GRAYDOG INTERNET, INC., an Oregon corporation, Respondent on Review, v. David GILLER, Petitioner on Review. David GILLER, Petitioner on Review, v. Douglas WESTERVELT, Respondent on Review.
CC 130506470, CA A156539, SC S064346
IN THE SUPREME COURT OF THE STATE OF OREGON
November 30, 2017
362 Or 177 (2017)
BALMER, C. J.
No. 61. Argued and submitted May 11, 2017. On review from the Court of Appeals.* Appeal from Multnomah County Circuit Court, Henry C. Breithaupt, Judge pro tem. 279 Or App 722, 381 P3d 903 (2016)
Colin M. Murphy, Southern Oregon Public Defenders, Medford, argued the cause for the petitioner on review. Gary M. Bullock, Gary M Bullock & Associates PC, Portland, filed the briefs for the petitioner on review.
Susan Marmaduke, Harrang Long Gary Rudnick PC, Portland, argued the cause and filed the brief for the respondent on review. Also on the brief were Nathan Robert Morales and C. Robert Steringer.
Before Balmer, Chief Justice, and Kistler, Walters, and Nakamoto, Justices, and Armstrong, Judge of the Court of Appeals, Justice pro tempore.**
BALMER, C. J.
______________
* Appeal from Multnomah County Circuit Court, Henry C. Breithaupt, Judge pro tem. 279 Or App 722, 381 P3d 903 (2016)
** Brewer, J., retired June 30, 2017, and did not participate in the decision of this case. Landau, Flynn, and Duncan, JJ., did not participate in the consideration or decision of this case.
The decision of the Court of Appeals is reversed. The judgment of the circuit court is affirmed, and the case is remanded to the circuit court for further proceedings.
Case Summary: A shareholder in a closely held corporation challenged the corporation’s attempt to purchase all of the shareholder’s shares pursuant to a provision of the Oregon Business Corporation Act,
The decision of the Court of Appeals is reversed. The judgment of the circuit court is affirmed, and the case is remanded to the circuit court for further proceedings.
Under
I. FACTS
Westervelt and Giller founded Graydog in 1997. Since incorporation, Westervelt has been the majority shareholder and Giller has been the minority shareholder. Both have been active in the management and operation of the firm. Their cooperation was fruitful and the company grew.
Eventually, however, Westervelt and Giller disagreed about aspects of their venture together. At some point, Westervelt offered to buy out Giller, but Giller refused to sell. A provision in a shareholder agreement among Graydog, Westervelt, and Giller allowed Graydog to purchase the shares of any shareholder who ceased to be employed by Graydog. To that end, Westervelt directed Graydog to file a declaratory judgment action against Giller seeking a declaration of his status as an at-will employee and Graydog’s right to terminate Giller’s employment.
Giller responded with an answer and counterclaims against Graydog. He also filed a third-party complaint against Westervelt personally. The third-party complaint asserted claims for
“(1) a declaration that the ‘shareholder agreement is void and unenforceable,’ (2) ‘breach of contract’ based on Westervelt allegedly violating the corporate bylaws by ‘tak[ing] unilateral action in his personal capacity and for his personal interests,’ and (3) ‘breach of [the] contractual duty of good faith and fair dealing’ based on Westervelt allegedly ‘having acted for the sole
purpose of trying to force [Giller] to unwillingly sell his shares to him.‘”
Graydog Internet, Inc. v. Giller, 279 Or App 722, 725, 381 P3d 903 (2016) (first and second brackets in Graydog Internet, Inc.). In support of those claims, Giller alleged:
“Westervelt loaned himself $20,000 from the company without the board’s approval; Westervelt elected his wife to the board of directors over Giller’s objection; Westervelt threatened to force Giller to sell his shares if Giller did not agree to do so voluntarily, and had an attorney prepare and file Graydog’s complaint to terminate Giller’s employment before the board of directors voted on the proposal. * ** Giller alleges that Westervelt took all of those actions ‘for his personal interests’ and harmed Giller as a result.”
In response to the third-party complaint, Graydog—controlled by Westervelt—filed an election to purchase all of Giller’s shares pursuant to
Subsection (6) of
or another shareholder, without resolving the merits of the complaint or other proceeding that the shareholder filed.
We return to the facts of the case. After Graydog filed an election, Giller objected to it. Graydog and Giller then filed cross-motions for partial summary judgment contesting the legality of Graydog’s election under
On the second issue, Giller argued that his third-party complaint was not actually “under”
After argument, the trial court entered a limited judgment stating:
“1.
ORS 60.952(6) does not apply to this case becauseORS 60.952(6) may be triggered only against one who commences an action, not against a party who files counterclaims or a third-party complaint.“2.
ORS 60.952(6) does not apply to this case for the further reason that the claims made by Mr. Giller are not of the type described inORS 60.952 .”
Graydog and Westervelt appealed that judgment to the Court of Appeals.
At the Court of Appeals, Graydog and Westervelt challenged both conclusions of the trial court. They argued that the text and context of
Giller argued that filing a third-party complaint was not the “filing of a proceeding” under the statute. He contended that the legislative history indicates that the legislature intended
The Court of Appeals agreed with Graydog and Westervelt and reversed the trial court. The court first considered the meaning of the phrase “filing of a proceeding” as used in
purposes of ORS chapter 60 is defined as “a civil, criminal, administrative or investigatory action.”
The court then considered whether the claims in Giller’s third-party complaint were claims “under subsection (1)” of
II. ANALYSIS
The issue here is the circumstances in which the filing of a pleading by a shareholder in a closely held corporation constitutes the “filing of a proceeding under [
“At any time within 90 days after the filing of a proceeding under subsection (1) of this section, or at such time determined by the court to be equitable, the corporation or
one or more shareholders may elect to purchase all of the shares owned by the shareholder who filed the proceeding for their fair value.”
As noted, subsection (1) imposes liability where the directors or shareholders are deadlocked; the directors have acted in an illegal, oppressive, or fraudulent manner; or waste has occurred. If a shareholder establishes such conduct, a court may order one or more remedies listed in
We begin by examining the text and context of the terms “filing of a proceeding” and “proceeding under subsection (1),” to understand their meaning and to determine whether either term conclusively excludes Giller’s third-party complaint, such that Graydog’s election must fail. After finding the text of both terms to be imprecise, and case law to be relatively unhelpful, we turn to the legislative history of
A. Text and Context
1. “Filing of a proceeding”
An initial textual dispute is whether the term “filing of a proceeding” in
Dictionary meanings are more helpful in seeking to understand other words in the key phrase “filing of a proceeding,” and the operative words in that phrase have several common meanings in the law. The verb “file” can mean “[t]o commence a lawsuit,” as in “the seller threatened to file against the buyer.” Black’s at 745. That definition pairs with the definition of “proceeding” as “[t]he regular and orderly procession of a lawsuit, including all acts and events between the time of commencement and the entry of judgment.” Id. at 1398. With those definitions, to “file a proceeding” can mean to commence, or begin, a lawsuit. So understood, the filing of a third-party complaint, as opposed to filing the initial complaint in an action, would not constitute the “filing of a proceeding.” But a “proceeding” can also mean “[a]n act or a step that is part of a larger action,” id. at 1398, and “file” can also mean the “deliver[y]” of a “legal document” to a court, id. at 745. Under those definitions, the “filing of a proceeding” could mean commencing some discrete part of a single lawsuit. Particularly where, as here, the third-party complaint asserts claims distinct from those in the initial complaint and could have been filed as a separate action apart from and in the absence of the initial complaint, it would unduly elevate form over substance to conclude that filing a third-party complaint never can be “filing of a proceeding” for purposes of
It follows that the phrase “filing of a proceeding” can be read either more broadly, to encompass the filing of a third-party complaint in an existing civil action, or more narrowly, to mean only the filing of an initial complaint or other action. To further interpret
The parties cite several decisions of this court as context for the word “action,” which is part of the definition of “proceeding” in
and third-party claims are part of the same action. Montara Owners Assn., 357 Or at 356-57. Giller analogizes this case to Montara Owners Assn. and argues that his third-party complaint is part of the same “action” as the first-party complaint.
We think that Montara Owners Assn.’s relevance is limited, however, because it interprets the word “action” as it appears in the context of
2. A proceeding “under subsection (1)”
The remedies in
management or shareholder deadlock, corporate waste, or illegal, fraudulent, or oppressive conduct by those in control of the corporation; and empowers the court to order certain remedies.
Several of the circumstances identified in subsection (1) are straightforward, such as whether “shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired.”
We turn briefly to consider the distinguishing characteristics of a claim for oppression. In Baker v. Commercial Body Builders, 264 Or 614, 507 P2d 387 (1973), this court repeated a widely quoted English definition of oppressive conduct as
“burdensome, harsh and wrongful conduct; a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or a visual departure
from the standards of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.”
Id. at 628-29. Put another way, conduct that violates the majority shareholders’ fiduciary duty to a minority shareholder
in a close corporation is “likely to be oppressive.” Naito v. Naito, 178 Or App 1, 20, 35 P3d 1068 (2001); accord Baker, 264 Or at 629 (“‘[O]ppressive’ conduct by those in control of a ‘close’ corporation as its majority stockholders is closely related to * * * the fiduciary duty of a good faith and fair dealing owed by them to its minority stockholders.“). “The majority shareholder of a close corporation owes the minority fiduciary duties of loyalty, good faith, fair dealing and full disclosure.” Chiles v. Robertson, 94 Or App 604, 619, 767 P2d 903, modified on recons, 96 Or App 658, 774 P2d 500, rev den, 308 Or 592 (1989). Whether or not a party’s specific conduct is oppressive, however, is a highly factual matter. See Baker, 264 Or at 628 (“[G]eneral definitions of ‘oppressive’ conduct are of little value for application in a specific case.“). The success of a claim depends on the facts and circumstances of the majority’s conduct; for example, the presence of a legitimate business reason for a decision may affect whether certain conduct is oppressive. See, e.g., Cooke v. Fresh Express Foods Corp., 169 Or App 101, 113, 7 P3d 717 (2000) (considering “the business reasons that defendants present for their actions“). As discussed in Baker and elsewhere, the concept of oppressive conduct and fiduciary duty eludes precise articulation. Baker, 264 Or at 628; see also Chiles, 94 Or App at 619 (“[T]he heart of a corporate fiduciary’s duty is an attitude, not a rule.“).
Another recurring issue in the litigation of oppression claims is the difficulty of fashioning a remedy that responds to the majority shareholder’s misconduct but does not harm corporate operations or shareholder value. Reflecting the varied “facts of the case and the nature of the problem involved” in claims of oppression, Baker, 264 Or at 631-32, Oregon cases have long required courts to carefully tailor remedies for oppression claims. See, e.g., Browning v. C & C Plywood Corp., 248 Or 574, 582, 434 P2d 339 (1968) (denying plaintiff’s request for dissolution of corporation as “untenable” and remanding case to trial court to “determine what the precise relief should be“). Depending upon the circumstances, “dissolution [or] * ** other appropriate equitable relief” may be proper. Baker, 264 Or at 631. The court in Baker compiled a list of alternative equitable remedies for oppression, id. at 631-33, which, as we will discuss below,
formed the basis for the additional remedies enacted when
We return to the question whether Giller’s third-party complaint was actually a claim for oppression. The task of determining whether a party’s labeling of a claim actually reflects the true nature of the claim arises in several contexts and lacks a definitive answer. As noted, the Court of Appeals analyzed Giller’s claims using the standard from Htaike. It acknowledged, however, that the purpose in Htaike—distinguishing contract claims from tort claims to properly apply the statute of limitations—differs from the proper application of
Although Securities-Intermountain did not establish a clear, easily applied test for determining the “true” nature of a claim, it does provide support for Giller’s position that courts generally should accept a party’s characterization of the party’s own claims. Securities-Intermountain discussed with approval earlier decisions by this court that
“took plaintiff’s pleading on its own terms *** [and] did not purport to look beyond a well-pleaded complaint so as to impose upon plaintiff a contrary characterization of his cause of action that would defeat it.”
289 Or at 254. And that statement is an application of the longstanding rule that “the party who brings a suit is master to decide what law he will rely upon.” The Fair v. Kohler Die & Specialty Co., 228 US 22, 25, 33 S Ct 410, 57 L Ed 716 (1913) (Holmes, J.); see also Caterpillar Inc. v. Williams, 482 US 386, 392, 107 S Ct 2425, 96 L Ed 2d 318 (1987) (discussing federal “well-pleaded complaint rule,” which “provides that federal jurisdiction exists only when a federal question is presented on the face of plaintiff’s properly pleaded complaint,” and which “makes the plaintiff master of the claim; he or she may avoid federal jurisdiction by exclusive reliance on state law“); Redwood Theaters, Inc. v. Festival Enterprises, Inc., 908 F2d 477, 479-80 (9th Cir 1990) (applying well-pleaded complaint rule to remand antitrust complaint to state court, despite potential nationwide effect of litigation, and noting “plaintiffs’ prerogatives to choose the forum and legal principles governing their complaints” (emphasis added)).
Giller did not expressly invoke
B. Context and Legislative History of ORS 60.952
Helpfully, the legislative history of
as
1. The minority shareholder in the close corporation
in the business as directors, officers, or employees. That involvement in the firm can make them more vulnerable to abuse by the shareholder majority; it also means that shareholder disputes can result in “serious harm” to the enterprise. Id. § 9:2 at 9-4, 9-6.
To protect minority shareholders, many states have developed legislative and judicial remedies to respond to shareholder oppression and other unfair treatment of the noncontrolling shareholders. Id. § 9:2 at 9-8 to 9-10. Historically, the only codified remedy for oppression or corporate deadlock was the dissolution of the corporation and distribution of its assets to the owners. See, e.g.,
Today, state statutes provide alternative remedies to dissolution. Consistent with that trend, a “principal change” contained in SB 116 was to specify additional remedies, beyond dissolution, that would be available to shareholders who could establish liability under
the corporation’s business,
2. The election to purchase
Under Oregon law, as well as statutes in other states regarding litigation involving closely held corporations, the corporation or shareholders may to elect to purchase, for “fair value,” the shares of a minority shareholder when the minority shareholder seeks a judicial remedy for oppression. Section
The Oregon and MBCA election statutes share the purposes of providing an incentive for shareholders to resolve their disputes without resorting to a “proceeding under subsection (1)” and providing a shortcut to a remedy when litigation does arise. Reducing litigation between shareholders in close corporations is desirable policy because it protects the firm, its employees, and other stakeholders from the consequences of extended litigation. See MBCA § 14.34 comment (“[A] resort to litigation may result in an irreparable breach of personal relationships among the shareholders of a closely held firm, making it impossible for them to continue in business to their mutual advantage.“). Steve Naito, testifying in support of SB 116, spoke about the costs, monetary and otherwise, associated with litigating disputes between shareholders in a close corporation:
“[T]hey are extremely expensive cases to litigate. They take a substantial amount of time and money. And again because it involves a lot of interpersonal issues it becomes just like a personal divorce—a marital divorce. It raises a lot of issues that no one ever wants to raise, especially in a court of law and it effectively—or in many cases it effectively—destroys the relationship of the parties going forward.”
Audio Recording, Senate Committee on Business, Labor and Economic Development, SB 116, Jan 15, 2001, at 25:41 (statement of Steve Naito); http://sos.oregon.gov/archives/Pages/records/legislative-minutes-2001.aspx (accessed Aug 16, 2017). The election provision in
The election provision reduces the costs associated with litigation in two ways. First, it discourages shareholders who wish to retain an interest in the firm from taking oppression claims to court, because only shareholders willing to be bought out will file a proceeding “under”
it allows a court to order the sale of all of a shareholder’s shares before trial, even if there are unresolved issues of fact that would prevent summary judgment.
However, a statutory election to purchase, such as that in
Cubalevic v. Superior Court of Los Angeles County, 240 Cal App 2d 557, 49 Cal Rptr 698 (1966), is illustrative. There, the court emphasized the right of a minority shareholder to maintain ownership of its shares and construed the California election buyout statute to be a narrow exception to that right. The plaintiff, a 50 percent shareholder, filed a complaint alleging misconduct against corporate
officers and other shareholders. One of his claims sought to dissolve the corporation under a state statute. Id. at 558. The defendants filed an election to purchase the plaintiff’s shares as permitted under the statute when a shareholder filed a claim seeking dissolution. Id. at 560. In response, the plaintiff dismissed his claim to dissolve the corporation. Id. The trial court nonetheless allowed the defendants to proceed with their purchase of the plaintiff’s shares. The appellate court reversed, holding that the election to purchase could not proceed after the claim for dissolution has been dismissed. It explained that, outside of the election procedure permitted by statute in certain narrow circumstances, controlling shareholders in a corporation have no “independent right * ** to compel the sale to them of the shares of stock of another.” Id. at 562. Cubalevic thus illustrates the court’s protection of the minority shareholder’s right to refuse to sell its shares in the context of the legislature’s creation of an exception to that right.
The legislative history of
C. Discussion
With that understanding of the statute, its context, and the legislative history, we return to the question here: What kind of “proceeding” triggers the availability of an election to purchase under
for liability and the remedies that the legislature identified in
As noted, Giller’s third-party complaint does not explicitly claim oppressive conduct by Graydog or Westervelt, nor does it purport to state a claim for relief on any of the grounds identified in
Graydog does not explain how the presence of allegations that could support a claim of oppression can change the claims Giller did assert into claims that he, in fact, intentionally did not assert. See Redwood Theaters, 908 F2d at 470 (Plaintiffs have the “prerogative[] to choose * * * the legal principles governing their complaints.“). The observation that certain factual allegations might also establish claims for breach of fiduciary duty or other oppressive conduct does not necessarily mean that the “true substance” of the third-party complaint is a claim for “oppression” or that the third-party complaint is a “proceeding under subsection (1),” a provision that does not mention breach of contract or declaratory judgment claims.
Similarly, the remedies Giller seeks do not suggest that his third-party complaint is the kind of claim for oppression “under subsection (1)” with which the legislature was concerned. The legislative history discussed above shows that in
of the many remedies identified in
As to his claim regarding the shareholder agreement, Giller, as noted, sought relief under the
In sum, the third-party complaint contains claims for breach of contract and a declaratory judgment, and it does not cite
those facts, Giller’s third-party complaint does not appear to be a proceeding “under”
That appearance is bolstered by the procedural posture of Giller’s third-party complaint. It is evident from the legislative history that a purpose of the legislature in enacting
In the context of this case, the legislature’s purpose of discouraging litigation by providing an incentive for prelitigation resolution of disputes would not be served by allowing Graydog to file an election based on Giller’s third-party complaint. A third-party complaint may be filed only “[a]fter commencement of the action.”
State law governing close corporations has as one purpose the protection of minority shareholders from oppression and mistreatment by the majority shareholder. That includes the protection of the right of a shareholder to decline to sell its shares to the corporation or another shareholder in the absence of some legal obligation to do so. See Cubalevic, 240 Cal App 2d at 562, 49 Cal Rptr at 701 (“There is no independent right on the part of one or more stockholders in a
corporation to compel the sale to them of the shares of stock of another.“); see also Thompson, 62 Wash U L Rev at 433 (“Shareholders who are squeezed out of [close corporations] lose more than the proportionate value of their shares.“). The election provision in
Giller’s third-party complaint was filed in an existing dispute, it joined a party who was already intimately involved in the litigation, and it contained contractual claims and a claim under the
The decision of the Court of Appeals is reversed. The judgment of the circuit court is affirmed, and the case is remanded to the circuit court for further proceedings.
Notes
“In a proceeding by a shareholder in a corporation that does not have shares that are listed on a national securities exchange or that are regularly traded in a market maintained by one or more members of a national or affiliated securities association, the circuit court may order one or more of the remedies listed in subsection (2) of this section if it is established that:
“(a) The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock;
“(b) The directors or those in control of the corporation have acted, are acting or will act in a manner that is illegal, oppressive or fraudulent;
“(c) The shareholders are deadlocked in voting power and have failed, for a period that includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired; or
“(d) The corporate assets are being misapplied or wasted.”
“At any time within 90 days after the filing of a proceeding under subsection (1) of this section, or at such time determined by the court to be equitable, the corporation or one or more shareholders may elect to purchase all of the shares owned by the shareholder who filed the proceeding for their fair value.”
The remainder of the provision details the procedures for the election, determination of the purchase price, involvement by the court, and related matters. See
“In a proceeding under section 14.30(2) to dissolve a [close corporation] ***, the corporation may elect or, if it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares. An election pursuant to this section shall be irrevocable unless the court determines that it is equitable to set aside or modify the election.”