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For North Dakota Directors: Be Fair or Beware!

Posted by Attorney Stephen Hance | Nov 01, 2013 | 0 Comments

In a recent decision, the North Dakota Supreme Court reaffirms the importance of fairness for minority shareholders and the broad scope of judicial discretion in fashioning a remedy. Danuser v. IDA Marketing Corporation, et al., 2013 N.D. 196, ND Supreme Court, October 30, 2013.

Danuser was the majority shareholder in IDA Marketing which had agreed to buy the stock of IDA of Moorhead Corporation by making payments over time. James Leach was the majority shareholder of IDA of Moorhead, and per the agreement, was a director in both corporations. By agreement, IDA of Moorhead could redeem its stock and cancel the agreement in the event of a default upon 90 days' notice to cure. Apparently, IDA Marketing had historically failed to strictly honor the payment terms of the agreement. Danuser, as part of the initial group of IDA Marketing shareholders, had run the companies in various capacities since the purchase in 1994.

In 2010, Mr. Leach organized a board meeting and had Danuser terminated as an officer of IDA Marketing. Then, without notifying Danuser as a director, held another meeting wherein the board of IDA Marketing agreed to waive the 90-day cure provision of the agreement and allowed IDA of Moorhead to redeem the stock. The result was a complete loss for IDA Marketing shareholders of the value it contributed over the 16-year history of the agreement. Shortly after redeeming the stock, Mr. Leach declared the company in good financial condition and marketed it for an eventual sale at a substantial return to him and the shareholders of IDA of Moorhead.

Danuser sued claiming that Mr. Leach, the other directors and the companies breached fiduciary duties to him. He claimed he was wrongfully frozen out and was denied his reasonable expectations as a shareholder. Following a court trial, the trial court agreed and awarded him judgment against the two companies and Mr. Leach jointly and severally in the amount of $567,200.00, among other things.

Mr. Leach, who was a director but not a co-shareholder of IDA Marketing, claimed it was an error to find that he had a fiduciary duty to Danuser individually. He argued that as a director, his duty extended only to the company and/or the shareholders generally. The Supreme Court disagreed finding that North Dakota statutes and pertinent caselaw establish a fiduciary duty upon Mr. Leach as a director, not to act in an unfairly prejudicial manor toward individual shareholders as well. (Citing N.D.C.C. §§10-19.1-115(1)(b)(3); Kortum v. Johnson, 2008 ND 154, ¶14, 755 N.W.2d 432,; Lonesome Dove Petroleum, Inc. v. Nelson, 2000 ND 104, ¶29, 611 N.W.2d 154.)

Moreover, the Supreme Court stated, “Whether James Leach breached a fiduciary duty to not unfairly prejudice Danuser is a question of fact.” (citation omitted). In other words, absent a clear error, the appellate courts should defer to the factual findings of the trial court judge that hears the case.

IDA of Moorhead also appealed the trial court's decision to award damages jointly and severally, believing that if damages were apportioned among the wrongdoers based on their respective wrongful conduct, a much smaller amount should have been apportioned to it.

The Supreme Court again, deferred to the trial court noting that, “A court has a wide range of discretion to fashion remedies for breach of fiduciary duty, up to and including dissolution of a closely-held corporation” and will only be reversed where the court's decision is “arbitrary, unreasonable, or unconscionable, or represents lack of rational mental processes...”

Key points to take from the Supreme Court's decision in Danuser are the importance of fairness in dealing with shareholders of North Dakota closely-held corporations and the scope of the trial court's discretion in righting wrongs. For me, the most telling quote from the trial court's decision was the following:

Whether Danuser could have paid the balance due if given the opportunity will never be known with certainty. However, he was entitled to that opportunity, and had paid dearly for it over the years.

In the end, it seems as though the defendants could have avoided the case and the adverse judgments if they had only the courtesy to give Danuser and IDA Marketing the benefit of a 90-day cure period.

About the Author

Attorney Stephen Hance

Steve represents and advises clients that are dealing with business and real estate disputes. Steve is an investor and business owner, and his approach is unique from other attorneys.

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