restrictions, or other matters, certificates of the Phase I
Shares, duly endorsed over to Buyer, or accompanied by
executed stock powers in favor of Buyer.
Exhibit Vol. I pp. 24-25. Upon the meeting of certain performance goals,
Patton agreed to transfer additional shares to Morris in Phase II and Phase III.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 4 of 16
[6] The Stockholders’ Agreement provided in relevant part:
*****
Section 20. Management of the Corporation.
20.1 The Stockholders acknowledge and agree that the Board of
Directors of the Corporation shall consist of three (3) members
(each, a “Board Member”) selected by the Stockholders, subject
to the following limitations. One (1) Board Member shall be
appointed by, and serve at the pleasure of, Morris; one (1) Board
Member shall be appointed by, and serve at the pleasure of
Patton; and one (1) Board Member shall be an independent
Board Member mutually appointed by, and serving at the
pleasure of both Morris and Patton. In the event Morris and
Patton are unable to agree upon and mutually appoint the
independent Board Member then Morris shall appoint the
independent Board Member. Until otherwise designated by
Morris, her representative on the Board shall be T. Leann Morris.
Id. at 16-17. Section 20.2 of the Stockholders’ Agreement designated Morris as
the Company’s Chief Executive Officer.
[7] Morris immediately started acting as the Company’s chief executive officer.
Patton and Morris began having disagreements in approximately February
2018. Patton then changed the locks on the premises and refused to allow
Morris to manage the Company. On April 16, 2018, Morris called a special
meeting of the Company’s shareholders, and Patton refused to attend. Morris
exercised her right to appoint an independent Board Member. A meeting of the
Company’s Board of Directors was then held.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 5 of 16
[8] On April 27, 2018, Morris filed a complaint for: (1) breach of contract regarding
the Stockholders’ Agreement; (2) breach of contract regarding the Stock
Purchase Agreement; and (3) declaratory judgment regarding Morris’ rights and
liabilities. Morris also requested injunctive relief. Patton then filed an answer,
affirmative defenses, and counterclaims against Morris.
[9] In May 2018, the trial court held a hearing on Morris’ motion for preliminary
injunction. At the conclusion of the hearing, the trial court ordered that Morris
be allowed back on the Company’s property, that Morris have access to the
books and records of the Company, and that the parties “fashion an interim
business agreement.” Appellant’s App. Vol. II p. 71.
[10] At Morris’ request, the trial court then set the matter for an evidentiary hearing
on the bifurcated claim for declaratory judgment and Patton’s affirmative
defenses. A bifurcated bench trial was held with respect to the declaratory
judgment claim on July 2, 2018. On Patton’s motion, the trial court
incorporated the evidence presented during the preliminary injunction hearing.
[11] On August 16, 2018, the trial court issued findings of fact and conclusions of
law regarding the declaratory judgment claim as follows:
1. The Stock Purchase Agreement (Plaintiffs Ex. 2) and
Stockholders’ Agreement (Plaintiffs Ex. 1) are binding and
enforceable agreements upon Morris and Patton.
2. Morris is a shareholder of the Company: Morris owns 83
share[s] of stock in the Company, and Patton owns 167 shares of
stock in the Company.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 6 of 16
3. Morris is the duly appointed and elected Chief Executive
officer of the Company, and otherwise authorized to act and bind
the Company in her capacity as the Company’s CEO.
4. The three (3) member Board of Directors of the Company is
comprised of the following individuals: Morris, Patton, and Steve
Settles, 830 Blue Street, Bonneterre, Missouri.
5. Unless and until the Company would hereinafter take action,
to the contrary Morris is entitled to access the Business Premises,
its equipment and other Company property thereon.
6. Morris and Patton are to convene and attend a special meeting
of the Company’s shareholders and directors within fifteen (15)
days after the entry of this judgment to take action, if any,
consistent with this court’s entry of judgment herein.
Appellant’s App. Vol. II p. 21. Patton now appeals. 3
Analysis
[12] Patton appeals the trial court’s judgment for Morris with respect to her
declaratory judgment claim and Patton’s affirmative defenses. Because the trial
court entered findings of fact and conclusions of law, we review the findings
and the judgment for clear error. Ind. Trial Rule 52(A). “This means that the
evidence must support the findings and the findings must support the
judgment.” Gittings v. Deal, 109 N.E.3d 963, 970 (Ind. 2018), reh’g denied. “We
3
Morris filed a motion to dismiss the appeal, arguing that the appeal was not a proper interlocutory appeal as
of right under Indiana Appellate Rule 14(A). We denied Morris’ motion pursuant to Indiana Appellate Rule
14(A)(3).
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 7 of 16
set aside the findings only if the record contains no supporting evidence, but we
review the court’s legal conclusions de novo.” Id.
[13] The trial court found that the Agreements were valid and enforceable; Patton,
however, seeks to avoid the enforcement of the Agreements that he entered into
with Morris. Generally, the interpretation and construction of contract
provisions are questions of law. John M. Abbott, LLC v. Lake City Bank, 14
N.E.3d 53, 56 (Ind. Ct. App. 2014). We review the contract as a whole,
attempting to ascertain the parties’ intent. We make every attempt to construe
the contract’s language in a way that we do not render any words, phrases, or
terms ineffective or meaningless. Id. Where terms of a contract are clear and
unambiguous, we will apply the plain and ordinary meaning of the terms and
enforce the contract according to its terms. Id. A contract will be found to be
ambiguous only if reasonable persons would differ as to the meaning of its
terms. Beam v. Wausau Ins. Co., 765 N.E.2d 524, 528 (Ind. 2002), reh’g denied.
[14] Patton does not argue that the Agreements are ambiguous, and our review
indicates that the Agreements’ terms are clear and unambiguous. Rather,
Patton argues that the Agreements are unenforceable because: (1) there was no
meeting of the minds; (2) the Agreements are unconscionable; (3) the
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 8 of 16
Agreements were procured through fraud; and (4) the Agreements are ultra
vires because they violate the Company’s articles of incorporation. 4
I. Meeting of the Minds
[15] Patton argues that the Agreements are unenforceable because there was no
meeting of the minds. Contracts are formed when parties exchange an offer
and acceptance. Jernas v. Gumz, 53 N.E.3d 434, 445 (Ind. Ct. App. 2016), trans.
denied. A meeting of the minds of the contracting parties, having the same
intent, is essential to the formation of a contract. Id. The basic requirements for
a contract are offer, acceptance, consideration, and a meeting of the minds
between the contracting parties on all essential elements or terms of the
transaction. Id. There must be mutual assent or a meeting of the minds on all
essential elements or terms in order to form a binding contract. Id.
[16] Patton seems to argue that the parties had different intentions regarding: (1)
when Morris was to earn her shares; (2) Morris’ control over the third director;
and (3) Morris’ ability to compete with the Company. Patton argues that he
“did not agree to any of these things.” Appellant’s Br. p. 20.
4
Patton argues that the trial court should have used the parol evidence admitted during the hearings to find
the Agreements unenforceable. The trial court noted that it had been “quite liberal” in allowing Patton to
present parol evidence. Appellant’s App. Vol. II p. 19. “‘[P]arol or extrinsic evidence is inadmissible to
expand, vary, or explain the instrument unless there has been a showing of fraud, mistake, ambiguity,
illegality, duress or undue influence.’” John M. Abbott, 14 N.E.3d at 56 (quoting Adams v. Reinaker, 808
N.E.2d 192, 196 (Ind. Ct. App. 2004)). The trial court found none of those circumstances here and did not
err.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 9 of 16
[17] The trial court rejected Patton’s argument and found:
Patton asserts that the contracts are not enforceable because there
was not a “meeting of the minds.” For a meeting of the minds,
the contracting parties must have the same intent essential[ly].
Wallem v. CIS Industries Inc., 725 N.E.2d 880. The intent relevant
is not the parties[’] subjective intent but their outward
manifestations of it. Centennial Mortgage, Inc. v. David Blumenfeld,
[745] N.E.2d 268 (Ind. Ct. App. 2001). A court does not
examine the hidden intentions in the secretive heart of a person;
rather it examines the final expression found in conduct, which
requires an examination of all the circumstances. Ochoa v. Ford,
641 N.E.2d 1042 (Ind. Ct. App. 1994).
The final version of the contracts was created after negotiations
between the parties. After negotiations, documents were then
given to Patton several days before the contracts were executed at
the Company’s place of business. The conduct of the party’s
[sic], therefore, clearly indicates that there was a meeting of the
minds.
Appellant’s App. Vol. II p. 19.
[18] Although Patton now claims that he did not agree to the terms of the
Agreements, the evidence shows that: (1) Patton and Morris negotiated the
terms of the Agreements; (2) Morris presented a draft Agreement to Patton, and
Patton requested revisions; (3) after making revisions to the Agreements, Morris
provided the revised Agreements to Patton; (4) Patton had the Agreements for
several days and did not request further revisions; (5) Patton and Morris then
met and signed the Agreements; and (6) Patton then allowed Morris to assume
control over the management of the Company.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 10 of 16
[19] Patton had the opportunity to read the Agreements and make further revisions.
“Under Indiana law, a party to a contract ‘is presumed to understand and
assent to the terms of the contracts he or she signs.’” John M. Abbott, LLC, 14
N.E.3d at 58 (quoting Sanford v. Castleton Health Care Ctr., LLC, 813 N.E.2d 411,
418 (Ind. Ct. App. 2004), trans. dismissed). “A court cannot relieve a party from
the terms of a contract because of his failure to read all or part of it, as he is
bound to know the contents of the contract which he signs.” Pinnacle Computer
Servs., Inc. v. Ameritech Pub., Inc., 642 N.E.2d 1011, 1017 (Ind. Ct. App. 1994),
reh’g denied. Patton’s later remorse over entering into the Agreements does not
mean that the parties lacked a “meeting of the minds.” The trial court’s finding
on this issue is not clearly erroneous.
II. Unconscionability
[20] Patton argues that the Agreements are unenforceable because they are
unconscionable. “‘As a general rule, a contract may be declared unenforceable
due to unconscionability when there is a great disparity in bargaining power
which leads the party with the lesser power to sign a contract unwillingly and
unaware of its terms.’” McAdams v. Foxcliff Estates Cmty. Ass’n, Inc., 92 N.E.3d
1144, 1150 (Ind. Ct. App. 2018) (quoting Pinnacle Computer, 642 N.E.2d at
1017)). “In such a case, the contract must be one that no sensible person not
under delusion or duress or in distress would make, and one that no honest and
fair person would accept.” Id.
[21] The trial court rejected Patton’s argument and found:
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 11 of 16
Patton did not execute the Stock Purchase Agreement or
Stockholders’ Agreement under any delusion, duress or distress,
nor was there any inequality of bargaining power by and between
the parties.
There is absolutely no evidence that Morris possessed
“prodigious amount[s] of bargaining power” over Patton. To the
contrary, Patton was the sole owner of the Company and would
remain a controlling shareholder after completion and
satisfaction of all conditions set forth in respective agreements.
Patton has failed to carry his burden of proof that either the Stock
Purchase Agreement or Stockholders’ Agreement can be avoided
on grounds of unconscionability.
Appellant’s App. Vol. II p. 18.
[22] There is no evidence here of a great disparity in bargaining power between the
parties. Relying on Martin Rispens & Son v. Hall Farms, 621 N.E.2d 1078 (Ind.
1993), reh’g denied, 5 and Stiefler v. McCullough, 174 N.E. 823, 97 Ind. App. 123
(1931), for the proposition that unequal bargaining power is not required,
Patton contends that Morris took advantage of Patton’s “necessities and distress
to obtain an unfair advantage.” Appellant’s Br. p. 18.
[23] “A contract procured from one in a situation of distress and necessity by
another who stands in a relation of confidence or who is in a situation of
advantage may be avoided.” Day v. Bicknell Minerals, Inc., 480 N.E.2d 567, 571
(Ind. Ct. App. 1985), reh’g denied. There is no indication here that Patton and
5
Abrogated by Hyundai Motor America, Inc. v. Goodin, 822 N.E.2d 947 (Ind. 2005).
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 12 of 16
Morris were in a confidential relationship. The evidence showed, however, that
Patton’s business was suffering due to poor management. Patton was aware
that he needed assistance and accepted Morris’ offer with the hope that she
could turn things around. Morris merely negotiated with Patton on the terms
of the Agreements, which Patton signed. There is no evidence that Patton was
without other options, that Morris caused Patton to be in the situation, or that
Morris somehow deprived Patton of his free will. Accordingly, the trial court’s
finding regarding unconscionability of the Agreements is not clearly erroneous.
See, e.g., Day, 480 N.E.2d at 571-72 (noting that “[n]o acts here were wrongful,
nor did they deprive the shareholders of the exercise of free will. Through no
fault of UM, the shareholders simply were faced with two choices: they could
take the deal it offered or face action by the banks. The shareholders were in
economic peril because their company failed to meet its obligations, not by
virtue of any course of conduct attributable to UM.”).
III. Fraud
[24] Next, Patton argues that the Agreements are unenforceable because they were
procured through fraud. The trial court rejected Patton’s argument and found:
Patton also failed to carry his burden of demonstrating that the
contract should be avoided on grounds of fraud or other
misrepresentation. Morris is bound to read and understand the
contracts he signed. See, e.g., Mayflower Transit, Inc. v. Davonport,
714 N.E.2d 794, 799 (Ind. Ct. App. 1999). There are basically
two types of frauds, “actual” and “constructive”. Patton’s
assertion is essentially one of “constructive fraud” which arises
out of conduct [that], if sanctioned by law, would secure the
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 13 of 16
offending party an unconscionable advantage. Messmer v. KDK
Financial Services Inc., 82 N.E.3d 774 (Ind. Ct. App. 2017).
Essential to a constructive fraud defense or claims is the existence
of a duty owed by the culpable party to the injured party. Heyser
v. Noble Roman’s, 933 N.E.2d [16] (Ind. Ct. App. 2010). There is
no evidence establishing that Morris had any pre-existing duty to
Patton.
Appellant’s App. Vol. II pp. 18-19. On appeal, Patton argues that the trial court
misunderstood his argument to be a claim of constructive fraud. According to
Patton, his claim was one of fraudulent inducement.
[25] “Fraud in the inducement of a contract is a basis for its rescission.” A.G.
Edwards & Sons, Inc. v. Hilligoss, 597 N.E.2d 1, 3 (Ind. Ct. App. 1991).
“Generally, parties are obligated to know the terms of the agreement they are
signing, and cannot avoid their obligations under the agreement due to a failure
to read it.” Park 100 Inv’rs, Inc. v. Kartes, 650 N.E.2d 347, 349 (Ind. Ct. App.
1995). “However, where one employs misrepresentation to induce a party’s
obligation under a contract, one cannot bind the party to the terms of the
agreement.” Id. Fraudulent inducement occurs when a party is induced
through fraudulent misrepresentations to enter into a contract. Brumley v.
Commonwealth Bus. Coll. Educ. Corp., 945 N.E.2d 770, 776 (Ind. Ct. App. 2011).
“‘If a party’s manifestation of assent is induced by either a fraudulent or a
material misrepresentation by the other party upon which the recipient is
justified in relying, the contract is voidable by the recipient.’” Id. (quoting
Restatement (Second) of Contracts § 164(1) (1981)). Fraudulent inducement
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 14 of 16
does not prevent the formation of a contract altogether, but it does render the
contract “voidable.” Id.
[26] This fraudulent inducement claim also fails. Patton contends that the
Agreements did not contain “the terms Patton insisted upon.” Appellant’s Br.
p. 22. As we have discussed, however, Patton had the opportunity to review
and revise the Agreements. Even assuming Morris misrepresented the terms of
the Agreements, Patton was not justified in relying upon any alleged
misrepresentation. Patton was not prevented in any way from making further
clarifications or revisions. The trial court properly denied Patton’s fraud claim.
IV. Ultra Vires
[27] Finally, Patton argues that the Agreements were “ultra vires” and void because
they violated the Company’s articles of incorporation and bylaws. An ultra
vires act is an act beyond the scope of the powers of a corporation as defined by
its charter or act of incorporation. Bajdek v. Bd. of Trustees of Am. Legion Pulaski
Post No. 357 Tr. for Veterans of World War I, 132 Ind. App. 116, 133, 173 N.E.2d
61, 69 (1961).
[28] Patton contends that the Agreements were not approved by the Company’s
board and were, thus, void. The Company was not a party to the Stock
Purchase Agreement. Rather, Patton signed that agreement in his position as a
shareholder. As for the Stockholders’ Agreement, Patton signed that agreement
in his position as president of the Company. Morris points out that the
Company’s articles of incorporation allow contracts and other legal instruments
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 15 of 16
to be signed for and on behalf of the Company by the Company president. See
Exhibit Vol. I p. 244. The trial court properly rejected Patton’s argument that
the Agreements are void as an ultra vires action.
Conclusion
[29] The parties’ Agreements are valid and enforceable. The trial court’s entry of
declaratory judgment in favor of Morris is not clearly erroneous. We affirm.
[30] Affirmed.
Baker, J., and May, J., concur.
Court of Appeals of Indiana | Memorandum Decision 18A-PL-2087 | June 14, 2019 Page 16 of 16