Michael Kent Smith v. Thomas L. Taulman, II

FOR PUBLICATION
Oct 31 2014, 10:01 am
ATTORNEYS FOR APPELLANT: ATTORNEYS FOR APPELLEES:
EDWARD R. HANNON MICHAEL B. LANGFORD
GREGORY C. IRBY BRADEN K. CORE
Steuerwald Hannon Zielinski & Witham Scopelitis, Garvin, Light, Hanson &
Danville, Indiana Feary, P.C.
Indianapolis, Indiana
IN THE
COURT OF APPEALS OF INDIANA
MICHAEL KENT SMITH, )
)
Appellant-Plaintiff, )
)
vs. ) No. 32A01-1402-PL-78
)
THOMAS L. TAULMAN, II, THOMAS MCCLELLAN, )
CHRISTINA R. HURLEY, GARY R. MEUNIER, )
DENNY D. SMITH, T.K.O. ENTERPRISES, INC.; )
T.K.O. COMMERCIAL DEVELOPMENT, LLC; )
SCS FLEET SERVICES, LLC; GTS PROPERTIES, )
LLC, and T.K.O. SOUTH, LLC, )
)
Appellees-Defendants. )
APPEAL FROM THE HENDRICKS SUPERIOR COURT
The Honorable Stephenie D. LeMay-Luken, Judge
Cause No. 32D05-1207-PL-82
October 31, 2014
OPINION - FOR PUBLICATION
NAJAM, Judge
STATEMENT OF THE CASE
The Indiana Supreme Court recently reaffirmed that Indiana’s summary judgment
standards establish a “high bar” for summary judgment movants to clear. Hughley v.
State, 15 N.E.3d 1000, 1004 (Ind. 2014). “In particular, while federal practice permits
the moving party to merely show that the party carrying the burden of proof [at trial]
lacks evidence on a necessary element, we impose a more onerous burden: to
affirmatively ‘negate an opponent’s claim.’” Id. at 1003 (quoting Jarboe v. Landmark
Cmty. Newspapers of Ind., Inc., 644 N.E.2d 118, 123 (Ind. 1994)). In this summary
judgment appeal, we consider the plaintiff-nonmovant’s personal claims as well as his
direct and derivative shareholder claims against the defendants-movants. After
determining whether the trial court erred when it entered summary judgment despite
pending discovery, we assess whether the summary judgment movants designated
evidence to either affirmatively negate an element of the nonmovant’s remaining claims
or to establish all of the elements of an affirmative defense. Where they have done so,
we consider whether the nonmovant designated evidence to establish a genuine issue of
material fact to preclude the entry of summary judgment.
Specifically, Michael Kent Smith (“Kent”) appeals the trial court’s entry of
summary judgment for Thomas L. Taulman, II (“Taulman”); Thomas McClellan,
Christina R. Hurley, Gary R. Meunier, and Denny D. Smith (who are individually
referred to in this opinion by their last names and collectively referred to as “the
Employees”); and T.K.O. Enterprises, Inc., d/b/a T.K.O. Graphix (“T.K.O. Enterprises”);
T.K.O. Commercial Development, LLC (“T.K.O. Commercial”); SCS Fleet Services,
2
LLC (“SCS”); GTS Properties, LLC (“GTS”); and T.K.O. South, LLC (“T.K.O. South”)
(collectively, “the T.K.O. Companies”) (Taulman, the Employees, and the T.K.O.
Companies are collectively referred to, where appropriate, as either “the Defendants” or
“the Appellees”). Kent raises the following two issues for our review:
1. Whether the trial court abused its discretion when it denied his
motion to compel the production of certain evidence; and
2. Whether the trial court erred when it entered summary judgment for
the Appellees.
We hold that the trial court abused its discretion when it denied Kent’s motion to
compel, and, therefore, the court erred when it entered summary judgment for the
Appellees on certain claims even though the pending discovery was relevant to those
claims and Kent had been diligent in seeking that discovery. As to Kent’s other claims,
we hold that the Appellees designated evidence to establish an affirmative defense
regarding Kent’s defamation claim against Taulman, and Kent failed to designate
evidence in response to negate an element of this affirmative defense. We also hold that
the Appellees designated evidence to negate an element of Kent’s claim that Taulman
breached a fiduciary duty when he fired Kent and on Kent’s claims that the Employees
breached their fiduciary duties, and Kent failed to designate evidence in response to
demonstrate that summary judgment should be precluded on these claims. Finally, we
hold that the Appellees failed to designate evidence to negate at least one element of
Kent’s shareholder derivative claims, in which Kent alleged that some of the T.K.O.
Companies had agreed to lease real property below fair rental value and that other T.K.O.
3
Companies had engaged in ghost employment. Thus, we affirm in part, reverse in part,
and remand for further proceedings.
FACTS AND PROCEDURAL HISTORY
In 1985, Thomas L. Taulman, Sr., Taulman, and Kent formed T.K.O. Enterprises.
T.K.O. Enterprises is a full-service graphics firm, and its work includes the design,
manufacture, installation, and removal of graphics on trailers used in the trucking
industry. Each of the three men owned T.K.O. Enterprises in equal one-third shares.
Eventually, Taulman, Sr. sold some of his shares back to the company and transferred the
remainder of his shares to his son, Taulman. From 2000 to late 2009, Taulman owned
about 52% of the shares of T.K.O. Enterprises, and Kent owned the remaining shares, or
about 48%.
Although Taulman, the President of T.K.O. Enterprises, was actively engaged in
the management and promotion of the business, it is not clear that Kent had any specific
job description. Rather, Kent was the Vice President, and he would help with various
odds-and-ends around the company. Nonetheless, Taulman and Kent shared in the
profits, and their respective incomes were based upon their ownership interests.
Over time, T.K.O. Enterprises expanded through the creation of the T.K.O.
Companies, in particular:
 T.K.O. Commercial, which owns and manages certain real property and is owned
equally by Taulman and Kent;
 SCS, which removes decals from and cleans semi-trailers and is equally owned by
Taulman, Kent, Meunier, and Smith;
4
 GTS, which owns and manages certain real property and is 50% owned by T.K.O.
Enterprises, 25% owned by Meunier, and 25% owned by Smith; and
 T.K.O. South, which owns and manages certain real property and is wholly owned
by T.K.O. Enterprises.
Between 2005 and 2009, Taulman and Kent discussed having Kent sell his shares
in T.K.O. Enterprises, but no agreement was reached. In 2009, T.K.O. Enterprises
suffered substantial losses in business and faced bankruptcy. In June of that year,
Huntington Bank (“Huntington”) downgraded its relationship with T.K.O. Enterprises to
“substandard” due to poor financial performance, which placed T.K.O. Enterprises’ line
of credit with Huntington in jeopardy. Appellant’s App. at 114. On September 11, Tina
Magyar, T.K.O. Enterprises’ Controller, e-mailed Taulman and Kent to tell them that
T.K.O. Enterprises was almost completely unable to meet its financial obligations. Id. at
631.
Shortly thereafter, Taulman invested $50,000 of his own money in T.K.O.
Enterprises to cover operating expenses. Taulman asked Kent to make a similar
investment. Kent declined. Instead, Kent agreed to reduce his annual salary from
$120,000 to $50,000, and he agreed to condition his employment on working “a billable
position.” Id. at 598, 633. In working a billable position, Taulman informed Kent that
Kent’s job requirements would include reporting to McClellan or another assigned
supervisor each week for specific instructions to help where needed, and that Kent would
“have to be accountable for [his] work.” Id. at 598.
5
On October 5, 2009, T.K.O. Enterprises’ line of credit with Huntington expired,
and the bank refused to automatically renew it. Also in October, Taulman sought to have
a new investor, Terry Dillon, buy out Kent’s shares in T.K.O. Enterprises. Taulman
discussed this plan with Kent, and Kent agreed. But Huntington informed Taulman that
it would not renew the line of credit even if Dillon bought out Kent, and the deal fell
through.
Although facing tough market conditions, T.K.O. Enterprises, through Taulman
and the rest of its sales staff, continued to pursue potential customers throughout 2009.
In particular, in mid-2009 T.K.O. Enterprises began to engage TruGreen, a nationwide
provider of residential and commercial lawn and landscape services, in what “had the
potential to be a large account representing a sizeable volume of sales in 2010.” Id. at
115. Kent was aware of T.K.O. Enterprises’ attempt to secure a contract with TruGreen.
In November of 2009, TruGreen selected T.K.O. Enterprises to demonstrate its products
in a pilot program. Taulman informed Kent of this development.
Throughout this time T.K.O. Enterprises faced the prospect of bankruptcy.
Taulman requested Kent to make a capital contribution on several occasions, which Kent
declined to do. Kent was included on monthly e-mails that provided detailed reports on
T.K.O. Enterprises’ weak financial condition. Kent, a guarantor to T.K.O. Enterprises’
line of credit, discussed having T.K.O. Enterprises “shut the doors to be able to pay
vendors, pay our taxes, and walk away without filing personal bankruptcy.” Id. at 234.
Kent’s understanding of the TruGreen negotiations, among others, was that there was
“nothing to count on for me to invest money in the company” because the company “was
6
not going to make it.” Id. Indeed, in late 2009, Kent told Taulman, Hurley, and Smith
that, even if the company landed the TruGreen account, T.K.O. Enterprises should “do
the TruGreen job if it comes in and then shut . . . down.” Id. at 255.
On December 16, 2009, Taulman issued a notice of a special meeting of the board
of directors to be held on December 21, which was also the date of T.K.O. Enterprises’
annual shareholders meeting. According to the notice, new and additional shares in
T.K.O. Enterprises would be offered, and Taulman was to receive 52% of those shares in
exchange for his earlier $50,000 investment. Kent was to be given the option to purchase
the remaining 48% of the new shares at the meeting.
Taulman attended the meeting on December 21 as President of T.K.O. Enterprises.
Kent attended as Vice President. Hurley attended as Secretary. Also present were
McClellan, Meunier, and Smith, high-ranking employees of T.K.O. Enterprises whom
Taulman had invited. Kent had been informed before the meeting that Hurley,
McClellan, Meunier, and Smith were each willing to invest up to $25,000 in T.K.O.
Enterprises.
At that meeting, Kent asked “everyone’s opinion of why they would invest into
the company” and stated that he was “concerned with the future of the company.” Id. at
400. Hurley’s handwritten minutes of the meeting do not reflect any statements about
TruGreen. However, the official minutes, which were prepared subsequent to the
meeting by Taulman and reviewed and signed by Hurley as consistent with her
recollection, reflect that Taulman stated at the meeting that “TruGreen was about 90%
sure, but no signed purchase order at the [t]ime.” Id. at 358, 404. And Hurley recorded
7
that at least three other accounts were discussed, along with Smith stating that he thought
the “[i]ndustry was coming back” and McClellan stating there had been a small upswing
in sales. Id. at 352. Meunier then added that he “feels very strong[ly] about the company
and his future”; McClellan stated that he “believes in himself and work ethic” and that he
“[w]ould take the gamble to keep his job”; and Hurley stated that she “wanted to keep
what [she] had at T.K.O.” because she “believed in the company.” Id. at 352, 359.
Kent did not think the others had presented any information that “would benefit
the company. There was nothing really to bank on.” Id. at 237. As such, he agreed to
waive his right to purchase the new shares and agreed to reduce his total shareholdings to
9.8% in T.K.O. Enterprises. Hurley, McClellan, Meunier, and Smith each then purchased
9.8% of T.K.O. Enterprises. Taulman remained the majority shareholder with 51% of the
total shares. The parties’ agreement became effective on December 22, 2009.
In March of 2010, TruGreen awarded its contract for graphics services to T.K.O.
Enterprises. Largely as a result of this contract, T.K.O. Enterprises’ sales in 2010 were
the highest in its history. In July of 2010, Taulman fired Kent for leaving work before
the end of work days, failing to keep regular hours, failing to report to McClellan and
other supervisors, and failing to work billable positions.
On December 19, 2011, Kent filed his complaint against the Defendants. In his
complaint, Kent alleged that Taulman and the Employees had breached fiduciary duties
owed to Kent and that they had committed fraud at the December 21, 2009, meeting.
Kent also alleged defamation against Taulman and a shareholder derivative action against
the T.K.O. Companies, in which Kent alleged that some of the T.K.O. Companies had
8
agreed to lease real property below fair rental value and that other T.K.O. Companies had
engaged in ghost employment.
During discovery, Kent requested the Defendants to produce “all communications
they shared with one another as well as communications they shared with the company’s
bankers and customers.” Appellant’s Br. at 8. After the Defendants filed a request for a
protective order based on, among other things, Kent’s overbroad requests, the parties
agreed to a relevant timeframe for the documents requested, and the Defendants
withdrew their request for a protective order. The Defendants then responded to Kent by
producing more than 10,000 pages of documents.
One document produced was a December 28, 2009, letter from Taulman to
Huntington in which Taulman described the following outlook for 2010:
I feel 100% sure we will get the large order [with TruGreen] soon . . . .
***
. . . As for projecting out the next 6 months, January and February are
usually slow months but we are seeing good activity with the 2 semi trailer
factories (Great Dane) that we do business with. Our fleet customers are
saying that their maintenance costs are killing them and it would be cheaper to
have new equipment than what it is costing them to keep their existing
equipment. They are starting to request bids from us and some have decided
to buy now. . . . Simon Mall is one of our accounts and we are currently
bidding some large projects for them. . . . With all the new accounts we have
landed this year and with one of our biggest competitors . . . being bought and
closed down this year too[] we have gained a lot more of the market share . . .
. As for what I can predict in the next 6 months, I think that January and
February are break even months, March, April, May and June I believe will be
profitable . . . and with TruGreen beginning in early 2010, I think that April
and May could be even bigger. . . . If for any reason TruGreen is delayed or
doesn’t happen . . . we will still make money with our current accounts that
we have for the next 6 months . . . .
9
Id. at 1080-81. Among other things, the Great Dane account was not an account raised
by either Taulman or the Employees in response to Kent’s questions at the December 21,
2009, meeting.
Following the production of documents, the parties held several depositions. In
particular, the parties held Smith’s deposition on August 8, 2013, and Meunier’s
deposition the next day. During those depositions, Kent learned that numerous
documents within the scope of the first request for the production of documents had not
been produced. As a result, on August 28, Kent submitted to the Defendants a second
request for the production of documents. The Defendants responded on October 10 and
stated, in relevant part, that they would “produce documents responsive” to Kent’s
requests. Id. at 779-95.
Nonetheless, just five days later on October 15, 2013, the Defendants filed their
motion for summary judgment. After the parties agreed to allow Kent an extension of
time in which to respond to the summary judgment motion, on November 26 Kent filed a
motion to compel discovery. On December 23, 2013, Kent filed his response to the
motion for summary judgment. Meanwhile, on January 3, 2014, the court granted the
renewed request for a protective order on Kent’s motion to compel, which allowed Kent
to access, pursuant to his motion to compel, the Appellees’ computers under a specific
procedure.
On January 21, the court held a consolidated hearing on the Defendants’ motion
for summary judgment and on Kent’s motion to compel. Following that hearing, the
10
court entered summary judgment for the Defendants on all of Kent’s claims. A few days
later, the court denied Kent’s motion to compel. This appeal ensued.
DISCUSSION AND DECISION
Issue One: Motion to Compel
On appeal, Kent first asserts that the trial court abused its discretion when it
denied his motion to compel. As we have explained:
The trial court is vested with broad discretion in ruling on pre-trial inquiry
under Indiana Trial Rules 26 through 37 and we will reverse only upon a
showing of an abuse of discretion. Due to the fact-sensitive nature of
discovery matters, the ruling of the trial court is cloaked in a strong
presumption of correctness on appeal. Discovery, like all matters of
procedure, has ultimate and necessary boundaries. It is within the discretion
of the trial court to place bounds on the duration of discovery.
[I]t is generally improper to grant summary judgment when requests
for discovery are pending. However, when pending discovery is unlikely to
develop a genuine issue of material fact, summary judgment may be granted.
Mut. Sec. Life Ins. Co. v. Fidelity & Deposit Co., 659 N.E.2d 1096, 1103 (Ind. Ct. App.
1995) (emphasis added; citations and quotations omitted), trans. denied. Moreover,
“Indiana Trial Rule 56(F) authorizes but does not require a trial court to order a
continuance to permit further discovery.” Id.
Kent’s argument is, in essence, that, after the Appellees had produced documents
pursuant to Kent’s first request for the production of documents, some of the Employees
testified at their depositions to the existence of other documents that were not produced
despite being within the scope of Kent’s requests. In particular, on appeal Kent asserts
11
that Smith’s deposition1 demonstrates the Appellees’ noncompliance with Kent’s first
request for the production of documents.
The parties held Smith’s deposition on August 8, 2013. During that deposition,
Kent’s counsel specifically asked Smith if Smith had submitted “all handwritten
materials” from 2009 pursuant to Kent’s first request for the production of documents.2
Appellant’s App. at 806. Smith responded that he did not know whether he “would even
have something that goes back that far” but acknowledged that he had not looked. Id.
Kent’s counsel then asked Smith if it were likely that Smith had only sent Taulman two
e-mails in December of 2009, which was the extent of the Appellees’ response to the first
request for the production of documents. Smith stated that he did not know how many e-
mails he had sent to Taulman in December of 2009 but that it would “surprise” him to
learn that he had sent only two. Id. at 809.
In light of Smith’s statements, on August 28, 2013, Kent sent a second request for
the production of documents to the Appellees. On October 10, the Appellees responded
to the second request and stated, in relevant part, that they would “produce documents
responsive” to Kent’s requests. Id. at 779-95. But just five days after responding to the
second request for the production of documents, the Appellees filed their motion for
summary judgment.
1
Kent also references Meunier’s deposition, but we need not consider it.
2
These handwritten notes were Smith’s reports on the work of the sales staff, which he
supervised. At some point, T.K.O. Enterprises shifted to using computers.
12
On November 26, 2013, Kent filed his motion to compel. In his motion to
compel, Kent moved the court to:
1. . . . order Defendants to produce the computers used by
[Taulman, Smith, and Hurley] during the years 2009, 2010, and 2011, as
well as the hard drive containing all T.K.O. emails . . . so that Plaintiff,
through a third-party designee, may copy the hard drives and inspect the
contents, under and pursuant to the terms of an appropriate protective order,
if one is requested . . . .
2. . . . order Defendants to produce the documents identified in
[first request] No. 16 ([Smith’s handwritten] notes) . . . .
3. . . . order production of the documents identified in [second
request] No. 9 ([Smith’s] Call Reports) . . . .
4. . . . order Defendants to produce the personal financial
documents described in [second r]equest Nos. 11, 12, 13, 14, and 15 . . . .
Id. at 694.
The Appellees responded to the motion to compel with their renewed request for a
protective order, which the court later granted as follows:
Defendants are not obligated to produce the computers subject to Request for
Production Nos. 6-8 (Set Two), except that, if Plaintiff elects to inspect them,
he must do so: (1) utilizing the services of a third-party vendor agreeable to
Defendants; (2) at his own expense; (3) subject to a protocol ensuring that
Defendants’ privileged, confidential, irrelevant, and other materials not
subject to discovery remain protected; and (4) in a manner that does not
disrupt the business operations of the Corporate Defendants.
Id. at 1245-46. The court did not address in the protective order Kent’s additional
requests in his motion to compel, and it denied the motion to compel altogether a few
days after it had entered summary judgment for the Appellees. While the court did not
explain its rationale for denying the motion to compel, the timing of the court’s order
13
suggests it deemed the motion to compel moot in light of the court’s order on summary
judgment.
It is clear from the record that, at the time the Appellees filed their motion for
summary judgment and at the time the court entered summary judgment, discovery was
pending. The Appellees filed their motion for summary judgment just five days after
they had responded to Kent’s second request for the production of documents. And, in
their response, the Appellees informed Kent that they would produce numerous
documents requested. Further, just a few weeks before the court’s summary judgment
hearing, the court ordered the Appellees to grant Kent access to their computers so long
as Kent followed a procedure specified by the court in its order.3 And, at the January 21
hearing, counsel for the Appellees acknowledged that discovery was pending and that the
parties were trying “to line . . . up” having Kent review Smith’s notes, which they had
only recently “made available for inspection and copying.” Tr. at 6.
Because discovery was pending, as a general rule it was “improper to grant
summary judgment.” Mut. Sec. Life Ins. Co., 659 N.E.2d at 1103. We thus consider
whether the “pending discovery is unlikely to develop a genuine issue of material fact.”
Id. Pending discovery is unlikely to develop a genuine issue of material fact, for
example, when the information sought is not related to the dispositive issue on summary
judgment. See Diaz v. Carpenter, 650 N.E.2d 688, 693 (Ind. Ct. App. 1995) (“Even if the
3
The Appellees assert that the protective order did not mandate them to turn over the computers.
The Appellees are mistaken. The court did not order the Appellees to grant Kent unfettered access to the
computers, but it did order them to permit Kent access to the computers if Kent follows the procedure
specified by the court.
14
interrogatories would have disclosed such disputes of fact, the disputes are immaterial to
the arguments associated with the motion for summary judgment, which centered on the
statute of limitations . . . .”); see also Quiring v. GEICO Gen. Ins. Co., 953 N.E.2d 119,
132 (Ind. Ct. App. 2011) (“The only issue as to which Quiring requested additional time
for discovery was whether the Johnston policy was an Indiana or an Oklahoma policy.
As explained above, that issue is immaterial in light of our conclusion that the trial court
properly granted summary judgment that Quiring was not a resident of Johnston’s
household.”). A trial court also does not abuse its discretion in entering summary
judgment despite pending discovery when it appears that the party seeking discovery is
doing so merely to delay summary judgment. See, e.g., Frohardt v. Bassett, 788 N.E.2d
462, 473 (Ind. Ct. App. 2003) (rejecting the requesting party’s attempt to depose a
witness only after that witness had submitted an affidavit that was designated in support
of the motion for summary judgment), trans. denied; see also Mut. Sec. Life Ins. Co., 659
N.E.2d at 1103 (holding that the trial court did not abuse its discretion when it entered
summary judgment after “nearly a year” had passed between the last discovery request
and the motion for summary judgment).
The information sought by Kent’s motion to compel was within the scope of some
of Kent’s claims, and the Appellees do not suggest a basis for summary judgment on
these claims that is wholly apart from the pending discovery. In particular, Kent claimed
that Taulman breached his fiduciary duties and committed fraud at the December 21,
2009, meeting when, according to Kent, Taulman knowingly withheld material
15
information regarding T.K.O. Enterprises’ financial outlook for 2010.4 For the same
reasons, Kent alleged actual fraud claims against the Employees.
There is no dispute between the parties that T.K.O. Enterprises is a close
corporation.5 “Consequently, shareholders in a close corporation stand in a fiduciary
relationship to each other, and as such, must deal fairly, honestly, and openly with the
corporation and with their fellow shareholders.” DiMaggio v. Rosario, 950 N.E.2d 1272,
1275 (Ind. Ct. App. 2011). This includes a duty “to make disclosure of all essential
information.” Cressy v. Shannon Cont’l Corp., 177 Ind. App. 224, 229, 378 N.E.2d 941,
945 (1978) (quotations omitted). As Taulman was a fellow shareholder at the December
21, 2009, meeting, these duties applied to him. As noted in more detail below, however,
the Employees, who were not yet shareholders at that meeting, were not subject to these
duties.
Kent also alleged actual fraud against Taulman and the Employees. The elements
of actual fraud are: (1) a material misrepresentation of past or existing facts; (2) made
with knowledge or reckless ignorance of falsity; (3) which caused the complainant to rely
on the misrepresentation to the complainant’s detriment. Ohio Farmers Ins. Co. v. Ind.
Drywall & Acoustics, Inc., 970 N.E.2d 674, 684 (Ind. Ct. App. 2012), trans. denied. And
we agree with the Appellees that a claim for actual fraud may not be predicated on “a
failure to disclose facts where information is as accessible to one as to the other and truth
4
We agree with the Appellees that Kent’s direct claims against Taulman and the Employees are
limited to their representations or omissions with respect to T.K.O. Enterprises.
A close corporation is “one that typically has relatively few shareholders and whose shares are
5
not generally traded in the securities market.” Melrose v. Capitol City Motor Lodge, Inc., 705 N.E.2d
985, 990 (Ind. 1998).
16
is ascertainable by exercise of reasonable diligence.” Neff v. Ind. State Univ. Bd. of
Trustees, 538 N.E.2d 255, 259 (Ind. Ct. App. 1989) (citing Stucco Cotton Duster Co. v.
Comet Elec. Co., 95 Ind. App. 672, 680, 180 N.E. 185, 188 (1932)), trans. denied.
In support of their motion for summary judgment, the Appellees argued, in
relevant part, that summary judgment was appropriate for Taulman on the claim that he
had breached his fiduciary duties because Kent knew that T.K.O. Enterprises’ 2010
financial prospects were speculative and, therefore, Indiana’s Business Judgment Rule
protects Taulman from liability. Similarly, on Kent’s fraud claims the Appellees argued
that summary judgment in their favor was appropriate both because Kent knew of T.K.O.
Enterprises’ dire financial situation and because Kent “had equal access to the 2010 sales
projections . . . .” Appellant’s App. at 99 (quotation omitted).
But the pending discovery is relevant to whether Taulman or the Employees
deliberately hid information from Kent regarding T.K.O. Enterprises’ 2010 financial
outlook. And because intent is an open question, the Indiana Business Judgment Rule
does not apply. See TP Orthodontics, Inc. v. Kesling, 15 N.E.3d 985, 991 (Ind. 2014)
(recognizing that the Business Judgment Rule does not apply to claims based on reckless
or willful misconduct).
Neither was Kent’s motion to compel the result of a lack of diligence in discovery
or otherwise merely an attempt to delay summary judgment. Kent served interrogatories
on the Appellees with his complaint. After some discovery disputes and the production
of at least some relevant information, the parties proceeded to depositions. The parties
held Smith’s deposition on August 8, 2013, during which Kent learned that the Appellees
17
had not fully responded to the original production requests. Kent then served the
Appellees with supplemental discovery requests on August 28, and, on October 10, the
Appellees stated that they would “produce documents responsive” to Kent’s
supplemental requests. Appellant’s App. at 779-95. Nonetheless, five days later the
Appellees moved for summary judgment. And relevant discovery continued throughout
the summary judgment proceedings. These facts are a far cry from cases in which we
have affirmed the trial court’s entry of summary judgment because the party seeking
discovery had been dilatory. See, e.g., Frohardt, 788 N.E.2d at 473; Mut. Sec. Life Ins.
Co., 659 N.E.2d at 1103.
It is not for the trial court or this court to assume that the pending discovery, once
produced, will fail to support Kent’s allegations. All that matters for the instant
proceedings is that Kent’s requests were relevant to the arguments made on summary
judgment on the issues discussed above and that Kent’s pursuit of discovery has been
reasonably diligent. Accordingly, the trial court abused its discretion when it denied
Kent’s motion to compel. For the same reasons, we reverse the trial court’s entry of
summary judgment on Kent’s claims against Taulman for Taulman’s alleged breach of
his fiduciary duties as well as Kent’s claims against Taulman and the Employees for
actual fraud.
Issue Two: Summary Judgment on Kent’s Other Claims
We next consider whether the trial court erred when it entered summary judgment
for the Appellees on the remainder of Kent’s claims, which are either outside the scope of
the pending discovery or can be decided on a basis independent of the pending discovery.
18
As stated above, our supreme court recently reaffirmed our standard of review in
summary judgment appeals:
We review summary judgment de novo, applying the same standard as the
trial court: “Drawing all reasonable inferences in favor of . . . the non-
moving parties, summary judgment is appropriate ‘if the designated
evidentiary matter shows that there is no genuine issue as to any material
fact and that the moving party is entitled to judgment as a matter of law.’”
Williams v. Tharp, 914 N.E.2d 756, 761 (Ind. 2009) (quoting T.R. 56(C)).
“A fact is ‘material’ if its resolution would affect the outcome of the case,
and an issue is ‘genuine’ if a trier of fact is required to resolve the parties’
differing accounts of the truth, or if the undisputed material facts support
conflicting reasonable inferences.” Id. (internal citations omitted).
The initial burden is on the summary-judgment movant to
“demonstrate[] the absence of any genuine issue of fact as to a
determinative issue,” at which point the burden shifts to the non-movant to
“come forward with contrary evidence” showing an issue for the trier of
fact. Id. at 761-62 (internal quotation marks and substitution omitted).
And “[a]lthough the non-moving party has the burden on appeal of
persuading us that the grant of summary judgment was erroneous, we
carefully assess the trial court’s decision to ensure that he was not
improperly denied his day in court.”[6] McSwane v. Bloomington Hosp. &
Healthcare Sys., 916 N.E.2d 906, 909-10 (Ind. 2009) (internal quotation
marks omitted).
Hughley, 15 N.E.3d at 1003 (alterations original to Hughley).
Again, we emphasize that summary judgment is a “high bar” for the moving party
to clear in Indiana. Id. at 1004. “In particular, while federal practice permits the moving
6
In another recent opinion, the Indiana Supreme Court stated that an appellee had “the burden of
proof on appeal” where the appellate court “st[oo]d in the trial court’s shoes” and the appellee was the
party with the burden of proof to the trial court. Ind. State Ethics Comm’n v. Sanchez, ___ N.E.3d ___,
2014 WL 5285657, at *2 & n.1 (Ind. Oct. 16, 2014). This language suggests that the Appellees here
likewise carry the burden on appeal because, “[w]hen appellate courts review the grant or denial of
summary judgment, the reviewing court stands in the shoes of the trial court and applies the same
methodology.” Smith v. Delta Tau Delta, Inc., 9 N.E.3d 154, 160 (Ind. 2014). But the appellee in
Sanchez had originally appealed an adverse agency action to the trial court. The agency then appealed the
trial court’s judgment to this court and the Indiana Supreme Court. We decline to read the language from
Sanchez to apply outside of that fact-specific context, and we instead follow our supreme court’s other
guidance that the appellant in a summary judgment appeal carries the burden of persuasion on appeal.
Hughley, 15 N.E.3d at 1003.
19
party to merely show that the party carrying the burden of proof [at trial] lacks evidence
on a necessary element, we impose a more onerous burden: to affirmatively ‘negate an
opponent’s claim.’” Id. at 1003 (quoting Jarboe, 644 N.E.2d at 123). Further:
Summary judgment is a desirable tool to allow the trial court to dispose of
cases where only legal issues exist. But it is also a “blunt . . . instrument”
by which the non-prevailing party is prevented from having his day in
court. We have therefore cautioned that summary judgment is not a
summary trial and the Court of Appeals has often rightly observed that it is
not appropriate merely because the non-movant appears unlikely to prevail
at trial. In essence, Indiana consciously errs on the side of letting marginal
cases proceed to trial on the merits, rather than risk short-circuiting
meritorious claims.
Id. at 1003-04 (citations and some quotations omitted; omission original to Hughley).
Thus, for the trial court to properly grant summary judgment, the movants must have
made a prima facie showing that their designated evidence negated an element of the
nonmovant’s claims, and, in response, the nonmovant must have failed to designate
evidence to establish a genuine issue of material fact. See Dreaded, Inc. v. St. Paul
Guardian Ins. Co., 904 N.E.2d 1267, 1270 (Ind. 2009). With these principles in mind, we
address Kent’s remaining claims against the Appellees.
Summary Judgment for Taulman
We first consider Kent’s remaining claims against Taulman, who, along with
Kent, was the only other shareholder at the December 21, 2009, meeting. Aside from his
claims that Taulman breached his fiduciary duties and committed fraud at the December
21, 2009, meeting, which we have resolved above, Kent also alleges that Taulman
20
breached a fiduciary duty when he terminated Kent’s employment7 and that Taulman
defamed Kent when Taulman told his former spouse that he had fired Kent because Kent
“never worked.” Appellant’s App. at 24.
On each of these claims, the Appellees asserted both that Kent’s termination was
for good cause and that Taulman had told the truth when he said Kent why he had fired
Kent. See, e.g., Gatto v. St. Richard Sch., Inc., 774 N.E.2d 914, 924 (Ind. Ct. App.
2002). In support, the Appellees designated Taulman’s affidavit, in which he explained
that he had fired Kent because Kent left work before the end of work days, failed to keep
regular hours, failed to report to McClellan and other supervisors, and failed to work
billable positions. The Appellees’ designated evidence negated an element of Kent’s
claim that Taulman breached a fiduciary duty when he fired Kent, and the designated
evidence established a prima facie case that the Appellees had an affirmative defense to
Kent’s defamation claim. As such, the Appellees were entitled to judgment as a matter of
law on these claims unless Kent designated evidence to show a genuine issue of material
fact that precluded the entry of summary judgment.
In his response, Kent did not challenge Taulman’s affidavit with designated
evidence that clearly disputed Taulman’s affidavit. Rather, Kent simply argued that
Taulman’s credibility is an issue of fact and that Kent was fired either in furtherance of a
vengeful scheme or because no one liked him. But, either way, Kent cannot undermine
7
We assume for the sake of argument that this is a cause of action on these facts even though
there is no dispute that Kent was an at-will employee. See W&W Equipment Co. v. Mink, 568 N.E.2d
564 (Ind. Ct. App. 1991), trans. denied. Further, insofar as Kent alleged this claim against the
Employees, for the same reasons summary judgment is appropriate for Taulman it is appropriate for the
Employees.
21
the summary judgment movant’s designated evidence by simply speculating that an
affiant lacks credibility. If what Taulman stated in his affidavit were untrue, Kent could
say so in his own affidavit and avoid summary judgment. 8 See Hughley, 15 N.E.3d at
1003 (stating that it is “accurate” that “summary judgment [may] be precluded by as little
as a non-movant’s ‘mere designation of a self-serving affidavit.’” (quoting Deuitch v.
Fleming, 746 N.E.2d 993, 999-1000 (Ind. Ct. App. 2001), trans. denied)). While a
minimum showing is sufficient, more than a mere supposition is required. A supposition
is not designated evidence and can neither mandate nor preclude the entry of summary
judgment. Thus, we affirm the trial court’s entry of summary judgment on these claims
against Taulman.
Summary Judgment for the Employees
We next consider Kent’s nonfraud claims against the Employees. As with
Taulman, Kent asserts that each of the Employees—McClellan, Hurley, Meunier, and
Smith—breached their fiduciary duties at the December 21, 2009, meeting when they did
not adequately inform Kent of T.K.O. Enterprises’ business outlook for 2010. But unlike
Kent’s claim against Taulman, Kent’s claims against the Employees are baseless.
The Appellees’ designated evidence is undisputed and shows that, at the
December 21, 2009, meeting, the Employees were not shareholders but, as our reference
to them makes clear, mere employees of T.K.O. Enterprises. Unlike the fiduciary duties
8
Instead, Kent cites nine pages of the record in support of his argument that Taulman did not fire
him in good faith and defamed him. But none of those pages supports Kent’s position. Indeed, one of the
pages is from Kent’s deposition, in which Kent admits that he had no idea if he actually worked a billable
position. See Appellant’s App. at 250.
22
shareholders have to each other, “[a]n employee owes his employer a fiduciary duty of
loyalty.” SJS Refractory Co. v. Empire Refractory Sales, Inc., 952 N.E.2d 758, 768 (Ind.
Ct. App. 2011). For example:
an employee who plans to leave his current job and go into competition
with his current employer must walk a fine line. Prior to his termination, an
employee must refrain from actively and directly competing with his
employer for customers and employees and must continue to exert his best
efforts on behalf of his employer. An employee may make arrangements to
compete with his employer, such as investments or the purchase of a rival
corporation or equipment. However, the employee cannot properly use
confidential information specific to his employer’s business before the
employee leaves his employ. These rules balance the concern for the
integrity of the employment relationship against the privilege of employees
to prepare to compete against their employers without fear of breaching
their fiduciary duty of loyalty.
Id. (citations omitted). But Kent was not the Employees’ employer; T.K.O. Enterprises
was. The Employees owed Kent no fiduciary duties and, as such, the trial court properly
entered summary judgment for the Employees on these claims. However, as explained
above, Kent’s fraud claims against the Employees remain alive.
Summary Judgment for the T.K.O. Companies
Last, we consider Kent’s shareholder derivative claims against the T.K.O.
Companies. In particular, Kent asserts that some of the T.K.O. Companies lease property
below fair rental value to other T.K.O. Companies or their customers. Kent also asserts
that T.K.O. Enterprises and SCS employ three ghost employees: Taulman, Sr.
(Taulman’s father), Sheila Nelson (Taulman’s significant other), and Amy Smith
(Smith’s wife).
As our supreme court has explained:
23
Derivative actions . . . are suits “asserted by a shareholder on the
corporation’s behalf against a third party . . . because of the corporation’s
failure to take some action against the third party.” They are brought “to
redress an injury sustained by, or enforce a duty owed to, a corporation.”
Derivative actions are brought in the name of the corporation and are
governed by Trial Rule 23.1 and Indiana Code section 23-1-32-1. To bring
a derivative action a shareholder must satisfy four requirements. They are:
(1) the complaint must be verified; (2) the plaintiff must have been a
shareholder at the time of the transaction of which he complains; (3) the
complaint must describe the efforts made by the plaintiff to obtain the
requested action from the board of directors; and (4) the plaintiff must
fairly and adequately represent the interests of the shareholders.[9]
Examples of actions that are typically required to be brought derivatively
include actions to recover for loss of a corporate opportunity, to recover
corporate waste, and to recover damages to a corporation caused by an
officer or director’s self-dealing.
G&N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 234-35 (Ind. 2001) (emphasis added;
citations omitted; second omission original).
The Appellees first assert that they are entitled to judgment as a matter of law
because Kent failed to describe in his complaint the efforts he made to obtain the
requested action from the T.K.O. Companies. But this argument is different from the
argument the Appellees made to the trial court. There, the Appellees argued that Kent
had failed to present a factual basis to demonstrate the efforts he had made to obtain relief
from the T.K.O. Companies. See Appellant’s App. at 1257-58 (“Plaintiff mistakenly
characterizes this argument as an attack on the pleadings, completely overlooking the fact
that he is obligated to designate evidence creating a question of fact as to whether he
9
The parties do not dispute in this appeal whether Kent fairly and adequately represents the
interests of the shareholders, and, therefore, we will not consider it. But we note that, where a
shareholder has “participated in the wrong complained of,” that shareholder may not bring a derivative
action. Dotlich v. Dotlich, 475 N.E.2d 331, 339 (Ind. Ct. App. 1985), trans. denied, abrogated on other
grounds, State Bd. of Tax Comm’rs v. Town of St. John, 751 N.E.2d 657, 660 (Ind. 2001).
24
actually made a pre-suit demand or whether it would have been futile to do so.”). On
appeal, however, they argue only that Kent’s complaint, standing alone, is materially
defective.10 See Appellees’ Br. at 37-38. The Appellees may not raise a new argument
for the first time on appeal, even in an appeal from a summary judgment. Clark Cnty.
Drainage Bd. v. Isgrigg, 963 N.E.2d 9, 19 n.4 (Ind. Ct. App. 2012), aff’d on reh’g, 966
N.E.2d 678. And they certainly cannot make an argument they expressly disavowed to
the trial court.
While the difference in these two arguments may appear to be slight, it is
significant in its consequences. Compliance with Trial Rule 23.1 in the pleadings is
required, but an alleged error in another party’s compliance must be preserved by “an
objection [that is] specific as well as timely.” Harp v. Ind. Dep’t of Highways, 585
N.E.2d 652, 659-60 (Ind. Ct. App. 1992). The Appellees do not demonstrate to this court
where any such objection, if it exists, might be found in the record. Ind. Appellate Rule
46(A)(8)(a). As such, we do not consider their argument under Trial Rule 23.1.
We next address the Appellees’ assertion that they are entitled to summary
judgment on the merits of Kent’s shareholder derivative claims. Again, as the summary
judgment movants, they had the initial burden to designate evidence to affirmatively
negate an element of Kent’s claims. Hughley, 15 N.E.3d at 1003. The Appellees have
not met this burden.
10
We assume the Appellees shifted their argument in light of the fact that, as the summary
judgment movants, it was their obligation to designate evidence to negate Kent’s claims, not Kent’s
obligation to support them. Hughley, 15 N.E.3d at 1003.
25
Regarding Kent’s claims that T.K.O. Commercial leases property below fair rental
value to T.K.O. Enterprises, the Appellees designated evidence that, “from January of
2009 through mid-2013, [T.K.O.] Enterprises paid . . . nearly $1,000,000 in rent to
[T.K.O.] Commercial.” Appellees’ Br. at 39. In response to Kent’s claim that T.K.O.
South leases property below fair rental value to either T.K.O. Enterprises or SCS, the
Appellees designated evidence that, “[f]rom 2009 through 2012, [T.K.O.] Enterprises
paid [T.K.O.] South approximately $2,000 per month in rent, and [SCS]
paid . . . approximately $4,000 per month in rent.” Appellant’s App. at 102. And with
respect to Kent’s claim on behalf of GTS, the Appellees designated evidence that GTS
had allowed customers of T.K.O. Enterprises to store equipment on GTS’ property “free
of charge to help build and cement a business relationship.” Id. at 124. GTS also
allowed T.K.O. Enterprises “to temporarily [store] trailers” free of charge “when there is
a backlog” at T.K.O. Enterprises’ site. Id.
This evidence is all well and good, but neither the total sum of rent paid nor the
monthly amounts, standing alone, say anything about the fair rental value. Likewise,
GTS’ willingness to allow T.K.O. Enterprises to enhance its good will with its own
customers free of charge, or GTS’ willingness to store T.K.O. Enterprises’ excess trailers
on GTS’ property free of charge, does not negate an element of Kent’s claims. Absent an
affirmative showing by the Appellees that T.K.O. Enterprises, SCS, and/or GTS11
11
We highly doubt that Kent is a fair and adequate representative on behalf of GTS. Again, GTS
is 50% owned by T.K.O. Enterprises, 25% owned by Meunier, and 25% owned by Smith. Thus, Kent’s
standing with respect to GTS is entirely through his interest in T.K.O. Enterprises. But the actions of
GTS that Kent complains of were to the benefit of T.K.O. Enterprises and, therefore, Kent. Nonetheless,
26
received fair value in exchange for the use of their property, the Appellees have not met
their burden to negate an element of these derivative claims. See Hughley, 15 N.E.3d at
1003.
We next consider the Appellees’ assertion that they are entitled to summary
judgment on Kent’s derivative claims of ghost employment. Again, in his complaint
Kent alleged that Taulman, Sr. and Nelson were ghost employees of T.K.O. Enterprises
and that Amy Smith was a ghost employee of SCS. We first note that the parties do not
define “ghost employment” in a civil context, and they do not direct this court to any
authority on this point. Nonetheless, they likewise do not dispute that a shareholder
derivative claim for ghost employment may lie either if an employee is paid for work not
actually performed by that employee or if the employee is paid an amount that is grossly
disproportionate to that employee’s job responsibilities.
On these claims, the Appellees designated Taulman’s affidavit in support of their
motion for summary judgment. According to Taulman’s affidavit:
33. As a part of his sale of shares upon his exit from ownership of
[T.K.O. Enterprises], Tom Taulman Sr. was retained as a consultant for his
continued assistance with the companies. Among other duties, he collects
and distributes company mail, he makes bank deposits, and he runs other
assorted errands on an as-needed basis.
34. Sheila Nelson works in sales at [T.K.O. Enterprises]. Her
compensation is composed of a base salary, commissions on sales, and
bonuses. In 2009 she generated over $280,000 in sales; in 2010 she
generated over $370,000 in sales; and in 2011 she generated over $380,000
in sales. . . .
as noted above the parties did not argue this position to either this court or the trial court, and we do not
consider it.
27
35. Amy Smith was retained by [SCS] as an Independent accounts
Payable/Accounts Receivable consultant. Her job responsibilities include:
entering into QuickBooks payables to outside vendors; preparing checks to
outside vendors; entering checks paid to outside vendors in QuickBooks;
billing; reconciling company bank statements; assisting in the preparation
of quarterly and year-end financials; [and] clerical duties as needed. In
exchange, she is paid a consulting fee of $500 per week.
Id. at 122-23. The Appellees further designated evidence that, between 2007 and 2012,
Taulman, Sr. was paid between $1,957.50 and $57,166.63 for the work described in
Taulman’s affidavit.
We agree with Kent that this evidence is not sufficient to negate an element of his
claim that these three employees were ghost employees. Absent designated evidence by
the summary judgment movant that demonstrates that an alleged ghost employee was
paid only for services he actually performed12 and was paid an amount not grossly
disproportionate to those services,13 the summary judgment movant cannot make a prima
facie showing that it is entitled to judgment as a matter of law on a derivative claim of
ghost employment. See Hughley, 15 N.E.3d at 1003. Thus, the trial court erred when it
entered summary judgment for the Appellees on these claims.
12
While we need not consider it, in his response to the Appellees’ motion for summary judgment
on this issue Kent designated Meunier’s deposition. At that deposition, Meunier testified that Nelson had
been paid sales commissions based on sales procured by Taulman. The parties do not dispute that
Taulman did not receive a commission based on his sales.
13
If anything, the Appellees’ designated evidence that Taulman, Sr. was paid up to $57,166.63
for “collect[ing] and distribut[ing] company mail, . . . mak[ing] bank deposits, and . . . other assorted
errands on an as-needed basis” suggests the opposite. Appellant’s App. at 122.
28
Conclusion
We hold that the trial court abused its discretion when it denied Kent’s motion to
compel. As such, we reverse the trial court’s entry of summary judgment for the
Appellees on Kent’s claim that Taulman had breached his fiduciary duties to Kent at the
December 21, 2009, meeting and on Kent’s fraud claims against Taulman and the
Employees.
As to Kent’s other claims, we hold that the Appellees are entitled to judgment as a
matter of law on Kent’s defamation claim against Taulman and on Kent’s claim that
Taulman breached a fiduciary duty when he fired Kent. We also hold that the Appellees
are entitled to judgment as a matter of law on Kent’s claims that the Employees breached
their fiduciary duties. However, we hold that the Appellees failed to designate evidence
to negate at least one element of Kent’s shareholder derivative claims. Thus, we affirm
in part, reverse in part, and remand for further proceedings.
Affirmed in part, reversed in part, and remanded with instructions.
BAILEY, J., and PYLE, J., concur.
29