Franchino v. FranchinoFranchino v. Franchino
Plaintiff Robert A. Franchino appeals the trial court’s grant of summary disposition under MCR 2.116(C)(8) and (C)(10) in favor of his father, defendant Richard Franchino, and intervening defendant Franchino Mold and Engineering Company (FMEC). Plaintiff also appeals the trial court’s denial of his motion to amend the complaint. This case raises an issue of first impression under Michigan law: Whether
I. FACTS AND PROCEDURAL HISTORY
In 1974, plaintiff began his employment at FMEC. Four years later, plaintiff and defendant signed an employment contract in which the parties agreed that plaintiff could only be terminated by the unanimous agreement of FMEC’s board of directors. From 1978 until 2001, plaintiff and defendant were the only members of the board of directors as well as the only shareholders, with plaintiff holding thirty-one percent and defendant holding sixty-nine percent. 1
Plaintiff and defendant were also parties to two stock purchase agreements (also referred to as the “buy-sell” agreements) signed in the early 1980s, one of which related to a family-owned company called Franchino, Inc., the other of which related to FMEC. Under the FMEC buy-sell agreement, defendant was required to offer his shares first to the corporation, then to plaintiff, before the shares could be offered to anyone else, including defendant’s daughters. The Franchino, Inc., buy-sell agreement required defendant to offer his shares to his children in proportion to their current holdings.
According to FMEC employees, the relationship between plaintiff and defendant deteriorated over the years they worked together. Arguments over equipment and personnel became more frequent, and witnesses testified that they heard defendant fire plaintiff more than once. Lois Franchino confirmed that defendant had talked about firing plaintiff in recent years and testified that she had begged defendant not to take action against plaintiff until their mother passed away, which she did in September 2000.
In early 2001, defendant became concerned that his estate would be “cannibalized” by estate taxes if the buy-sell agreements remained in place. To address this concern, attorney Robert Dietrich suggested forming Franchino Holdings in January 2001. On May 7, 2001, plaintiff received a letter from Dietrich stating that defendant sought to set aside the 1982 buy-sell agreement for Franchino, Inc., and that if plaintiff was unwilling to set the agreement aside, defendant was prepared to have it set aside by operation of law. A second letter explained that defendant desired the agreement set aside “for estate planning purposes,” specifically, to achieve a “more equitable distribution of his estate” in light of changes in the tax structure and business assets since the agreement was signed. According to Dietrich’s letter, defendant wanted “unrestricted freedom to redistribute his shares among [the] family” and planned to “merge Franchino Inc. into a new entity” if the agreement was not set aside by mutual consent.
Defendant and his two daughters filed articles of incorporation for Franchino Holdings, Inc., on July 6, 2001. On August 1, 2001, defendant gave notice that a special shareholder meeting for shareholders
The tensions between the parties worsened in the middle of August 2001 after plaintiff yelled obscenities at FMEC employee Timothy Vascillion 2 for not having the correct paperwork before beginning a welding project. On August 17, 2001, defendant orally fired plaintiff, then sent a letter four days later confirming that his firing would be effective September 16, 2001, and instructing plaintiff to return any FMEC property he had in his possession.
Defendant maintained that his decision to fire plaintiff was the result of disagreements over equipment purchases; plaintiffs refusal to listen to, talk to, or take direction from defendant; plaintiff repeatedly walking out of FMEC meetings; and plaintiffs desire to fire what defendant considered to be some of FMEC’s most valuable employees. Defendant stated that the Vascillion incident was the “straw that broke the camel’s back.” However, two FMEC employees testified that defendant had threatened to fire plaintiff if he pursued his plan to sue defendant, and one employee testified that defendant had said he wanted to fire plaintiff in order to terminate the buy-sell agreement and reconfigure his estate plan.
On August 20, 2001, plaintiff filed suit to prevent defendant from merging Franchino, Inc., with Franchino Holdings, and the trial court granted a preliminary injunction prohibiting the merger. On September 5, 2001, defendant sent a follow-up letter confirming that plaintiff had been fired, demanding that plaintiff vacate FMEC premises by noon of that day, and instructing him to return only once before September 16, 2001, to return company property. The letter indicated that plaintiff would continue to receive his salary until September 16, 2001.
On September 10, 2001, plaintiff filed a one-count complaint alleging that defendant breached his fiduciary duties to FMEC by terminating plaintiffs employment in retaliation for plaintiff having sued defendant over the buy-sell agreement. FMEC moved to intervene, and the trial court granted the motion.
On September 15, 2001, with the aid of his attorneys Robert Dietrich and Charles Cuzydlo, defendant held a special shareholder meeting to remove plaintiff from the board of directors and to amend FMEC’s bylaws. Defendant appointed Cuzydlo to act as secretary, then he appointed as proxies Dietrich’s wife, Lynn Dietrich, and Cuzydlo’s friend, Jonathan Harmon.
Working from a script Cuzydlo prepared, Harmon moved to remove plaintiff from FMEC’s board of directors, then moved to amend FMEC’s bylaws to allow between one and five directors, who need not be shareholders and who would be elected to specific terms, and also to specify that all shareholder meetings would be chaired by FMEC’s president. Lynn Dietrich seconded these motions and all three were adopted. On September 20, 2001, defendant held a board of directors meeting at which he moved to fire plaintiff, seconded his own motion, and “unanimously adopted” the motion himself.
In January 2002, plaintiff amended the complaint to include allegations of willfully unfair and oppressive conduct, wrongful discharge, intentional interference with contractual relations, and negligent interference with contractual relations. Plaintiff also sought to have defendant removed
The second amended complaint alleged that defendant “used his position as the majority shareholder” of FMEC “in a willfully unfair and oppressive manner” by terminating plaintiffs employment in violation of the employment contract, removing plaintiff from the board of directors, and amending the bylaws of the corporation. Plaintiff alleged that these actions “destroyed the harmonious management of the corporation’s affairs and defeated Plaintiffs reasonable expectations” of remaining employed, being on the board of directors, and continuing to share in the corporation’s earnings.
Both defendant and intervening defendant moved for summary disposition under MCR 2.116(C)(8) and (C)(10), and argued at the motion hearing that plaintiff had ignored that portion of
After hearing the arguments, the trial court clarified that the only theory of liability plaintiff had put forward was liability under
The trial court agreed that defendant’s conduct “could be deemed to be oppressive” when viewed in a light most favorable to plaintiff; however, it concluded that this conduct did not affect plaintiffs interests as a shareholder. Of the plaintiffs “three expectations that were disappointed: 1) lifetime employment; 2) a position on the board; [and] 3) a share of the profits,” the trial court concluded that a right to lifetime employment was not part of being a shareholder, nor was holding a board position, because the majority owner could change the board’s membership if the change is permitted by the corporation’s articles. With respect to plaintiffs right to receive a share of the profits, the trial court noted that there had been “no suggestion that there’s been a dispro [sic]—distribution of profits inconsistent with that that was utilized during the course of the operation of the corporation before the alleged oppressive conduct.” Accordingly, the trial court concluded that no “diminution in the distributions has been suggested that would warrant the relief.”
On October 17, 2002, plaintiff filed a motion to amend the complaint. Count I of the proposed third amended complaint again alleged a violation of
After hearing oral arguments on the motion to amend, the trial court noted that plaintiff had been allowed multiple amendments, lengthy discovery had been completed, case evaluation had taken place, jury charges had been submitted, and the claims and theories had been provided to the trial court. The trial court observed that plaintiff had not alleged the breach of a stock purchase agreement or wrongful termination, but only oppression of a minority shareholder under
II. EXTENT OF “SHAREHOLDER INTERESTS” UNDER
A. STANDARD OF REVIEW
. Plaintiff argues that the trial court erred in granting summary disposition pursuant to MCR 2.116(C)(8) and (0(10). We review de novo the trial court’s decision on a motion for summary disposition.
Maiden v Rozwood,
B. ISSUE PRESERVATION
As an initial matter, defendant maintains that plaintiff should be estopped from arguing that his lost wages and benefits were part of his corporate earnings because plaintiff never claimed a loss of corporate dividends in the pleadings or before the trial court. However, this argument misapprehends the thrust of plaintiffs argument. Plaintiff contends that individuals generally join close corporations not for dividends, but for employment and a share of the profits, which are often paid through salaries and bonuses. Further, plaintiff says that while the parties’ salaries averaged approximately $500,000 a year, plaintiff received only $3,100 a year in dividends. Because plaintiffs attorney raised the question whether plaintiffs firing affected his right, as a shareholder, to receive his full measure of the corporate earnings, it was adequately preserved for our review. See
Fast Air, Inc v Knight,
C. INTERESTS OF SHAREHOLDER “AS A SHAREHOLDER"
Plaintiff sued defendant pursuant to
A shareholder may bring an action in the circuit court of the county in which the principal place of business or registered office of the corporation is located to establish that the acts of the directors or those in control of the corporation are illegal, fraudulent, or willfully unfair and oppressive to the corporation or to the shareholder.
This statute was amended by
a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder. The term does not include conduct or actions that are permitted by an agreement, the articles of incorporation, the bylaws, or a consistently applied written corporate policy or procedure. [MCL 450.1489(3) (emphasis added).]
Plaintiff argues that his removal from the board of directors and from his employment at FMEC constituted oppression of his rights as a shareholder because he received the bulk of his share of the corporate profits through his salary and expected to participate in FMEC’s management. This argument raises an issue of first impression under Michigan law: Are a shareholder’s employment with the company and membership on the board of directors shareholder interests protected by
The primary goal of judicial interpretation of statutes is to ascertain and give effect to the intent of the Legislature.
Frankenmuth Mut Ins v Marlette Homes, Inc,
It is generally acknowledged that, in close corporations, shareholders often work for the corporation, and corporate dividends are often paid in the form of a salary. See O’Neal &
Despite the fact that employment and board membership are not considered shareholder rights, termination of a minority shareholder’s employment or board position has been recognized as a form of oppression.
3
To remedy this situation, some states have enacted statutes that explicitly protect the rights of minority shareholders in their capacities as employees and directors. In New Jersey, for example, the statutory provision analogous to
In states where the applicable statutes do not specifically protect minority shareholders in their capacities as employees and directors, some courts have nonetheless extended protection to minority shareholders when they suffered harm in those capacities. For example, New York’s oppression statute provides for relief if the “directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders.” NY Bus Corp Law § 1104-a(a)(l). Despite the absence of language explicitly protecting the interest of minority shareholders as employees or directors, New York courts have extended protection where these interests were oppressed by the majority. See
In re Topper,
D. REASONABLE EXPECTATIONS TEST
By holding that
Plaintiff observes that a panel of this Court made reference to the reasonable expectations test in
Lardner
v Port Huron Golf
Club
4
and determined that the plaintiff would not have been able to recover under the reasonable expectations test because the plaintiffs expectations were unreasonable. However,
Lardner
predates our Legislature’s enactment of
Courts in other jurisdictions have generally refused to adopt the reasonable expectations test for oppression if the applicable state statute defines oppression in terms of the majority’s conduct rather than the effect of that conduct on the minority. For example, in
Kiriakides v Atlas Food Systems & Services, Inc,
343 SC 587;
In declining to adopt the reasonable expectations test, the Kiriakides court observed that “[although several jurisdictions have adopted ‘reasonable expecta tions’ as a guide to the meaning of ‘oppression,’ it has been noted by one commentator that ‘no court has adopted the reasonable expectations test without the assistance of a statute.’ ” Id. at 601. Noting that “section 33-14-300 does not place the focus upon the ‘rights or interests’ of the complaining shareholder but, rather, specifically places the focus upon the actions of the majority,” the court concluded that “a ‘reasonable expectations’ approach is simply inconsistent with our statute.” Id. at 600. Accordingly, the court “decline[d] to adopt such an expansive approach to oppressive conduct in the absence of a legislative mandate.” Id. at 602. 7
We find the reasoning in
Kiriakides
persuasive.
Applying the above-discussed legal principles to the facts presented here, we conclude that the trial court properly granted summary disposition in favor of defendant pursuant to MCR 2.116(C)(8) and (C)(10). Plaintiff
alleged only that defendant engaged in shareholder oppression under
Plaintiff also argues that the trial court erred in denying his motion to amend the complaint. We review denials of motions for leave to amend pleadings for an abuse of discretion.
Weymers v Khera,
Motions to amend should be denied only for specific reasons such as “ ‘[1] undue delay, [2] bad faith or dilatory motive on the part of the movant, [3] repeated
failure to cure deficiencies by amendments previously allowed, [4] undue prejudice to the opposing party by virtue of allowance of the amendment, [and 5] futility”
Id.
at 658, quoting
Ben P Fyke & Sons v Gunter Co,
Here, the trial court explained that
the delay in asserting those claims in this lawsuit has so colored discovery, case evaluation, and trial preparation that to permit amendment at this juncture is, in essence, to create an entirely new lawsuit in the guise of this preexisting case and require discovery anew, evaluation anew, trial preparation anew. If that’s necessary, that ought to be conducted in the context of a subsequent, separate lawsuit, particularly with regard to the wrongful discharge issue. . .. I’m satisfied that, first, amendment at this juncture would involve undue delay. I’m satisfied that amendment would be futile.
Plaintiff sought to add fifteen separate theories under which he could recover for shareholder oppression under
Similarly, subparagraphs (e)-(h), (j), (1), and (m) of the proposed third amended complaint attempt to allege, in various ways, that plaintiff suffered injuries to his rights as a shareholder because he would not give up his rights in the stock purchase agreement. Again, however, the underlying basis of these claims is that plaintiffs employment was terminated, allegedly in retaliation for this refusal. Plaintiffs termination, regardless of its motivation, does not relate to plaintiffs interests as a shareholder. The trial court did not abuse its discretion in determining that adding these claims would also be futile. See Weymers, supra at 658.
Plaintiff also sought to add four claims unrelated to his termination; these include the following contentions: defendant (1) siphoned off corporate earnings by overcompensating himself and his two daughters, (2) depressed the value of plaintiffs
It is true that delay alone does not justify denying a motion to amend. See id. at 659. However, “a court may deny a motion to amend if the delay was in bad faith or if the opposing party suffered actual prejudice as a result.” Id. Actual prejudice results when an amendment prevents the opposing party from receiving a fair trial. Id. As the Weymers Court clarified,
a trial court may find prejudice when the moving party seeks to add a new claim or a new theory of recovery on the basis of the same set of facts, after discovery is closed, just before trial, and the opposing party shows that he did not have reasonable notice, from any source, that the moving party would rely on the new claim or theory at trial. [Id. at 659-660.]
The four new claims brought under
Whether the denial was justified with respect to plaintiffs wrongful termination claim is somewhat less clear. At first blush, the notion that there was inadequate notice that plaintiff might bring a wrongful termination claim seems somewhat implausible. Plaintiffs initial complaint alleged that defendant breached his fiduciary duty by wrongfully discharging plaintiff, the first amended complaint contained a wrongful discharge allegation based on breach of contract, and the basis on which plaintiff claimed oppression under
However, when the trial court granted plaintiff leave to file his second amended complaint, plaintiff agreed to voluntarily dismiss his wrongful discharge claim, and it was clear that the only theory on which plaintiff planned to proceed was shareholder oppression under
As noted, the trial court’s decision is reviewed for an abuse of discretion, which “ ‘involves far more than a difference in judicial opinion.’ ”
Kurtz v Faygo Beverages, Inc,
Affirmed.
Notes
Plaintiffs two sisters, Lois Franchino and Phyllis Hetherington, also worked for FMEC. Although neither was a shareholder in FMEC, both held shares in Franchino, Inc.
The cover page of Mr. Vascillion’s deposition incorrectly gives his name as “Tom.”
Indeed, in one leading commentator’s assessment, termination of a minority shareholder’s employment or board position is much more common than infringement of the rights of a shareholder as a shareholder. See 2 O’Neal, § 9.27, p 9-165.
Lardner v Port Huron Golf Club, unpublished opinion per curiam of the Court of Appeals, issued August 4, 1994 (Docket Nos. 138038, 139092).
See MCR 7.215(C)(1) (unpublished opinions are not precedentially binding).
We note that at least one Michigan commentator has militated against adoption of this test for various policy reasons. See Bruno,
“Reasonable expectations"—A primer on an oppressive standard,
71 Mich B J 434 (1992). However, because we conclude that
By contrast, the North Carolina Supreme Court adopted the reasonable expectations test on the basis of a statute allowing dissolution where “reasonably necessary for the protection of the rights or interests of the complaining shareholder.” See
Meiselman v Meiselman,
309 NC 279, 298;
Plaintiff also argues that