Maurice Schwegman v. Shelby Howard

IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
MARCH 19, 2002 SESSION
MAURICE SCHWEGMAN, ET AL. v. SHELBY D. HOWARD, III, ET AL.
Appeal from the Chancery Court for Davidson County
No. 98-2340-I Irvin H. Kilcrease, Jr., Chancellor
No. M2001-00845-COA-R3-CV - Filed October 8, 2002
Maurice Schwegman filed a complaint alleging claims for breaches of fiduciary duty by
appellees, Shelby D. Howard and Malcolm L. Greeno, in their capacity as shareholders with
Schwegman in a closely held corporation, breaches of fiduciary duty by Howard and Greeno in their
capacity as officers and directors of the closely held corporation, and for breach of contract between
Howard and Schwegman with respect to the assignment of an interest in another closely held
company. The chancellor granted the appellees' motion for summary judgment and dismissed the
case. We reverse as to the breach of contract issue and affirm as to all other issues.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court
Affirmed in Part, Reversed and Remanded in Part
BUDDY D. PERRY , SP . J., delivered the opinion of the court, in which BEN H. CANTRELL , P.J., M.S.,
AND WILLIAM C. KOCH , JR ., J., joined.
James A. Freeman, III, and John R. Callcott, Nashville, Tennessee, for the appellants Maurice
Schwegman, et al.
Wallace W. Dietz and Henry L. Hipkens, Nashville, Tennessee, and Michael J. Rusnak, Stephen J.
Peters, and David I. Rubin, Indianapolis, Indiana, for the appellees Shelby D. Howard, III, et al.
OPINION
The question before the court is whether the Davidson County Chancery Court properly
granted appellees-defendants', Shelby D. Howard ("Howard"), Malcolm L. Greeno ("Greeno"),
ByAnda, LLC ("ByAnda"), and Central Tennessee Mack Sales & Service, Inc. ("Central Tennessee
Mack") motion for summary judgment against the plaintiff, Maurice Schwegman ("Schwegman").
In granting the motion, the chancellor made several specific findings. The chancellor found that part
of Schwegman's claims are barred by the statute of limitations, part of the claims are barred by
equitable principles, and that the claim for usurpation of corporate opportunity is barred because the
corporation was financially unable to exercise the opportunity. As to these rulings, we sustain the
chancellor and affirm the judgment.
Schwegman also claimed that Howard breached an assignment agreement. Finding that
Schwegman offered no consideration for the contract and that Schwegman failed to comply with
certain conditions precedent, the chancellor dismissed the claim. We disagree and remand this issue
for further consideration.
Procedural History
On August 3, 1998, Schwegman filed his verified complaint in the Chancery Court of
Davidson County, seeking injunctive relief and other equitable remedies against Howard, Greeno,
Rick Snellings, Johnny McBride, Central Tennessee Mack, Central Indiana Mack Sales and Services,
Inc., and ByAnda. The case was removed to the United States District Court, Middle District of
Tennessee, Nashville Division, but was later remanded to the Chancery Court of Davidson County.
Following the remand of the action to the Davidson County Chancery Court, Rick Snellings, Johnny
McBride, and Central Indiana Mack Sales & Service, Inc., filed a motion to dismiss for lack of
personal jurisdiction, and Howard, Greeno, and Central Indiana Mack filed a motion to dismiss
counts I through VI of the complaint on the grounds of forum non- conveniens. Because the court
lacked personal jurisdiction over Snellings, McBride, and Central Indiana Mack Sales and Services,
Inc., the chancellor granted their motion to dismiss. Pursuant to the doctrine of forum non-
conveniens, the chancellor concluded that counts I through VI could be more conveniently tried in
a court of competent jurisdiction in Indiana, and those counts were dismissed without prejudice.
After the dismissal, the two remaining causes of action involved an allegation by Schwegman
that Howard and Greeno breached fiduciary duties, both as stockholders and directors of Central
Tennessee Mack, by forming ByAnda and having ByAnda own the land upon which Central
Tennessee Mack's facility was built, and by the alleged improper removal of Schwegman as
president of Central Tennessee Mack. The remaining cause of action alleges that Howard agreed
to assign a 10% share of ByAnda to Schwegman and breached the agreement.
Factual Background
Schwegman had twenty years of management experience with Mack truck dealerships.
When the opportunity to purchase a Mack truck dealership in the Nashville area arose, Howard and
Greeno approached Schwegman and offered him the opportunity to be president of a newly formed
corporation along with a percentage of stock. The ownership of the newly formed corporation,
Central Tennessee Mack, was as follows: Howard 40%, Greeno 40%, and Schwegman 20%.
As a part of the arrangement for the dealership, the parties were required to build some new
facilities for the operation of the dealership. The parties did not discuss the ownership of the new
facilities, but it is apparent that Schwegman assumed that Central Tennessee Mack would own the
new operating facilities.
Without Schwegman's knowledge, Greeno and Howard set up a limited liability investment
company, ByAnda. Howard held a 50% interest in ByAnda and Greeno's daughters held a 25%
interest each. Greeno insists that ByAnda was set up for estate planning purposes.
The property for the operation of the dealership was located in the Lavergne, Tennessee, area.
Central Tennessee Mack did not have the funds to purchase the property nor the ability to purchase
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the property without the personal guarantee of the parties. Greeno wrote a check to Central
Tennessee Mack for the purchase of the land and noted on the check that it was a loan. Greeno
claims that the check was given to Central Tennessee Mack, but the intention was for the property
to be owned by ByAnda. Without Schwegman's knowledge, the land in question was transferred by
Quit Claim Deed from Central Tennessee Mack to ByAnda.
After he learned that the land and operating facilities would be owned by ByAnda,
Schwegman confronted Greeno and Howard. Schwegman believed that he was entitled to a 20%
interest in ByAnda. Believing that he was going to get an interest in ByAnda, Schwegman assisted
ByAnda in the loan application process for the building of the operating facilities. Howard did agree
to assign 10% of his interest in ByAnda to Schwegman, and this assignment is the subject of the
breach of contract action alleged in the complaint.
Standard of Review
Rule 56.04 of the Tennessee Rules of Civil Procedure provides that summary judgment is
appropriate and should be granted if:
The pleadings, depositions, answers to interrogatories, and admissions
on file, together with affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.
The party seeking summary judgment has the burden of establishing that no material factual issues exist,
and the moving party is entitled to a judgment as a matter of law. Byrd v. Hall, 847 S.W.2d 208, 215
(Tenn. 1993). Trial courts are required to review the evidence in the light most favorable to the
nonmoving party and must draw all reasonable inferences in favor of the nonmoving party. Byrd, 847
S.W.2d at 210-11.
Because the case comes to this court on purely a question of law, this court must conduct a de
novo review with no presumption of correctness. Sullivan v. Baptist Memorial Hospital, 995 S.W.2d
569, 571 (Tenn. 1999); Cowden v. Sovran Bank/Central South, 816 S.W.2d 741, 744 (Tenn. 1991).
Statute of Limitations
None of the parties challenged the chancellor's choice of law rulings. Substantive issues in this
dispute are governed by Indiana law, and the procedural matters are governed by Tennessee law. See
State v. Early, 934 S.W.2d 655, 657 (Tenn. Ct. App. 1996). Statute of limitations is considered
procedural issue. Cronin v. Howe, 906 S.W.2d 910, 913-14 (Tenn. 1995). Therefore, the one year
statute of limitations imposed by T.C.A. §48-18-601(2000) is applicable. See Mike v. PO Group, Inc.,
937 S.W.2d 790, 792-93 (Tenn. 1996).
The core of the controversy in this case centers on the transfer of the real estate from Central
Tennessee Mack to ByAnda.
Schwegman contends that he was enticed to move to Davidson County to operate the Mack truck
business in return for an offer of 20% interest in Central Tennessee Mack and the opportunity to be the
company's president. He contends that a central and vital part of Central Tennessee Mack was the
ownership of the land and facilities. The land in question was transferred without Schwegman's
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knowledge. He asserts that the land transfer constitutes "self dealing transactions" which breaches
Greeno and Howard's fiduciary duties as directors. Schwegman admits that he learned of the transfer
of the real estate from Central Tennessee Mack to ByAnda on or about June 13, 1997. The complaint
was not filed until fourteen months later. Therefore, the chancellor found that Schwegman's cause of
action for breach of fiduciary duties of the directors based on the real estate transfer was barred by the
statute of limitations found in T.C.A. §48-18-601(2000).
Schwegman asserts that the appellees are estopped from asserting the statute of limitations. He
argues that Howard repeatedly assured him that he would be given a proportionate share in the newly
formed company, ByAnda. He asserts that his delay in filing suit was based solely on his reliance of the
appellees' representations.
The appellees argue that the principle of estoppel does not apply in this case. They argue that
in order for the principle to apply, one party must believe "that the other party is going to pay or
otherwise satisfy the claim of the first party, and in reliance on that representation the first party delays
in filing suit . . . ." See Bernard v. Houston Ezell Corp., 968 S.W.2d 855, 862 (Tenn. Ct. App. 1997).
They correctly argue that the action involved here is a derivative suit, and the rights belong to Central
Tennessee Mack, not Schwegman. See Dotlich v. Dotlich, 475 N.E.2d 331, 339 (Ind. Ct. App. 1985).
Assuming arguendo that misleading statements were made to Schwegman, causing him to
believe that he would receive a personal interest in ByAnda, his reliance upon these misleading
statements cannot be used to extend the derivative cause of action belonging to Central Tennessee Mack.
Thus, the parties are not estopped from asserting the statute of limitations.
Schwegman also asserts that Greeno and Howard breached their fiduciary duties as directors of
Central Tennessee Mack by terminating him as president and replacing him with an inexperienced and
unqualified family member. This count was brought within one year and is not barred by the statute of
limitations. The dispositive issue is Schwegman's termination and not the hiring of his replacement.
Schwegman acknowledges he was an employee at will. When employment is at will, employment is
terminable at any time, with or without cause, by either party. Orr v. Westminster Village North, Inc.,
689 N.E.2d 712, 717 (Ind. 1997).
Equitable Principles
The statute of limitations for breaches of fiduciary duties among joint shareholders is three years.
See Mike v. PO Group, Inc., 937 S.W.2d 790, 796 (Tenn. 1996). Although this action was brought
within the three-year time period, the chancellor determined that Schwegman's claims were barred by
equitable principles.
Schwegman asserts that the shares in Central Tennessee Mack have been diminished in value
by the real estate transaction, and the transaction was detrimental to the corporation and a breach of
Howard and Greeno's fiduciary duty. Schwegman seeks equitable relief.
Appellees insist that Schwegman acquiesced and participated in the same transactions about
which he complains. They argue that established principles of equity require that "[h]e who seeks equity
must do equity," Willig v. Dowell, 625 N.E.2d 476, 484 ( Ind. Ct. App. 1993), and that a party is
estopped from contesting conduct when the party was silent or acquiesced to the conduct in the face of
a duty of good faith to speak or act. Kahf v. Charleston South Apartments, 461 N.E.2d 723, 734 (Ind.
Ct. App. 1984). They assert that "shareholders in a close corporation stand in a fiduciary relationship
to each other." Barth v. Barth, 659 N.E.2d 559, 561 (Ind. 1995).
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Schwegman argues that the doctrine of unclean hands is not applicable because he did not
participate in the transfer of the property from Central Tennessee Mack to ByAnda. He asserts that for
the doctrine of unclean hands to apply, his actions would have to be directly related to the real estate
transfer. The appellees assert that Schwegman's hands are unclean, because he signed the guarantee
application for ByAnda after he knew that the real estate had been transferred, and he failed to bring any
suit on behalf of the corporation until he discovered that he would not be given an interest in ByAnda.
We agree with the chancellor's conclusion. Schwegman's concern was for himself and not
Central Tennessee Mack. He is not in a position to seek equitable relief for the alleged breach of
fiduciary obligations. Schwegman was willing to forget about the interest of Central Tennessee Mack,
provided he was compensated.
Usurpation of Corporate Opportunity
Schwegman's counsel argues that Central Tennessee Mack signed the purchase agreement for
the property in question, paid the earnest money on the purchase contract from its account, and
actually paid for the property from its account. He argues, therefore, that Central Tennessee Mack
purchased the property, and the transfer of the property from Central Tennessee Mack to ByAnda
was the usurpation of a business opportunity of Central Tennessee Mack.
Notwithstanding the foregoing, all of the parties agree that the key to purchasing the land and
the financing of the construction was the personal guarantee and loan of Greeno. Schwegman simply
contends that the loan guarantee should have been given to Central Tennessee Mack and not
ByAnda.
We agree with the chancellor's finding that there was no corporate opportunity to be usurped.
The "corporate opportunity doctrine" requires that, "'if there is presented to a corporate officer or
director a business opportunity which the corporation is financially able to undertake . . . in the line
of the corporation's business and is of practical advantage to it . . . the law will not permit [the
director] to seize the opportunity for himself.'" Kirtley v. McCelland, 562 N.E.2d 27, 33 (Ind. Ct.
App. 1990) (quoting Guth v. Loft, Inc., 5 A.2d 503, 510-ll (Del. 1939)).
To sustain Schwegman's argument, the court would have to find that Greeno had an
obligation to use his personal funds to guarantee the obligations of Central Tennessee Mack.
Generally, a director of a corporation has no duty to use personal funds to guarantee the obligations
of a corporation. Urban J. Alexander Co. v. Trinkle, 224 S.W.2d 923, 927, (Ky. 1949); Hart v. Bell,
23 N.W.2d 375, 382 (Minn. 1946); Frank Lerner & Assoc., Inc. v. Vassy, 599 N.E.2d 734, 738 (Ohio
Ct. App. 1991). Greeno provided the money for the transaction, and the chancellor correctly found
no usurpation of a corporate opportunity.
Assignment of Interest in ByAnda
It appears that Schwegman is not concerned about which entity, either Central Tennessee
Mack or ByAnda, owns the land and operating facilities as long as he has a 20% interest in the entity
owning the facilities. Schwegman made his contentions clear to all the parties.
Schwegman was offered the opportunity to purchase 20% of ByAnda, if he paid 20% of the
money to fund the loan of Greeno. Howard executed an assignment of 10% of his interest in
ByAnda to Schwegman. At the same time Schwegman received the assignment, he received a copy
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of ByAnda's operating agreement and a consent to membership by assignee of interest in ByAnda.
Howard signed the consent to membership, but the other two members did not.
Howard insists that the claim for breach of the contract must fail because Schwegman offered
no consideration for the contract and the contemporaneous document rule requires a construction of
all writings which were submitted to Schwegman as a part of the transaction. Howard insists that the
documents, when read together, establish a condition precedent to the agreement which was not
fulfilled. The chancellor agreed with Howard's contention.
It is not disputed that mutual assent between the parties is necessary to form a contract,
Pinnacle Computer Service Inc., v. Ameritech Publishing, Inc., 642 N.E.2d 1011, 1013 (Ind. Ct.
App. 1994) and "[t]he intent relevant in contract matters is not the parties' subjective intents but their
outward manifestations of it." Holloway v. Giganti, Inc., 540 N.E.2d 97, 99 (Ind. Ct. App. 1989).
Howard insists that the contemporaneous documents rule is applicable to establish the parties'
intentions.
The contemporaneous document rule requires that writings, which relate to the same
transaction, even if they are executed at a different time, must be construed together to determine the
contract. Geico Ins. Co. v. Rowell, 705 N.E.2d 476, 482 ( Ind. Ct. App. 1999). Howard insists that
the contemporaneous documents rule requires that the assignment and the consent to membership be
construed together. He argues that assent by the other members of ByAnda is a condition precedent
which has not been completed. A condition precedent is a condition which must be performed
before the agreement of the parties becomes binding, or a condition which must be fulfilled before
the duty to perform an existing contract arises. Barrington Management Co. v. Paul E. Draper
Family Ltd. Partnership, 695 N.E.2d 135, 141 (Ind. Ct. App. 1998).
Howard insists that, under Indiana law, an assignee of an interest in a limited liability
company can become a member only if other members unanimously agree absent a provision in the
operating agreement otherwise. Ind. Code. Ann. § 23-18-6-4(b)(2000). The operating agreement of
ByAnda contained no provision dealing with the admission of new members. Therefore, Howard
contends that unanimous consent of all members was required for Schwegman to receive an interest
in ByAnda. Greeno's children never consented.
Simply stated, Howard is insisting that a transfer of a 10% interest in ByAnda to Schwegman
was conditioned upon the consent of the other members. Howard insists that Schwegman
understood this condition.
Schwegman argues that the issue is one of assignment of shares rather than transfer of shares.
He concedes that the other members of ByAnda would have to execute the consent for there to be a
transfer of shares, but he contends no consent is required for an assignment of shares. Schwegman
insists that Indiana law draws a substantive distinction between the assignment of shares and the
transfer of shares in a limited liability company context. See Ind. Code Ann. § 23-18-6-1 and § 23-
18-6-3. He argues that Ind. Code Ann. § 23-18-6-3(a)(1) allows an assignment in a limited liability
company either in whole or part unless prohibited by the operating agreement. In the case of an
assignment, the assignee would be entitled to "receive only the distributions to which the assignor
would be normally entitled". Ind. Code Ann. § 23-18-6-3(b)(2). The assignor continues to be a
member and exercise the rights of the member and such an assignment does not dissolve the limited
liability corporation. Ind. Code Ann. § 23-18-6-3(b)(4)and (3).
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Howard further insists that there was no consideration for the assignment of shares and that
Schwegman, by judicial admission, conceded the lack of consideration. Schwegman argues that
Indiana courts are generally hesitant to inquire into the adequacy of consideration. See Bernstein v.
Glavin 725 N.E.2d 455, 460-461 (Ind. Ct. App. 2000). Schwegman also asserts that this is especially
true where consideration of indeterminate value is agreed upon by the parties. Harrison-Floyd Farm
Bureau Coop. v. Reed, 546 N.E.2d 855, 857 (Ind. App.1989).
We find that the Indiana courts would not have inquired into the adequacy of the
consideration given the facts of this case. Whether the agreement between Schwegman and Howard
was an assignment of shares or a transfer of shares can only be determined after an evidentiary
hearing. The contract was prepared by Howard and on a question of interpretation inference is
against the drafter of the document. If the chancellor finds that Howard's position overcomes the
inference or other relevant facts and that the consent of other members is required, then Howard
prevails. However, the issue cannot be resolved on motion for summary judgment.
Finally, the appellees insist that the breach of contract claim is barred by the "mend the hold
doctrine". See National Home and Chain Company v. Robertson, 161 N.E. 851 (Ind. Ct. App.
1928); Governmental Inter-Insurance Exchange v. City of Angola, 8 F. Supp. 2d 1120 (N.D.Ind.
1998); Harbor Insurance Company v. Continental Bank Corporation, 922 F.2d 357 (7th Cir. 1990).
"In Habor, Judge Posner explained that 'mend the hold doctrine' 'is the name of a common law
doctrine that limits the right of a party to a contract suit to change his litigating position. In fact the
phrase is a nineteenth century wrestling term, meaning to get a better grip (hold) on your opponent.'
Harbor, 922 F.2d at 362." Governmental Inter-Insurance Exchange, 8 F. Supp. 2d at 1128.
Judge Posner says that the doctrine is a "cousin to judicial estoppel" and imposes on the
parties to a contract a duty of good faith. Harbor, 922 F.2d at 357. Whether Howard has changed
positions to the extent the court will find he violated a duty of good faith dealing, as required by the
"mend to hold doctrine" can only be determined after a hearing. Whether there was an assignment or
transfer agreement, supported by adequate consideration, can only be determined after a hearing on
the merits. Therefore, we reverse and remand on the contract issue and affirm as to all other issues.
_________________________________
BUDDY D. PERRY
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