In this shareholder derivative action, David K. Straight appeals from an order of the special referee finding largely in favor of Michael H. Goss (Goss) and his wife, Pamela W. Goss (Pam). In particular, Straight appeals the referee’s findings relating to his claims the Gosses, as directors of Timberline Building Systems, Inc. (Timberline), (1) received excess wages in the nature of salary overrides; (2) misappropriated a corporate opportunity by purchasing property the Gosses then leased to Timberline, which the Gosses thereafter conveyed to their corporation, Commerce Properties, LLC (Commerce Properties), and caused Timberline to pay rent to cover the Gosses’ taxes and mortgage on the property and also pay the rent of the Gosses’ truss company; (3) misappropriated a corporate opportunity by creating a truss company, Custom Built Trusses, Inc. (CBT), which ultimately was succeeded by the Gosses’ company Structural Component Systems, Inc., and used Timberline employees and materials for the benefit of the truss company; and (4) made inappropriate distributions to themselves through another of the Gosses’ companies, Allied Products and Services, LLC (Allied). We affirm.
FACTUAL/PROCEDURAL HISTORY
In 1983, Straight, along with Larry Gandolfi and another person, formed Eagle’s Nest Homes, Inc. (Eagle’s Nest), a company that distributes panelized buildings through independent representatives. In the spring of 1983, Straight and Gandolfi were searching for a multi-sided house to market and found that a business called Deltec Homes produced a multisided, round house. Straight called Deltec and made an appointment with Goss, Deltec’s marketing manager.
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Eagle’s Nest purchased panelized houses from Deltec for approximately one year and thereafter purchased the round houses from Kingsberry Homes, a company for which Goss had
In January 1986, Goss prepared a prospectus for a company called Timberline Manufacturing, Inc. On February 28, 1986, Straight, Gandolfi, and Goss signed a letter of intent, setting forth the parties’ agreement in regard to the formation of the company. In particular, the letter of intent provided the company would be devoted exclusively to the production and delivery of Eagle’s Nest homes, with other businesses and products added as warranted from retained earnings. It further stated Eagle’s Nest homes would be purchased exclusively from the company, provided that pricing and delivery terms were competitive. The letter of intent also placed responsibility of day-to-day management of the company on Goss as president, and set his compensation at $1,000 a week plus two percent of sales orders, not to exceed $80,000 a year without prior approval of Timberline’s board of directors. Goss testified the purpose of Timberline was to capture the manufacturing profits that suppliers Deltec and Kingsberry had previously realized from Eagle’s Nest homes.
In September 1986, Timberline Building Systems, Inc. was incorporated by Straight, Gandolfi, Goss, and Pam, with these four likewise listed as the initial directors. However, shortly after incorporation, Straight, Gandolfi, Goss, and Pam each owned twenty-three percent of the company, with the president of Eagle’s Nest, John Chester, owning the remaining eight percent, and Goss and Chester became the directors of Timberline’s board. Thereafter, Straight and Gandolfi fired Chester from Eagle’s Nest, resulting in Chester’s dismissal as a director of Timberline in 1991, and Pam’s replacement of him on the board. 2
Timberline manufactured the panelized homes, and Eagle’s Nest sold them. As part of its production of the homes, Timberline would fabricate them, provide drawings, codes, and
While Timberline initially leased premises for the manufacture of the panelized homes, the leased premises incurred two separate fires over the years and were acquired by a new landlord, who wanted to take over the building occupied by Timberline. Thereafter, Goss and Pam found and purchased at an auction for themselves property (the Wickes property) that met Timberline’s needs in August 1997, and in early 1998, Timberline moved to this new facility. Rent was charged to Timberline based on the recommendation of an economic development director as to what constituted competitive rent for that space. The Wickes property was subsequently transferred to Commerce Properties in December 1999.
In June 1998, Pam purchased truss manufacturing machinery and started a company called Custom Built Trusses (CBT). In July 1998, CBT began building trusses in one of the buildings located on the Wickes property. In October 1998, CBT’s articles of incorporation were filed listing Pam as the registered agent for and incorporator of the business. CBT supplied the trusses Timberline needed for the manufacture of panelized houses, with cost based on the price charged by Timberline’s previous supplier before that company’s latest price increase.
Over time, Timberline experienced serious financial difficulties as sales declined substantially. It delivered its last home for Eagle’s Nest in March 2000. Goss began closing Timberline down at that time and continued that process until around June of that year. CBT ceased operating on December 31, 2000. In January 2001, Goss and Pam began operating Structural Component Systems, Inc., a company that is the successor of CBT. In April 2001, Straight filed this action. Thereaf
This matter was heard by a special referee by order of reference dated September 29, 2005. The referee noted Straight had abandoned his individual claims and chose to continue on the derivative claims alone, asserting the following four causes of action in his derivative suit: (1) negligent mismanagement; (2) conversion, (3) breach of fiduciary duty, and (4) civil conspiracy. The referee found the specific claims by Straight included the payment of excess wages to the Gosses, the use of Timberline employees and material for CBT, the purchase of the Wickes property and development of the truss business, and the transfer of funds to Allied from Timberline. The referee further noted the Gosses had brought a counterclaim against Straight and a third party claim against Eagle’s Nest for money owed Timberline and for minority shareholder oppression.
After considering the evidence, the referee determined (1) no excess salary had been received by the Gosses, (2) the funds initially provided by Timberline for the payment of CBT employees were offset by the trusses delivered to Timberline but not paid to CBT, (3) Timberline did not have the ability to acquire the Wickes property and no funds of Timberline were improperly used to improve the Wickes property for the benefit of Commerce, (4) Timberline did not have the capital and resources necessary for the creation of a truss business and the truss business therefore was not a business opportunity for Timberline, and Timberline was treated fairly in all respects by CBT, and (5) the transfer of funds to Allied, along with certain payments of attorney’s fees and special commissions, were essentially distributions of profits to the shareholders, and after considering the distributions made, the Gosses had received $21,449.97 more than Straight in distributions which the Gosses should return to Timberline based upon Straight’s assignment of his claims to the company. Further, as equitable considerations, the referee found Straight used
ISSUES
1. Whether the Gosses violated their duties as Timberline’s officers and directors by engaging in undisclosed conflict of interest transactions with the corporation and failed to prove the fairness of the transactions.
2. Whether there was a claim stated upon which to offset the amount of the attorney’s fees or the special discounts against the conflict of interest transactions.
3. Whether the defense of unclean hands applies to conflict of interest transactions or matters unrelated to the litigation.
4. Whether the common paymaster doctrine applies when employees are paid by one corporation but work exclusively for another when there is no common ownership.
5. Whether corporate directors are liable for misappropriated corporate opportunities when no disclosure was made to disinterested shareholders.
STANDARD OF REVIEW
A shareholder’s derivative action, as well as an action for stockholder oppression, is one in equity.
McDuffie v.
LAW/ANALYSIS
Engaging in Undisclosed Conflict of Interest Transactions
Straight first contends the special referee erred in failing to properly analyze the Gosses’ conflict of interest transactions under section 33-8-310 of the South Carolina Code (2006). In particular, he argues the Gosses engaged in three conflict of interest transactions: (1) the payment of salary overrides for the years 1995, 1996, and 1997, (2) the purchase of property and creation of a truss company by the Gosses, initially funded by Timberline assets, and (3) distributions of money to Allied from 1993 to 1998. We disagree.
Section 33-8-310 which governs standards of conduct for directors and officers of a corporation involving conflict of interest transactions, provides as follows:
(a) A conflict of interest transaction is a transaction with the corporation in which a director of the corporation has a direct or indirect interest. A conflict of interest transaction is not voidable by the corporation solely because of the director’s interest in the transaction if any one of the following is true:
(1) the material facts of the transaction and the director’s interest were disclosed or known to the board of directors or a committee of the board of directors, and the board of directors or a committee authorized, approved, or ratified the transaction;
(2) the material facts of the transaction and the director’s interest were disclosed or known to the shareholders entitled to vote and they authorized, approved, or ratified the transaction; or
(3) the transaction was fair to the corporation.
If (1) or (2) has been accomplished, the burden of proving unfairness of any transaction covered by this section is on the party claiming unfairness. If neither (1) nor (2) has been accomplished, the party seeking to uphold the transaction has the burden of proving fairness.
(b) For purposes of this section, a director of the corporation has an indirect interest in a transaction if (1) another entity in which he has a material financial interest or in which he is a general partner is a party to the transaction or (2) another entity of which he is a director, officer, or trustee is a party to the transaction and the transaction is or should be considered by the board of directors of the corporation.
(c) For purposes of subsection (a)(1), a conflict of interest transaction is authorized, approved, or ratified if it receives the affirmative vote of a majority of the directors on the board of directors (or on the committee) who have no direct or indirect interest in the transaction, but a transaction may not be authorized, approved, or ratified under this section by a single director. If a majority of the directors who have no direct or indirect interest in the transaction vote to authorize, approve, or ratify the transaction, a quorum is present for the purpose of taking action under this section. The presence of, or a vote cast by, a director with a direct or indirect interest in the transaction does not affect the validity of any action taken under subsection (a)(1) if the transaction is otherwise authorized, approved, or ratified as provided in that subsection.
(d) For purposes of subsection (a)(2), a conflict of interest transaction is authorized, approved, or ratified if it receives the vote of a majority of the shares entitled to be counted under this subsection. Shares owned by or voted under the control of a director who has a direct or indirect interest in the transaction, and shares owned by or voted under the control of an entity described in subsection (b)(1), may not be counted in a vote of shareholders to determine whether to authorize, approve, or ratify a conflict of interest transaction under subsection (a)(2). The vote of those shares, however, is counted in determining whether the transaction is approved under other sections of Chapters 1 through 20of this Title. A majority of the shares, whether or not present, that are entitled to be counted in a vote on the transaction under this subsection constitutes a quorum for the purpose of taking action under this section.
§ 83-8-310.
Salary Overrides
Straight contends the special referee erred in finding Goss’s salary overrides in 1995,1996, and 1997 were proper as they were neither disclosed nor approved and, therefore, were only valid if they were fair to the corporation. He argues the Gosses failed to meet their burden to establish fairness under section 33-8-310(b) as they failed to offer any evidence of fairness given the declining business and increased cash needs of Timberline during this time. We disagree.
Straight testified, based on his concern that someone running Timberline would be able to increase salary and diminish the shareholders’ ability to pull out profits, the parties agreed a salary of approximately $80,000 a year would be paid to Goss and that any other income he would earn would come from distributions and profits. At trial, he presented a document purporting the Gosses received excess wages of $214,233 in 1995, $66,864 in 1996, and $101,670 in 1997, while the number of packages Timberline produced for Eagle’s Nest during those years was declining.
As previously noted, the letter of intent provided Goss was to receive a salary of $1,000 per week plus a sales override of two percent, not to exceed $80,000 per year “without prior approval of Timberline’s Board of Directors.” Thus, contrary to Straight’s testimony, Goss’s salary was not strictly limited to $80,000 a year with his only other source of income from the company to be income received as distribution of profits, as the letter of intent clearly contemplates Goss’s salary may increase with board approval. The record shows that at a Timberline Board of Directors meeting on May 12, 1993, directors Goss and Pam, after noting Timberline’s recent improved profitability, approved an increase in overrides to five and a half percent of sales.
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At this time, Pam had
In addition to Straight’s knowledge that Goss and Pam could make changes to the compensation, there is evidence of record that the Gosses made significant financial and sweat equity contributions to Timberline. In particular, although the letter of intent anticipated initial capital requirements of approximately $195,000 or less, with half the amount to be contributed by the Gosses and the other half to be contributed by Straight and Gandolfi, the record shows Straight and Gandolfi actually contributed only $25,000 and refused to cosign any loans to finance any further necessary capital.
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According to Goss, the business was ultimately started with $150,000 in funds. Goss stated he and Pam put $25,000 of capital into the business by borrowing from their pension. The parties had agreed the remaining $100,000 was to be borrowed, and the bankers Goss met with requested Straight and Gandolfi co-sign for a loan. However, Straight and Gandolfi adamantly refused to sign any notes. One of the bankers ultimately agreed to loan Timberline money on the Gosses’ personal guarantee if Straight and Gandolfi “put up $50,000.” The Gosses ultimately gave their personal guarantee to obtain a loan from the bank. Although Straight main
Paragraph four of the official comments for section 33-8-310 discusses the “fairness” of a transaction and provides as follows:
The fairness of a transaction for purposes of section 8.31 (Section 33-8-310) should be evaluated on the basis of the facts and circumstances as they were known or should have been known at the time the transaction was entered into. For example, the terms of a transaction subject to section 8.31 (Section 33-8-310) should normally be deemed “fair” if they are within the range that might have been entered into at arms-length by disinterested persons.
Given Straight’s knowledge of the compensation parameters set forth by the letter of intent along with his refusal to serve on the board, leaving Pam as the only alternative director, and in consideration of the Gosses’ concerted efforts and financial support of Timberline, we believe the Gosses have met their burden of showing the fairness of the additional overrides paid in 1995,1996, and 1997. Additionally, based upon other equity considerations discussed further in this opinion, we find no error in the referee’s determination that the Gosses were entitled to the salaries received during these years.
Land Purchase and Truss Company
Straight next contends the special referee erred in failing to find improper the Gosses’ purchase of the Wickes property
Straight complains the Gosses purchased the Wickes property, appraised at $1,300,000, for only $304,000, and Timberline could have done the same with no out-of-pocket investment required of Timberline or its shareholders. Additionally, he maintains that the rent charged to Timberline enabled the Gosses to make the mortgage payments and pay taxes on the property, and further asserts Timberline paid CBT’s rent. As for the truss company, Straight asserts the Gosses failed to disclose the existence of CBT until he confronted Goss in December 1999 after receiving an anonymous clipping in the mail. He claims the Gosses also used Timberline to supply significant labor, materials, and rent for CBT.
The Wickes Property
The record shows that on November 1, 1991, following the first fire at the property initially leased by Timberline, the Timberline Board approved the negotiation and purchase of land and the construction of a new building for Timberline. While Straight and Gandolfi agreed to such an investment by Timberline, they informed Goss they were unwilling to give any guarantees or make any investment in it. Shortly thereafter, Timberline acquired eight acres of raw land in Hodges, South Carolina. Timberline however remained at the leased premises, where a second fire ultimately occurred on the property in 1994. At this time, Timberline was on a month-to-month lease, and the new landlord decided to take over the
Goss testified he and Pam searched Greenwood and the neighboring counties for a suitable location to lease, but were unable to find one that suited Timberline’s needs. Eventually, Goss learned that the Wickes property was to be auctioned, and he and Pam subsequently purchased it for $304,000 in August 1997. The Gosses obtained a mortgage in the amount of $415,000, giving their personal guarantee, and used the difference to make improvements to the property. Goss testified Timberline did not buy the property because, in speaking with its banker, he knew Timberline could not borrow the money without Straight’s guarantee. When presented with the idea of purchasing land and a building and mortgaging it, Straight clearly indicated to Goss that Straight would have no part of it and Goss would have to “do it alone.” Timberline thus did not have the financial ability to secure a mortgage on the property. Additionally, rent of $4,527 a month was charged to Timberline after Goss consulted the executive director of The Greenwood County Economic Alliance as to what constituted competitive rent for that space. Goss further testified he informed Straight of the new rent charged Timberline and Straight “seemed happy with it.”
Based on the evidence that Timberline did not have the financial ability to acquire the Wickes property and the rent charged to Timberline was competitive for the area leased, we find no error in the special referee’s refusal to find purchase of the Wickes property by the Gosses was improper under section 33-8-310, as the evidence supports the fairness under the circumstances. Additionally, as with the salary overrides, based upon the other equity considerations we find no error in the referee’s determination that the transactions involving the Wickes property were reasonable under the circumstances.
The Truss Business
Goss testified that Pam purchased truss machinery and started CBT in the summer of 1998. CBT and Timberline were located in the same compound, on the Wickes property, but Timberline was in one building and CBT was in another. Until a conversation with Straight in December 1999, Goss did not inform Straight about the existence of CBT. He and Pam
Goss maintained that upon advice from his attorney and accountant, CBT and Timberline were operated as separate companies and in arm’s length transactions with competitive pricing. The Gosses made improvements to the Wickes property to accommodate Timberline’s needs. According to Goss, the only improvements made by Timberline to the property involved the running of electrical and compressor lines the business needed and possibly “another item or two.” Goss admitted that for a very short period of time, while his wife was out of town tending to their son’s medical situation, some materials ordered for CBT were inadvertently included on the Timberline account, but the matter was corrected in an adjustment at the end of the year. Goss also admitted that some employees who worked exclusively for CBT were paid from
As for the rent, the testimony does not show, as Straight contends, that Timberline paid CBT’s rent. Rather, CBT entered its own lease agreement with Commerce to pay $1,500 a month in rent for a much smaller area than Timberline’s. Rent was charged on a prorated basis, with both Timberline and CBT paying $2.50 per square foot. While CBT apparently made only $1,500 in monetary payments, its remaining rent accrued on the books and there is no evidence this rent was paid by Timberline.
Further, CBT charged Timberline the same price Timberline had been paying its previous truss provider before that company announced a fifteen percent price increase. Accordingly, Timberline actually saved that fifteen percent difference when it obtained trusses from CBT. Additionally, Timberline benefited from the arrangement inasmuch as it received custom quotes faster, the quality of the trusses was somewhat superior, it received the trusses themselves more quickly, and it incurred no delivery charge.
Based on the foregoing evidence, we find no error in the referee’s determinations that the funds provided by Timberline for the payment of CBT employees were offset by the trusses delivered to Timberline but not paid to CBT, that Timberline did not have the ability to acquire the Wickes property and no funds of Timberline were improperly used to improve the Wickes property for the benefit of Commerce,
Allied Distributions
Straight further contends the special referee erred in his determination regarding the Allied distributions to the Gosses. He argues the referee improperly tied the Allied distributions to the American Accent legal fees and special discounts because Goss’s testimony on the matter was not credible, it was reasonable for Timberline to incur these fees on its own behalf, and the special discounts were made for legitimate business reasons. We disagree.
Goss testified that Allied was a company they used to enable him to receive an equal amount of distributions from Timberline that Straight received in the nature of legal fees incurred in the American Accent lawsuit and some “special deals” Straight obtained from Timberline. According to Goss, Straight requested Timberline sue American Accent because American Accent was competing with Eagle’s Nest in its sale of dealerships.
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Goss stated the lawsuit did not benefit Tim
Goss also testified that in 1992, Straight wanted to take distributions from Timberline in the form of a two and a half percent “special discount,” to be received on top of the eight percent volume rebate Eagle’s Nest was receiving from Timberline. According to Goss, this was during a time Straight was arguing with Gandolfi, and Straight was seeking a way to receive the money from Timberline without Gandolfi benefiting. Accordingly, Straight came up with the idea of this
While Straight asserts on appeal that the evidence shows Goss’s testimony was wholly unreliable, a thorough review of the entire record convinces us otherwise. Implicit within the referee’s order is that the referee found Goss was credible and Straight was not. Though the actions of the Gosses may appear inappropriate at first blush, an understanding of the workings between the parties and their various businesses gives credence to Goss’s testimony regarding the reasons behind the actions he and his wife took.
Goss testified at length to Straight’s actions that required the various reactions by Goss. For instance, although Straight acknowledged in the letter of intent that he and Gandolfi were to contribute half of the initial capital investment, the two provided only $25,000 in a questionable transaction from Eagle’s Nest, only provided a short term loan to the company in order to satisfy the bank in regard to their investment in the company, and refused to co-sign or guarantee any loans. This placed Goss and Pam in the position of having to personally guarantee Timberline’s loans and letters of credit alone, taking on all of the risk of the company. At the same time, Straight made clear to Goss that he had no intention of ever guaranteeing any loans or investing any more money in Timberline. Goss also testified that Straight consistently insisted that Timberline’s profits be distributed, thereby leaving no retained earnings in the business with which to invest in assets or other lines of business. Goss further testified that Straight insisted that Timberline bring a legal action against American Accent, Timberline’s only other customer of any significance, even though only Straight and Eagle’s Nest stood to gain from such an action, and Timberline would only lose this additional business. Additionally, Goss related that although the parties had agreed from inception that they would follow the Kings-berry pricing model in setting the prices Timberline would charge for the panelized houses, Straight fought Goss on each
Aside from this support of the record, Goss also presented evidence from two independent witnesses as to his credibility. Reed Fickling, an employee of an insurance agency, testified he provided insurance for Timberline and Goss, and Goss was not his friend, but simply a client. Fickling testified that from his experience with Goss, Goss “was totally truthful and totally honest” and he would trust him implicitly. Willie Garvin, an accountant who provided services to Timberline until it ceased operations, testified Goss had “a very strong” reputation in the Greenwood business community, and he had heard someone comment that Goss “was as honest a person as they had ever met.” Garvin stated he found Goss to be “straightforward and responsive” in answering questions in regard to the business.
While the record shows Goss enjoyed a reputation of honesty in the business community, no such evidence was submitted by Straight. On the other hand, counsel for the Gosses successfully impeached Straight’s testimony before the referee. Contrary to Goss’s testimony, Straight stated he wanted Timberline to be successful and never told Goss he was washing his hands of Timberline. He further denied planning
Based on the foregoing, we find the evidence supports Goss’s assertions that the legal fees and special discounts were provided for the benefit of Straight and the parties agreed that these monies would be considered distributions to Straight, for which the Gosses would receive the equivalent through payments made to Allied. Accordingly, we find no error in the referee’s determination in this regard.
Offset of Attorney’s Fees and Special Discounts
Straight next contends the special referee erred in offsetting the attorney’s fees and special discounts against the Allied disbursements, essentially performing an accounting, because there was no claim upon which to base the offset. He argues the referee went beyond the scope of the pleadings in awarding such relief, and even if a counterclaim or third party claim had requested the relief, such claims would be barred by the statute of limitations. We disagree.
A reading of the order shows the special referee did not perform an accounting as asserted by Straight. Nor did he address, nor rely on, any counterclaim or third party claim of respondents as the basis for his decision regarding treatment of the payments to Allied. Rather, the referee considered Straight’s claim that the Gosses wrongfully caused Timberline to distribute funds to themselves through Allied and the
Unclean Hands
Straight also contends the special referee erred in using the doctrine of unclean hands to “support the offset of attorney’s fee and special discounts or for any other purpose.” He argues the doctrine does not apply to conflict of interest transactions, as the test is whether the plaintiff is untainted with regard to the particular transaction of which he complains, and in order for a plaintiff to be precluded from recovering in equity under this doctrine, he must have acted unfairly in a matter that is the subject of the litigation. He maintains Timberline is the real party in interest and is the victim of the Gosses’ -wrongdoing, and Timberline could not have participated in the wrongdoing. 10 We disagree.
“When this court is sitting in equity, and thus viewing evidence for its preponderance, we are to consider the equities of both sides, balancing the two to determine what, if any, relief to give.”
Anderson v. Buonforte,
Contrary to Straight’s assertion, the equitable defense of unclean hands is available in a shareholder derivative action.
See Gaudiosi v. Mellon,
Straight does not challenge on appeal the specific findings of the referee that his conscious harassment of the Gosses constitutes unclean hands, or that he came into court with unclean hands in that the following actions by Straight were unfair and inequitable: (1) putting himself in conflict of interest by being a dominant shareholder in Timberline while controlling its major customer, (2) causing Timberline to sue its only other customer, (3) subordinating the interests of Timberline to those of Eagle’s Nest, (4) setting an eight percent volume rebate when Timberline’s sales to Eagle’s Nest were below break-even, (5) surreptitiously recording telephone calls with Goss, (6) looting Timberline’s assets, specifically the manufacturing design plans for the round house, and (7) threatening to move Eagle’s Nest business to another builder after causing Timberline to lose its only other customer and thereafter conspiring and attempting to open Eagle’s Nest’s own manufacturing facility.
See ML-Lee Acquisition Fund, L.P. v. Deloitte & Touche,
Furthermore, Straight’s own inequitable conduct came directly to bear on the transactions of which Straight now complains. Straight refused to contribute his time or money to Timberline while damaging the corporation’s financial position by subordinating the interests of Timberline to those of Eagle’s Nest. These actions left Timberline in no condition to either purchase the Wickes property or form a truss company. They also left the Gosses struggling to maintain Timberline through their own contributions of time and financial resources and resulted in their making the salary overrides and Allied distributions. Accordingly, we find the special referee did not err in holding the doctrine of unclean hands precluded Straight from recovering against the Gosses.
Straight next argues the special referee erred in using the common paymaster doctrine in regard to the payment by Timberline of CBT employees. Straight asserts such a doctrine does not apply here because the two companies were not commonly owned, but simply had “interlocking ownership and directors.” We disagree.
A reading of the special referee’s order shows he did not rely on a common paymaster doctrine. Rather, the referee simply noted that Timberline and CBT essentially engaged in a “common paymaster scheme” for the payment of labor, which is not an uncommon approach with related companies. The referee did not make any findings whether the common paymaster doctrine would apply in a situation where some, but not all, of the shareholders have two companies in common. Further, there is evidence of record that use of one payroll account for two companies may have cost-saving benefits and is an appropriate practice. Most importantly, there is evidence to support the referee’s finding that the funds paid by Timberline for CBT labor were offset by the trusses CBT provided for Timberline, that the accounts were reconciled at the end of each year, and that at the end of 2000, Timberline actually owed CBT over $14,000. Accordingly, there was clearly no harm to Timberline in the employment of a common paymaster scheme under the circumstances.
Misappropriation of Corporate Opportunities
Finally, Straight argues the acquisition of the Wickes property and formation of CBT were corporate opportunities for Timberline which the Gosses misappropriated for themselves. He asserts the special referee improperly relied on his conclusion that Timberline was financially incapable of taking advantage of the opportunities presented because Timberline would have had the funds available had the Gosses not removed them through the improper Allied and salary override payments. He further maintains CBT used Timberline to “bankroll” itself, and used Timberline employees, material and rent to nourish CBT. He thus contends the use of Timberline assets during a decline in business, along with the monies removed by the Gosses, resulted in the demise of Timberline
“A constructive trust results “when circumstances under which property was acquired make it inequitable that it be retained by the one holding legal title. These circumstances include fraud, bad faith, abuse of confidence, or violation of a fiduciary duty which gives rise to an obligation in equity to make restitution.’ ”
Macaulay v. Wachovia Bank of S.C., N.A.,
In general, a constructive trust may be imposed when a party obtains a benefit “which does not equitably belong to him and which he cannot in good conscience retain or withhold from another who is beneficially entitled to it as where money has been paid by accident, mistake of fact, or fraud, or has been acquired through a breach of trust or the violation of a fiduciary duty.”
Id.
(quoting
SSI Medical Servs., Inc. v. Cox,
As previously stated, the evidence of record supports the Gosses’ actions when considered in conjunction with those of Straight. There is evidence Straight consistently insisted on the distribution of Timberline profits, insisted Timberline engage in an expensive lawsuit with Timberline’s only other customer, refused to invest any further funds beyond his nominal initial investment and short term loan, refused to guarantee any loans, which would have been necessary for Timberline to purchase any property or begin its own truss business, and agreed Goss was to receive distributions through Allied to level out the benefits he received by way of the
Reviewing the evidence in accordance with our own view of the preponderance of the evidence, we agree with the referee that there was no misappropriation of corporate opportunities of Timberline by the Gosses, and to invoke a constructive trust as requested by Straight is entirely inappropriate under the circumstances presented.
CONCLUSION
For the foregoing reasons, the special referee’s order is
AFFIRMED.
Notes
. Both Goss and Gandolfi had engineering backgrounds. Goss testified he designed the round houses.
. At some point, Straight acquired Gandolfi's shares in Timberline and the company bought Chester’s shares, resulting in Straight owning fifty percent of Timberline and Goss and Pam together owning the remaining fifty percent.
. The only other evidence of Timberline producing homes for other customers is that it manufactured about four panelized packages for some local individuals as well as one for Goss and one for a Timberline employee.
. It appears that Straight felt he was "duped" by Gandolfi when Gandolfi talked him into selling Helms his shares in American Accent, but Gandolfi, who was also supposedly selling his shares, either repurchased those shares or negated the transaction in order for Helms and Gandolfi to shut Straight out of American Accents. Goss testified American Accent and Eagle's Nest had the same marketing approach, Straight wanted American Accent out of that market, and Straight told Goss he wanted to "squash” American Accent and he was going to "crush” them because American Accent was competing with Eagle’s Nest. Because American Accent had an agreement with Timberline that it would buy houses exclusively from Timberline, Straight believed Timberline could initiate a lawsuit against American Accent to enforce that agreement. Straight, on the other hand, maintained that he had an agreement drawn up between Timberline and American Accent which not only made Timberline an exclusive provider, but also placed limitations on the product Timberline produced for American Accent. Straight contended that American Accent violated the agreement, informing people it could make any type of home, including the round house. While Goss's position was that the lawsuit was instituted solely for Straight's and Eagle's Nest's benefit, Straight asserted it was beneficial to Timberline as well. This lawsuit started around 1994 and ended in 1995 or 1996.
. The order of the referee notes that in December 1998, the board reduced the override to three percent of sales.
. It is of further interest to note Goss testified this start-up capital of $25,000 contributed by Straight and Gandolfi was paid for by Eagle’s Nest, whereby that company paid for a house manufactured by Kings-berry twice, paying Kingsberry for the home and then issuing a $25,000 check to Timberline for the same home, in order to improperly deduct the expense of their capital contribution.
. When Timberline ultimately ceased production, it was still obligated on a $150,000 note. After selling some land owned by Timberline to pay down the note, a balance of approximately $85,000 remained, which the Gosses were forced to assume as they had personally guaranteed the note.
. Straight also summarily asserts the referee further erred in applying the business judgment rule to these transactions, as such a rule is not applicable to conflict of interest transactions. A reading of the referee’s order discloses, however, that the referee did not reference this rule in regard to Straight’s claims that the land purchase and truss business transactions were conflicts of interest, but rather did so in regard to Straight’s assertions of negligent mismanagement of Timberline.
. Goss testified about what he learned over time in regard to these dealerships sold by Eagle's Nest. When Timberline first started, Eagle’s Nest was charging $3,000 for a dealership, which was essentially the right to sell a panelized house. By the end, the price of a dealership had risen to $10,000. Goss stated that Eagle's Nest would have three to four hundred dealers, whom they called reps, who made $8,000 to $10,000 a year in nonrefundable deposits. The person only had three to four months time from the date of deposit to have the house shipped. Because it was almost impossible for these dealers, for whom there was no required specialized training, to make the necessary preparations for delivery, which included obtaining financing, finding land, choosing the
. Straight summarily asserts Timberline is the real party in interest. However, in his order the special referee noted from the outset, although this action is ostensibly for the benefit of Timberline, as a practical matter the only beneficiary of the lawsuit would be the only shareholder who is not an officer or director, Straight. Straight does not challenge this finding.