Lindskov v. Lindskov

#25621-a-GAS
2011 S.D. 34IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
* * * *
DENNIS LINDSKOV and
AUTOMOTIVE COMPANY, INC., Plaintiffs and Appellants,
v.
LES LINDSKOV and PREMIER
EQUIPMENT, L.L.C., d/b/a
PREMIER EQUIPMENT and d/b/a
K&A IMPLEMENT, L.L.C., Defendants and Appellees.
* * * *
APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
WALWORTH COUNTY, SOUTH DAKOTA
* * * *
HONORABLE TONY L. PORTRA
Judge
* * * *
RONALD A. PARSONS, Jr.
PAMELA R. BOLLWEG
STEVEN M. JOHNSON
SHANNON R. FALON of
Johnson, Heidepriem &
Abdallah, LLP
Sioux Falls, South Dakota Attorneys for plaintiffs
and appellants.
JOHN W. BURKE of
Thomas, Braun, Bernard
& Burke, LLP
Rapid City, South Dakota Attorneys for defendants
and appellees.
* * * *
ARGUED ON MARCH 23, 2011
OPINION FILED 07/06/11
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SEVERSON, Justice
[¶1.] Dennis Lindskov purchased Les Lindskov’s interest in Automotive
Company, Inc. Dennis and Les signed a dissolution agreement that contained a
non-disparagement clause. When Les opened a competing business within months
of the sale of his interest in the company, Dennis initiated this breach of contract
and fraud and deceit action, alleging that the non-disparagement clause contained a
covenant not to compete. The trial court granted Les’s motions for summary
judgment on both causes of action and dismissed Dennis’s complaint. We affirm.
Background
[¶2.] Automotive Company is a South Dakota corporation engaged in the
sales and service of farm implement equipment. It is an authorized dealer of New
Holland farm equipment with dealerships in Isabel and Mobridge, South Dakota.
Automotive Company was incorporated in December 1982, and cousins, Dennis and
Les, owned and operated it until 2006. They were equal shareholders of the
company with each owning approximately 2,500 shares of common stock. Les
served as the company’s president, and Dennis served as its secretary-treasurer.
Both served on the company’s board of directors.
[¶3.] By spring 2005, the cousins’ relationship had deteriorated. Dennis and
Les therefore discussed the possibility of dividing Automotive Company. They
wrote to New Holland to inquire whether one party could operate the Isabel
dealership while the other operated the Mobridge dealership. In March 2005, New
Holland declined the cousins’ request, stating that it would “not approve any
separation of the existing locations.” New Holland also declined to establish a new
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dealership for either Dennis or Les. The cousins’ relationship became further
strained in the coming months.
[¶4.] In October 2005, Les initiated an action seeking the dissolution of
Automotive Company. The cousins were now represented by counsel, and each
negotiated and extended offers to purchase the other’s interest in the company. On
April 14, 2006, Dennis agreed to purchase Les’s 2,500 shares in the company for
$1,190,000, as well as the real property associated with the business for $210,000.
The cousins executed a dissolution agreement that day. Section 4.1 of the
agreement was entitled “Confidentiality and Non-disparagement”:
In addition, Seller and Buyer agree that they shall not
hereinafter engage in any form of conduct, or make any
statements or representations, that will disparage or otherwise
harm the reputation, goodwill, or commercial interests of the
other party.
The cousins closed on their agreement on April 25, 2006. Les remained on the
company’s board of directors and continued to serve as its president until the
closing.
[¶5.] Les subsequently elected to enter business with his four sons. On May
12, 2006, the South Dakota Secretary of State issued a Certificate of Organization
to Les’s new venture, Premier Equipment, L.L.C. Les and his sons opened a farm
implement dealership in Mobridge in late 2006. And in October 2006, they acquired
K&A Implement, a New Holland dealership in Eureka, South Dakota. Finally,
Premier Equipment opened a branch location in Isabel in spring 2007. Through
Premier Equipment, Les now sells farm equipment in the Isabel and Mobridge
areas in immediate competition with Automotive Company.
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[¶6.] In September 2008, Dennis initiated this breach of contract and fraud
and deceit action against Les. Les filed motions for summary judgment on both
causes of action. After hearings on the motions, the trial court granted Les’s
motions for summary judgment on both causes of action. As to the breach of
contract claim, the trial court concluded that the non-disparagement clause did not
prohibit competition by Les. As to the fraud and deceit claim, the trial court
concluded that Les did not owe Dennis a duty to disclose his intent to open a
competing business. The trial court entered a judgment dismissing Dennis’s
complaint.
Standard of Review
[¶7.] This Court’s standard of review of a grant or denial of a motion for
summary judgment is well-settled. “In reviewing a grant or a denial of summary
judgment under SDCL 15-6-56(c), we determine whether the moving party has
demonstrated the absence of any genuine issue of material fact and showed
entitlement to judgment on the merits as a matter of law.” Advanced Recycling
Sys., L.L.C. v. Se. Prop., L.P., 2010 S.D. 70, ¶ 10, 787 N.W.2d 778, 783 (quoting
Janis v. Nash Finch Co., 2010 S.D. 27, ¶ 6, 780 N.W.2d 497, 500). “[I]n considering
a trial court’s grant of a motion for summary judgment, this Court ‘will affirm only
if all legal questions have been decided correctly.’” Id. (quoting Gehrts v. Batteen,
2001 S.D. 10, ¶ 4, 620 N.W.2d 775, 777).
Analysis and Decision
[¶8.] 1. Whether Les breached the non-disparagement clause of
the dissolution agreement by opening a competing
business.
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[¶9.] Dennis argues that Les breached the non-disparagement clause of the
dissolution agreement by opening a competing business. In addressing his
argument, we strive to give effect to the plain meaning of the agreement.
Lillibridge v. Meade Sch. Dist. #46-1, 2008 S.D. 17, ¶ 12, 746 N.W.2d 428, 432
(quoting In re Dissolution of Midnight Star Enter., L.P., 2006 S.D. 98, ¶ 12, 724
N.W.2d 334, 337). We read and understand contracts “according to the natural and
obvious import of the language without resorting to subtle and forced construction
for the purpose of either limiting or extending their operation.” Id. ¶ 19 (citing
Citibank (S.D.), N.A. v. Hauff, 2003 S.D. 99, ¶ 12, 668 N.W.2d 528, 533). “Contract
interpretation is a question of law reviewed de novo.” Id. ¶ 9 (citing Hanson v.
Vermillion Sch. Dist. #13-1, 2007 S.D. 9, ¶ 24, 727 N.W.2d 459, 467).
[¶10.] The crux of the dispute in this case is the breadth of conduct the non-
disparagement clause prohibits. Dennis argues that because the clause broadly
prohibits Les from engaging in any form of conduct that harms his commercial
interests, it essentially contains a covenant not to compete. He thus maintains that
Les breached that covenant by opening a competing business within months of his
departure from Automotive Company. Les argues that, by its plain language, the
clause is not a covenant not to compete. In examining the language of the entire
clause, we ultimately disagree with Dennis’s contention that it creates a covenant
not to compete.
[¶11.] The plain language of the non-disparagement clause prohibits both
Dennis and Les from disparaging or harming the other’s commercial interests. If
the clause contains a covenant not to compete, it thus prohibits Dennis from
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competing with Les. Yet the intended purpose of the dissolution agreement was for
Dennis to own and operate Automotive Company. Reading the clause as a covenant
not to compete thus negates the parties’ intent. See Cramer v. Smith, 1997 S.D.
137, ¶ 10, 572 N.W.2d 445, 447 (citing Chord v. Pacer Corp., 326 N.W.2d 224, 226
(S.D. 1982)).
[¶12.] Dennis seizes on the prohibition in the non-disparagement clause of
any form of conduct that harms his commercial interests. But we cannot read that
imprecise language as prohibiting actual competition. In South Dakota, contracts
in restraint of trade are generally void as against public policy: “Any contract
restraining exercise of a lawful profession, trade, or business is void to that extent,
except as provided by §§ 53-9-9 to 53-9-12, inclusive.” SDCL 53-9-8. There must be
a distinct agreement creating a covenant in restraint of trade. Pub. Op. Publ’g Co.
v. Ransom, 34 S.D. 381, 148 N.W. 838, 842 (1914). In this case, the clause does not
contain distinct language creating a covenant not to compete and additionally does
not fall within the statutory exceptions. See id. Because the clause does not create
a covenant not to compete, Les did not breach the dissolution agreement by opening
a competing business after his departure from Automotive Company. The trial
court properly granted Les’s motion for summary judgment on the breach of
contract claim.
[¶13.] 2. Whether Les committed fraud and deceit by not
disclosing his intent to open a competing business.
[¶14.] Dennis argues that Les committed fraud and deceit by not disclosing
his intent to open a competing business. “One who willfully deceives another, with
intent to induce him to alter his position to his injury or risk, is liable for any
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damage which he thereby suffers.” SDCL 20-10-1. Deceit is “[t]he suppression of a
fact by one who is bound to disclose it[.]” SDCL 20-10-2(3). To proceed on his fraud
and deceit claim, Dennis must establish that Les had a duty to disclose his intent to
compete. The existence of a duty to disclose is a question of law that we review de
novo. Schwartz v. Morgan, 2009 S.D. 110, ¶ 10, 776 N.W.2d 827, 830 (citing
McGuire v. Curry, 2009 S.D. 40, ¶ 9, 766 N.W.2d 501, 505).
[¶15.] A fiduciary duty may include a duty to disclose. Taggart v. Ford Motor
Credit Co., 462 N.W.2d 493, 499-500 (S.D. 1990) (citations omitted). An officer or
director of a corporation has a fiduciary duty to act in a manner that he reasonably
believes is in its best interests. See SDCL 47-1A-830, -842. He is bound to exercise
the “utmost good faith and fair dealing” with the company. Mueller v. Cedar Shore
Resort, Inc., 2002 S.D. 38, ¶ 26, 643 N.W.2d 56, 66 (citing Hayes v. N. Hills Gen.
Hosp., 1999 S.D. 28, ¶ 52, 590 N.W.2d 243, 253) (additional citations omitted).
When dealing with the company, an officer or director must “make full and frank
disclosure of the circumstances” of a business transaction. Schurr v. Weaver, 74
S.D. 378, 384, 53 N.W.2d 290, 293 (1952) (citing Knudsen v. Burdett, 67 S.D. 20, 287
N.W. 673 (1939); Troy Mining Co. v. White, 10 S.D. 475, 74 N.W. 236 (1898)).
[¶16.] Dennis’s purchase of Les’s interest in Automotive Company was not an
ordinary business transaction between a company and its officer or director. Les
initiated an action seeking the dissolution of the company. After signing the
dissolution agreement, Les continued to serve as an officer or director of the
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company for nearly two weeks until the final closing on the sale of his stock.*
Because the sale of Les’s interest in the company occurred during an adversarial
dissolution proceeding, Les did not have a fiduciary duty to disclose his intent to
compete.
[¶17.] But this conclusion does not end our inquiry. Even in the absence of a
fiduciary duty, a party may be bound to disclose facts relating to the transaction.
Schwartz, 2009 S.D. 110, ¶ 12, 776 N.W.2d at 831 (citing Ducheneaux v. Miller, 488
N.W.2d 902, 913 (S.D. 1992)). A party to a business transaction is under a duty to
disclose facts basic to the transaction: (1) if he knows that the other party is about
to enter into it under a mistake as to the facts, (2) if he knows that the other party
would reasonably expect disclosure of the facts because of the relationship between
them, the customs of the trade, or other objective circumstances; and (3) if the
information is not otherwise discoverable by reasonable care. Id. ¶¶ 12-13 (citing
Ducheneaux, 488 N.W.2d at 913 (adopting Restatement (Second) Torts § 551(2)(e))).
[¶18.] We must first consider whether Les’s intent to open a competing
business is a fact basic to the transaction. We have said that the “facts basic to the
transaction” analysis is best suited to cases
in which the advantage taken of the plaintiff’s ignorance is so
shocking to the ethical sense of the community and is so extreme
and unfair as to amount to a form of swindling, in which the
plaintiff is led by appearances into a bargain that is a trap, of
whose essence and substance he is unaware.
* Les’s preparations to open a competing business during this time were
merely exploratory. He contacted New Holland to inquire about available
dealerships in the area, but he neither utilized Automotive Company’s
resources in laying his plans to compete nor directly solicited its customers or
employees.
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Id. ¶ 13 (quoting Restatement (Second) Torts § 551(2)(e)(cmt 1)). See, e.g.,
Ducheneaux, 488 N.W.2d at 913 (holding that this high standard was satisfied when
a rancher did not disclose that the cattle he was selling were infected with a
contagious disease that prevented importing them into South Dakota).
[¶19.] Les’s failure to disclose his intent to compete does not meet this high
standard. When Les initiated an action seeking the dissolution of Automotive
Company, Dennis and Les, who were both represented by counsel, extended offers
to purchase the other’s interest in the company. This was an arms-length
transaction between business partners with equal bargaining power. Although a
duty to disclose may arise in some arms-length business transactions, Les’s failure
to disclose his intent to compete is not “so shocking to the ethical sense of the
community and . . . so extreme and unfair as to amount to a form of swindling.” See
Schwartz, 2009 S.D. 110, ¶¶ 12-13, 776 N.W.2d at 831 (citation omitted). Because
Les had no duty to disclose, he did not commit fraud or deceit as a matter of law.
See SDCL 20-10-2(3). The trial court properly granted Les’s motion for summary
judgment on the fraud and deceit claim.
[¶20.] Affirmed.
[¶21.] GILBERTSON, Chief Justice, and KONENKAMP and ZINTER,
Justices, and MEIERHENRY, Retired Justice, concur.
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