Griffith v. Griffith, 997 So.2d 218 (Miss. App. December 02, 2008). [Download Opinion]
The Mississippi Court of Appeals has handed down an opinion in a lawsuit between two shareholders of a closely-held corporation. The Mississippi corporation was started by the father of two shareholders in the 1950s. The corporation manufactured a pecan picker. Most of the two brothers' shares were held in trust, but Tom held 3 shares individually and Harry held 2 shares individually. In 1998 board of directors appointed Harry the president. Tom was vice president. Over the ensuing years, the dividends of the corporation decreased, until Tom discovered that the reason the corporation's expenses were increasing was that Harry was charging personal expenses to the corporation and charging expenses of his two other businesses to the corporation. Tom sued Harry for conversion and breach of fiduciary duty. Tom obtained a temporary restraining order and was named temporary receiver of the corporation. A shareholders' meeting was held, and Harry was voted out as president. Thereafter, Harry went into business in competition with the corporation, importing cheaper Chinese knock-off pecan pickers. Tom contended that this was a usurpation of corporate opportunities because, several years before, Tom had proposed that the corporation import the less expensive Chinese pickers rather than manufacture its own product, and Harry had refused to pursue that opportunity. As a result of Harry's new business, Tom also sued Harry for usurpation of corporate opportunities.
The Chancellor ordered an accounting be performed by a certified public accountant appointed by the court. A CPA found that Kerry had charged $54,490 in personal expenses. Additionally, the CPA found that more than three hundred thousand dollars could not be accounted for because of the corporation's poor bookkeeping. The Chancellor awarded Tom $27,245 for breach of fiduciary duty, $50,000 punitive damages, and $5000 in attorneys fees, but nothing for usurpation of corporate opportunities. Both brothers appealed. A court of appeals affirmed.
The court of appeals noted that Tom had brought the lawsuit directly, claiming a breach of fiduciary duty to himself individually, and had not joined the corporation as party. This was not fatal to the breach of fiduciary duty claim, because Mississippi case law provides that, in a closely held corporation, the chancellor may treat a shareholder's derivative suit as a direct action and order an individual recovery so long as it does not prejudice the interests of the creditors, expose the corporation to multiple actions, or prejudice recovery for all other interested parties. See ERA Franchise Sys. v. Mathis, 931 So.2d 1278, 1281 (Miss. 2006) (citing Derouen v. Murray, 604 So.2d 1086, 1091 n.2 (Miss.1992)). Presumably, the plaintiff should have brought the lawsuit as a derivative action, naming the corporation as a party, and then requested the court to treat the derivative action as a direct action. However, the Court of Appeals held that the Chancellor had not erred because the plaintiff had "essentially" filed a shareholders derivative action. Therefore, the court of appeals held that the Chancellor had correctly awarded half the personal expenses charged the corporation by Harry. The court of appeals found that Chancellor did not abuse his discretion in finding Harry's explanation not credible that the expenses were legitimate. However, the court of appeals also held that the Chancellor did not err in refusing to award Tom any damages for the greater sum of money that could not be accounted for. The Chancellor had held that there was not sufficient evidence to prove that the money had been misappropriated. As the fiduciary that had control over the corporation, Harry should have had the burden of proof with regard to the accounting. Therefore the Chancellor's refusal to award damages due to a lack of evidence is clearly wrong. However, the court of appeals did not consider this issue.
The court of appeals also affirmed the Chancellor's refusal to award damages for usurpation of the corporate opportunity. The basis for the court of appeals' holding was that Harry did not have standing to assert a claim for lost profits based on usurpation of corporate opportunities, as this claim belongs solely to the corporation and could only be brought in a derivative suit. Of course, the exact same standing problem existed on the award that the court of appeals did affirm, and the court of appeals had held just a few paragraphs before that Tom had escaped the standing problem by virtue of the doctrine of allowing shareholders in a closely-held corporation to bring a direct action instead of a derivative action. These two holdings by the court of appeals constitute to a head-spinning contradiction, of which the court seems totally unaware.
The court of appeals also affirmed the Chancellor's award of punitive damages and attorney's fees. The court did not address the basis of an award of punitive damages in an equitable action, but seems to hold back the Chancellor has discretion to award punitive damages based on his assessment of the circumstances. See Aqua-Culture Techs., Ltd. v. Holly, 677 So.2d 171, 184 (Miss.1996). "[T]he question of whether punitive damages should be awarded depends largely upon the particular circumstances of the case." Id. The court also affirms the attorneys' fees award on the basis of the somewhat usual Mississippi rule that attorneys' fees may be awarded when the trial court has found that punitive damages are appropriate. See Aqua-Culture Techs., 677 So.2d at 184 (citing Greenlee v. Mitchell, 607 So.2d 97, 108 (Miss.1992)).