Supreme Court
No. 97-627-Appeal.
No. 98-436-Appeal.
(PC 94-6222)
: Joyce C. Hendrick, Executrix of the Estate of
Jeffrey P. Hendrick et al.
: v.
: Paul Hendrick, in his capacity as trustee
Present: Weisberger, C.J., Lederberg, Bourcier, Flanders, and Goldberg, JJ.
DATE OPINION FILED: July 10, 2000
Appeal from County:
SOURCE OF APPEAL: Superior Providence
JUDGE FROM OTHER
COURT: Clifton, J. & Thompson, J.
JUSTICES: Weisberger, C.J., Lederberg, Bourcier,
Flanders, Goldberg, JJ. Concurring
WRITTEN BY: BOURCIER, J.
ATTORNEYS: Bret Jedele
Amato A. Deluca
For Plaintiff
ATTORNEYS: Lauren E. Jones
John C. Tibbitts, Daniel P. Carter
For Defendant
--------------------------------------------------------------------------------
O P I N I O N
Bourcier, Justice. In these consolidated appeals, Joyce Hendrick, individually and as
executrix of the estate of her late husband, Jeffrey Hendrick, seeks review of two Superior Court final
judgments that served to dismiss her eight counterclaims and/or crossclaims asserted against various
parties, both plaintiff and defendant, that include the Exeter Country Club, Inc., its officers, directors, stockholders and certain trustees.[1] Those asserted claims alleged, in general terms, breach of fiduciary obligations and duties and majority stockholder oppression. They also sought dissolution of the corporation, or alternatively, the corporate buyout of Joyce’s approximately 30 percent shareholder interest in the corporation pursuant to G.L. 1956 §§ 7-1.1-90 and 7-1.1-90.1.
I
Case Facts and Travel
The appellate Gordian knot we have before us was created and solidified in the following
fashion: Exeter Country Club, Inc. (ECC) is a closely held corporation owned by the Hendrick family
and authorized under Rhode Island law to carry on the business of a golf course in the Town of Exeter.
As of 1986, Paul Hendrick was a majority stockholder in ECC, and his two sons, Jeffrey and Peter,
owned minority interests in ECC. On January 17, 1986, Jeffrey and Peter entered into a reciprocal
stock purchase agreement (the purchase agreement), whereupon the death of one brother, the
survivor-brother would automatically, by way of such purchase agreement, purchase certain identified
ECC stock held by the decedent-brother, through the use of proceeds from life insurance policies held
on the life of that decedent-brother. [2] The agreement named both Paul and Rolland Jones (Jones), an
insurance agent, as trustees to administer the purchase-agreement transaction. Pursuant to that
agreement, the trustees were required to hold Jeffrey’s and Peter’s shares of stock designated in the
purchase agreement in trust, receive the life insurance policies proceeds, deliver the designated stock to
the survivor-brother, and deliver the stock purchase proceeds from the purchase-agreement transaction
to the particular decedent- brother’s executor or representative.
In late December 1990, ECC underwent a process of corporate recapitalization through the
issuance to the respective family shareholders of nine shares of Class B nonvoting stock for each Class
A voting stock or Class B stock then owned by the shareholders. Additionally, Paul and his wife,
Elizabeth, made subsequent gifts to both Peter and Jeffrey of a percentage of the newly issued stock. As
a result of the corporate recapitalization and the parental gifts, Jeffrey’s Class B equity shares in ECC
increased from 1,858 to approximately 22,000 shares. There was some immediate disagreement
between the Hendrick family members as to whether the newly issued and newly received shares were
to be governed by the 1986 stock purchase agreement executed between Peter and Jeffrey. Legal
counsel for trustee Jones opined in an August 1992 letter that because the purchase agreement predated
the recapitalization, the recapitalized new shares were not within the parameters of the purchase
agreement. On the other hand, ECC’s corporate counsel, several years later, reached the opposite
conclusion, advising ECC, its directors and the trustees that the purchase agreement was intended to
encompass all shares held by Jeffrey at the time of his death.
In June 1993, while Jeffrey was still alive but seriously ill, an attempt was made by ECC and the
trustees, through counsel, to revise or amend the 1986 purchase agreement to include those new Class
B shares in the purchase agreement, but Joyce, now acting as Jeffrey’s "attorney-in-fact," refused to
allow the purchase agreement to be modified to include the new shares. Despite this continuing feud
over the scope of the purchase agreement, after Jeffrey’s death on December 22, 1993, the trustees
designated by the purchase agreement attempted a valuation of all shares then owned by Jeffrey and set
a purchase closing date in September 1994 for the transfer of all of those shares to Peter. Joyce, the
executrix of Jeffrey’s estate, disputed the trustees’ valuation and purchase attempt of the additional
Class B stock owned by Jeffrey, disagreed with the price valuation on that stock as determined by
ECC’s accountant, and did not attend the scheduled stock-purchase closing. Subsequently, no attempt
was made by the trustees to transfer any of Jeffrey’s interest in ECC, although under the purchase
agreement the original 1,858 shares could have been transferred by the trustees without the presence or
permission of Joyce.
On November 9, 1994, Paul commenced an action in the Washington County Superior Court
against Joyce, Jeffrey’s estate and Peter, [3] seeking specific performance of the stock purchase
agreement. Joyce responded to that complaint by denying that specific performance should be ordered,
and filed a counterclaim against Paul in his individual capacity and as trustee, and a crossclaim against
Peter, alleging certain breaches of fiduciary duty towards her and waste of corporate assets as a result
of actions taken by both Paul and Peter. Over the later course of the litigation, ECC, trustee Jones, later
his executrix, Alice Jones [4] and Elizabeth Hendrick, Paul’s wife, all were added as parties in the case. [5]
The Hendrick family feud not only expanded, but also spilled out of the courtroom into the everyday
operations of the corporation, with ever-increasing animosity. In December 1994, ECC declared no
dividends on its stock for the year, but instead voted to give Paul a bonus of $65,000 and to give Peter
a bonus of $85,000, while Joyce received a bonus amount of only $2,500. The Internal Revenue
Service, upon review, subsequently disallowed $40,000 of that bonus amount paid to the ECC
corporate officers during 1994.
In March 1995, Paul proceeded on his complaint for a declaratory judgment relating to the
purchase agreement. On May 18, 1995, after trial, a Superior Court trial justice issued a declaratory
judgment declaring that the January 17, 1986, purchase agreement was unambiguous on its face and did
not by its terms include the shares in ECC that Jeffrey had subsequently acquired. He declared that the
purchase agreement provided for the sale and purchase of only the original 1,858 shares held by Jeffrey
on January 17, 1986, and not to the recapitalization shares and the stock gifts Jeffrey received after that
agreement was executed.[6] He ordered those 1,858 shares to be transferred, and severed Joyce’s
counter and crossclaims for later trial. After the transfer of the 1,858 shares to Peter, pursuant to the
May 18, 1995 declaratory judgment, Joyce was left owning approximately 31 percent of the Class B
nonvoting shares in ECC. Unfortunately for Joyce, her status as a powerless minority shareholder was
merely the beginning of her travails with ECC. In August 1995, Joyce was fired from her position as
ECC’s bookkeeper after eighteen years of service, for what she claimed was her refusal to convey her
remaining stock to ECC and what ECC characterized as her creation of a hostile workplace
environment. She also found herself thwarted in her attempts to gain sufficient access to review ECC’s
corporate books and records. Finally, in January 1996, ECC purchased a $400,000 parcel of land
which, although not adjacent or directly beneficial to ECC’s property, apparently fronted certain parcels
owned jointly by Peter and his wife and son, a transaction that Joyce asserted benefited Peter
individually and not the corporation.
On September 2, 1997, the defendants in Joyce’s counterclaims and crossclaims moved for
summary judgment on Joyce’s claims relating to the breach of fiduciary duties owed to her and the issue
of excessive bonuses paid to the directors and officers of ECC. While that summary judgment motion
was pending, Joyce moved, and was granted leave, to amend both her counterclaims and crossclaims.
Upon amendment, her counterclaims and crossclaims alleged common law breach of fiduciary duty on
the part of the trustees and ECC by failing to act impartially in their attempts to coerce Joyce into
modifying the stock purchase agreement to include all shares owned by Jeffrey at the time of his death;
malicious prosecution and abuse of process [7] relating to the specific performance and declaratory- relief
civil action filed by Paul against her; oppressive conduct by ECC toward her as a minority shareholder
by its failure to declare stock dividends while granting excessive bonuses to its officers and directors, as
well as the termination of her eighteen-year long-standing employment relationship with ECC and finally,
denying her access to necessary ECC corporate books and records, in violation of § 7-1.1-46. Joyce
also alleged shareholder derivative type-claims, asserting that the $400,000 land purchase by ECC was
for the primary benefit only of Peter and not the corporation and that the above-described excessive
bonuses paid to Paul and Peter operated as a financial drain on the corporate assets. Contained within
each count in Joyce’s claims were allegations based in part upon § 7-1.1-90.1 as well as common law,
and allegations that the acts described in each count amounted to "illegal, oppressive or fraudulent"
conduct pursuant to § 7-1.1-90. Her prayers for relief included a demand in the form of a buyout of her
corporate shares at fair value by ECC, or, in the alternative, a court-ordered forced liquidation sale of
ECC, pursuant to § 7-1.1-90.
On October 21, 1997, a Superior Court motion hearing justice, after hearing on the counter and
crossclaim defendants’ motions for summary judgment, granted those motions on counts 1, 2, and 5 in
the counterclaims and crossclaims. He found that as a matter of law, no coercion had been exerted by
the trustees toward Joyce, and that the trustees had acted in good faith reliance on advice of counsel,
pursuant to § 7-1.1-33, [8] when they attempted to persuade Joyce to modify the purchase agreement to
include all of Jeffrey’s outstanding shares. The hearing justice determined that there was no evidence of
any disputed material facts concerning whether any corporate assets had been wasted or improperly
drained through the payment of the corporate bonuses. The record reveals, however, that the hearing
justice failed to address Joyce’s claims of oppression under §§ 7-1.1-90 and 7-1.1-90.1.
On June 26, 1998, the defendants moved to dismiss Joyce’s remaining counterclaims and
crossclaims in a second Superior Court hearing before a different motion justice in that court. The
second hearing justice ultimately dismissed with prejudice Joyce’s shareholder derivative claims (counts
4 and 7), finding that both causes of action as alleged properly belonged to the corporation, not to
Joyce. She also granted summary judgment against Joyce with respect to Joyce’s remaining counts
(counts 3, 6, and 8), concluding that Joyce had failed to show, in those three counts, the existence of
any material issues of disputed facts. Alternatively, she found that the trustees were shielded from
liability relating to the purchase-agreement transaction by an exculpatory provision contained in the
purchase agreement. [9] The hearing justice, it should be noted, only addressed Joyce’s claims made
pursuant to §§ 7-1.1-90 and 7-1.1-90.1 to the extent that she believed they were not properly pled as
causes of action. Joyce has timely appealed the final judgments entered in both those proceedings, and
they have been consolidated here for purposes of this appeal.
II
The Summary Judgment Motions
It is well settled that "[s]ummary judgment is an extreme remedy that should be applied
cautiously." Sjogren v. Metropolitan Property and Casualty Insurance Co., 703 A.2d 608, 610 (R.I.
1997) (citing Rotelli v. Catanzaro, 686 A.2d 91, 93 (R.I. 1996)). "In reviewing the grant of a summary
judgment motion, this Court employs the same standard on review as the trial justice. We must examine
all of the pleadings, memoranda and affidavits in the ‘light most favorable to the party opposing the
motion.’ " Truk-Away of Rhode Island, Inc. v. Aetna Casualty & Surety Co., 723 A.2d 309, 313 (R.I.
1999) (quoting Splendorio v. Bilray Demolition Co., 682 A.2d 461, 465 (R.I. 1996)). We have said on
previous occasions that "n reviewing these materials, the motion justice should draw all reasonable
inferences in favor of the nonmoving party and must refrain from weighing the evidence or passing upon
issues of credibility." Superior Boiler Works, Inc. v. R.J. Sanders, Inc., 711 A.2d 628, 631 (R.I. 1998)
(citing Rustigian v. Celona, 478 A.2d 187, 189 (R.I. 1984)). "Accordingly, if our review of the
admissible evidence viewed in the light most favorable to the nonmoving party reveals no genuine issues
of material fact, and if we conclude that the moving party was entitled to judgment as a matter of law,
we shall sustain the trial justice’s granting of summary judgment." Accent Store Design, Inc. v.
Marathon House, Inc., 674 A.2d 1223, 1225 (R.I. 1996) (citing Mallane v. Holyoke Mutual Insurance
Company in Salem, 658 A.2d 18, 20 (R.I. 1995)).
We are mindful that "[c]orporate officers and directors of any corporate enterprise, public or
close, have long been recognized as corporate fiduciaries owing a duty of loyalty to the corporation and
its shareholders * * *." A. Teixeira & Co. v. Teixeira, 699 A.2d 1383, 1386 (R.I. 1997). This Court
has also recognized that, quite apart from officers and directors, the shareholders themselves in a closely
held family corporation may have a fiduciary duty toward one another and to the minority shareholders
because of the potential for oppression by the majority toward the minority shareholders by simple
virtue of majority voting share power, coupled with the absence of a ready market for a closely held
corporation’s shares. See, e.g., Broccoli v. Broccoli, 710 A.2d 669, 673 (R.I. 1998); A. Teixeira &
Co., 699 A.2d at 1386-87; Long v. Atlantic PBS, Inc., 681 A.2d 249, 256 n. 8 (R.I. 1996); Estate of
Meller v. Adolf Meller Co., 554 A.2d 648, 651-52 (R.I. 1989). "Such a [fiduciary] relationship is one
of trust and confidence and imposes the duty on the fiduciary to act with the utmost good faith." Point
Trap Co. v. Manchester, 98 R.I. 49, 54, 199 A.2d 592, 596 (1964).
Recognizing the potential for the freeze out and oppression of minority shareholders, the General
Assembly enacted several statutory mechanisms by which such aggrieved shareholders might seek relief.
Section § 7-1.1-90, entitled "[j]urisdiction of court to liquidate assets and business of corporation,"
allows shareholders to seek relief from "illegal, oppressive, or fraudulent" acts of those controlling the
corporation:
"(a) The superior court shall have full power to liquidate the assets and business of a
corporation:
(1) In an action by a shareholder when it is established that, whether or not the
corporate business has been or could be operated at a profit, dissolution would be
beneficial to the shareholders because:
(i) The directors or those other persons that may be responsible for
management pursuant to § 7-1.1-51(a) are deadlocked in the management of the
corporate affairs and the shareholders are unable to break the deadlock; or
(ii) The acts of the directors or those in control of the corporation are illegal,
oppressive, or fraudulent; or
(iii) The shareholders are deadlocked in voting power, and have failed, for a
period which includes at least two (2) consecutive annual meeting dates, to elect
successors to directors whose terms have expired or would have expired upon the
election of their successors; or
(iv) The corporate assets are being misapplied or are in danger of being wasted
or lost; or
(v) Two (2) or more factions of shareholders are divided and there is such
internal dissension that serious harm to the business and affairs of the corporation is
threatened * * *."
Section 7-1.1-90.1, entitled "[a]voidance of dissolution by stock buyout," provides an
alternative to the drastic remedy of liquidation by allowing the corporation the option of buying out the
aggrieved shareholder’s equity interest at fair value:
"Whenever a petition for dissolution of a corporation is filed by one or more
shareholders (subsequently in this section referred to as the ‘petitioner’) pursuant to
either § 7-1.1-90 or a right to compel dissolution which is authorized under § 7-1.1-51
or is otherwise valid, one or more of its other shareholders may avoid the dissolution by
filing with the court prior to the commencement of the hearing, or, in the discretion of the
court, at any time prior to a sale or other disposition of the assets of the corporation, an
election to purchase the shares owned by the petitioner at a price equal to their fair
value. If the shares are to be purchased by other shareholders, notice shall be sent to all
shareholders of the corporation other than the petitioner, giving them an opportunity to
join in the election to purchase the shares. If the parties are unable to reach an
agreement as to the fair value of the shares, the court shall, upon the giving of a bond or
other security sufficient to assure to the petitioner payment of the value of the shares,
stay the proceeding and determine the value of the shares, in accordance with the
procedure set forth in § 7-1.1-74, as of the close of business on the day on which the
petition for dissolution was filed." |
