Franks v. Franks

          St. Joseph Circuit Court LC No. 2013-000809-CB

          Before: K. F. Kelly, P. J., and Fort Hood and Redford, JJ.

          Per Curiam.

         In this shareholders' dispute, defendants, Newell A. Franks II, Brian McConnell, LeeAnn McConnell, David Franks, Lawrence Franks, and Burr Oak Tool, Inc., appeal by right the trial court's order entered following its granting of summary disposition in favor of plaintiffs, Jeffrey Franks, the Franks Family Trust, ^[1] and Willis Franks. Defendants also challenge the trial court's order compelling Burr Oak to purchase plaintiffs' shares in Burr Oak. We reverse and remand for proceedings consistent with this opinion.

         I. BASIC FACTS

          The late Newell A. Franks founded Burr Oak in 1944. Burr Oak manufactures and sells machine tools in the heat transfer industry. It is located in Sturgis, Michigan. The parties to this case are all related to Newell A. Franks in some way. Newell A. Franks was the father of defendant Lawrence Franks, former plaintiff Richard Franks, and Tom Franks, who was deceased by the time of this litigation. Lawrence Franks is the father of defendant Newell A. Franks II, defendant David Franks, and defendant LeeAnn McConnell. LeeAnn McConnell is married to defendant, Brian McConnell. Tom Franks was the father of plaintiffs Jeffrey Franks and Willis Franks.

         Defendants own voting shares-Class A shares-of Burr Oak or have an active role in the management of the corporation, as noted by Burr Oak's then accountant, Bruce Gosling. Newell A. Franks II is the Chief Executive officer and the Chairman of the Board of Directors. Plaintiffs each own Class B or C shares in the corporation, which are nonvoting shares. Class B shares do not get dividends, but Class B shares can be converted into Class C shares, which do get dividends. Plaintiffs have no role in the management of the corporation.

         Historically, Burr Oak distributed dividends to its shareholders: Burr Oak issued dividends every year from 1950 to 2004 with the exception of five years. In 2001, for example, Burr Oak distributed $23 per share to holders of Class A stock and $45 per share to holders of Class C stock. Burr Oak paid out about $2.2 million to shareholders in 2002, and paid out $2, 288, 000 in 2003. It distributed another $2.2 million to shareholders in 2004. However, Burr Oak ceased paying dividends after the death of Newell A. Franks in 2007. Newell A. Franks II testified that Burr Oak stopped paying dividends because the company incurred a "tremendous outflow of cash" related to his grandfather's estate. He stated that the company had no formal policy for determining when to make a dividend distribution. Previously, his grandfather would just make the decision and it would be carried out.

         Newell A. Franks II agreed that he had Gosling calculate the value of Burr Oak in 2012 in anticipation of a stock buyback. He agreed that Gosling's report, which was dated May 21, 2012, valued the company at $46, 125, 355, or at approximately $598 per share for the 77, 043 shares of outstanding stock. Gosling testified that Newell A. Franks II asked him to prepare the valuation to help with a proposed buyout of the "minority shareholders." Newell A. Franks II stated that Burr Oak had more than $20 million in cash in May 2012. He indicated that it was not all available for the payment of dividends, but agreed that some could have been used to pay dividends. He also testified that Burr Oak loaned $1 million to Sturgis Bank in 2012, and he conceded that David Franks served on the board of directors for the bank. David Franks testified that he was a voting shareholder of the bank.

         Six months after Gosling's valuation, defendants had Burr Oak offer to purchase defendants' shares for $62 per share. Newell A. Franks II conceded that there was no valuation to support that offer. He further acknowledged that Gosling wrote him and stated that his offer was "a good plan" because the nonvoting members were astute enough to realize that their shares had no value unless a different buyer were to offer them more. Gosling said that he told Newell A. Franks II that because, "if no dividends are being paid and there are no redemptions being made, then nobody else is going to buy the stock." He explained that Burr Oak was probably the only market for the shares and, if one cannot convert the stock certificate into cash in some way, it has no value. David Franks similarly testified that he knew that the $62 offer did not have any support, but he agreed to move to make the offer on the understanding that it would get the conversation started. He also testified that he did not expect anyone to accept that offer. Newell A. Franks II admitted that no one accepted the offer of $62 per share. He also admitted that there was no valuation to support it. He, however, opined that $62 per share was a fair return given that plaintiffs paid zero dollars for their shares.

         E-mail communications between David Franks and Brian McConnell suggested that the $62 per share offer to the "outside stock holders" was not made in good faith. David Franks wrote that the justification for the offer that Brian McConnell proposed to provide to Jeffrey Franks after Jeffrey Franks questioned the basis of the offer should not mention a related company-Oak Press Solutions, Inc.-because they had taken measures to ensure that that entity paid a fair price and he did not want to "plant a bug" about that company, which itself did not have the same "ownership concerns." Notably, plaintiffs had alleged that defendants caused Burr Oak to conduct business through related entities such as Oak Press Solutions to receive undisclosed distributions. Newell A. Franks II also admitted that his grandfather had in the past paid dividends of $62 per share in a single year. At a February 2013 meeting of the board of directors, the directors agreed to offer plaintiffs $141.26 per share. In September 2013, Burr Oak offered to buy shares at $248 per share. Defendants did not, however, accept any of these offers.

         In September 2013, Jeffrey Franks, Richard Franks, and Willis Franks sued defendants. They alleged that Lawrence Franks, David Franks, Newell A. Franks II, Brian McConnell, and Lee Ann McConnell used their control of Burr Oak to benefit themselves and their families at the expense of the minority shareholders. They asserted that the identified conduct amounted to illegal, fraudulent, willfully unfair, and oppressive conduct in violation of MCL 450.1489. They asked the trial court to remedy the oppression by, among other possible remedies, ordering defendants to purchase plaintiffs' shares at fair value. They also alleged a claim of breach of fiduciary duty and a claim for an accounting. Plaintiffs filed an amended complaint in October 2013. They alleged seven claims in the amended complaint: shareholder oppression under MCL 450.1489, breach of fiduciary duties, accounting, fraud, constructive fraud, breach of contract, and aiding and abetting the scheme to deprive plaintiffs of their interests as shareholders.

         On June 16, 2014, plaintiffs filed a motion with the trial court asking it to order Burr Oak to issue a dividend. In that same month, defendants moved for summary disposition of plaintiffs' claims under MCR 2.116(C)(8) and (C)(10). Defendants argued that the trial court had to dismiss the shareholder oppression claim because the conduct at issue did not establish a question of fact as to whether there was shareholder oppression. Specifically, they maintained that the failure to purchase stock was not by itself oppressive conduct; and, similarly, an offer to purchase stock at a particular price was also not oppressive. Moreover, they stated, defendants eventually offered to purchase plaintiffs' shares at $248 per share, which was the same price earlier offered to Lawrence Franks for his shares. Finally, they argued and presented evidence that the Board of Directors elected not to issue dividends for legitimate business reasons, which were protected under the business judgment rule. Namely, they maintained that Burr Oak had to retain its profits for capital improvements, to retire debt, and possibly redeem stock. Defendants relied in part on Brian McConnell's affidavit. Brian McConnell averred that he was Burr Oak's Chief Operating Officer and stated that Burr Oak had to pay out more than $15 million from 2007 to 2012 to cover obligations under Newell A. Franks' estate plan. He also stated that the Board of Directors felt that Burr Oak needed to establish an ambitious expansion plan to remain competitive. Defendants also argued that the failure to pay dividends affected all the shareholders equally and so could not be oppressive to plaintiffs. In short, they maintained that there was no evidence that the board's exercise of business judgment was feigned or a mere subterfuge. As pertinent to this appeal, defendants also argued that plaintiffs failed to state a claim against LeeAnn McConnell because she was not a director of Burr Oak and did not participate in any of the decisions at issue.

         On June 30, 2014, plaintiffs moved for partial summary disposition on their claim of shareholder oppression. Plaintiffs maintained that the undisputed evidence showed that defendants tried to implement an unfair stock redemption plan and wrongfully withheld the payment of dividends for the purpose of squeezing the nonvoting stock holders out of the corporation. They argued that the wrongful conduct established as a matter of law that defendants engaged in shareholder oppression. They further stated that defendants' admission that they had an obligation to buy the minority shareholders shares at fair value, which did not include discounts for marketability or lack of control, established that the trial court had to order a buyout at fair value with no discounts.

         Defendants argued in opposition to plaintiffs' motion for partial summary disposition that the evidence showed that, at the very least, whether defendants acted with sound business judgment when they elected not to distribute dividends was a contested matter. They also maintained that whether Burr Oak had sufficient reserves to pay dividends was a contested matter. They supported their position with another affidavit by Brian McConnell in which he made averments concerning the financial condition of Burr Oak during 2012 and 2013 and its ability to pay dividends.

         Plaintiffs filed a brief in opposition to defendants' motion for summary disposition and moving for summary disposition of their claim for shareholder oppression under MCR 2.116(1) on July 21, 2014. In part, plaintiffs argued and presented evidence that LeeAnn McConnell, contrary to her affidavit, did play a significant role in the management of Burr Oak as part of the controlling family faction. As for the claim that defendants had not engaged in any oppressive conduct, plaintiffs argued that the evidence showed that defendants implemented an aggressive stock redemption program in which they offered an unfair price after deliberately manipulating and misrepresenting the fair value of the stock. They made the offer after wrongfully withholding dividends in order to bully the minority shareholders into accepting a suppressed value. Plaintiffs presented evidence that the obligations that Burr Oak had arising from Newell A. Franks's estate ended in mid-2012, and that Burr Oak had significant cash reserves with which to both expand its operations and pay a significant dividend. This evidence, they maintained, showed that defendants were not in fact withholding dividends for a legitimate reason.

         The trial court held a hearing on the various motions that were before it on December 1, 2014. The trial court started the hearing by stating that it would deny defendants' motion for summary disposition because there were "issues that do suggest that there was infringement of the minority shareholders." It went on, however, and stated that it found "infringement of the minority shareholders' rights." The trial court indicated that it was unsure what the remedy should be and stated that it wanted input from an independent expert to determine how to remedy the situation. The trial court stated that it wanted the parties to agree on an expert but said that it would appoint one if they could not agree. The trial court also said that it would thereafter set a date for a two-day hearing to address the remedy. When asked to clarify its ruling, the trial court indicated that it was not granting plaintiffs' motion "just yet" on the issue of liability. But it also stated that it was not sure whether there were issues of material fact on plaintiffs' motion for partial summary disposition. On December 3, 2014, the trial court entered an order denying defendants' motion for summary disposition and reserving its ruling on the remaining motion. As pertinent to this appeal, the court subsequently instructed the parties to brief an appropriate remedy for shareholder oppression and indicated that it did not think that dissolution was a proper remedy.

         As pertinent to this appeal, the trial court subsequently held a hearing on October 21, 2016 to consider plaintiffs' original motion for partial summary disposition. The trial court surveyed the evidence indicating that the controlling shareholders were not in fact dealing fairly with the nonvoting shareholders. On the basis of that evidence, it then found "that there has been suppression of the minority shareholder[]." For that reason, the trial court stated, it would grant plaintiffs' motion for summary disposition. The trial court determined that the appropriate remedy was to compel the corporation to buy the nonvoting members' shares at a price to be determined after an evidentiary hearing. Defendants moved for reconsideration in November 2016. As they had throughout the pendency of the lower court proceedings, defendants stated their belief that the trial court could not find oppression and select a remedy without holding an evidentiary hearing. The trial court denied the motion for reconsideration in January 2017.

         A trial on the issue of plaintiffs' remedy was held on May 2, 2017. Plaintiffs' expert certified public accountant, Thomas Frazee, testified generally about his valuation of Burr Oak. He opined that plaintiffs' shares in Burr Oak were worth $26, 826, 736. After Frazee testified, plaintiffs rested and defendants moved for a directed verdict. They argued that Frazee's testimony and report were insufficient to establish the value of plaintiffs' shares because he did not discount the value for marketability. The trial court denied the motion. Brian McConnell testified for the defense and stated that he had worked for Burr Oak for 26 years. He was Burr Oak's President and Chief Operating Officer. He stated that the three classes of stock came into being because Newell A. Franks wanted to create different classes to transfer as gifts for dividend purposes. The individuals who owned the voting shares ended up purchasing those shares whereas the other classes were all gifts. Although they often referred to the nonvoting shareholders as the "minority shareholders, " the holders of the Class B and C shares actually owned 52% of the company. Newell A. Franks established the Class B and C shares in the 1980s so that he could pay dividends to those whom he gifted Class C shares without paying himself a dividend as the owner of the Class B shares.

         Brian McConnell stated that, in 2006, before he died in 2007, Newell A. Franks sold his voting shares for $280 per share. The highest price ever requested for shares of Burr Oak was $356.22 per share, which was substantially less than the $712 per share calculated by Frazee. Brian opined that the company was not worth $50 million. He stated his belief that Burr Oak would be vulnerable if it became highly leveraged. The trial court, however, precluded him from testifying about the debt load that Burr Oak might be able to carry. Michael Oliphant testified on behalf of the defense as an expert certified public accountant. He opined that plaintiffs' shares were worth $398 per share. He, however, discounted the shares for marketability. The mathematical value based on the company's valuation would be $632 per share.

         The trial court held a hearing to state its ruling on July 25, 2017. The trial court adopted plaintiffs' proposed findings of fact and found that plaintiffs' shares were worth $712 per share. The trial court specifically held that it could not apply a discount to lower the fair value of the shares. The trial court subsequently signed an order requiring Burr Oak to purchase plaintiffs' shares within two years for $712 per share. The trial court's order provided that Burr Oak would pay equitable interest and plaintiffs' attorney fees as well. The trial court entered a stipulated order dismissing plaintiffs' remaining claims without prejudice on December 28, 2017. It further provided that its order requiring redemption would be stayed pending defendants' appeal. The trial court entered an order dismissing plaintiffs' remaining claims with prejudice on March 27, 2018. Defendants now appeal as of right.

         II. ANALYSIS

         We review de novo a trial court's decision on a motion for summary disposition. Barnard Mfg Co, Inc v Gates Performance Engineering, Inc, 285 Mich.App. 362, 369; 775 N.W.2d 618 (2009).

A motion under MCR 2.116(C)(10) tests the factual sufficiency of the complaint. In evaluating a motion for summary disposition brought under this subsection, a trial court considers affidavits, pleadings, depositions, admissions, and other evidence submitted by the parties, MCR 2.116(G)(5), in the light most favorable to the party opposing the motion. Where the proffered evidence fails to establish a genuine issue regarding any material fact, the moving party is entitled to judgment as a matter of law. MCR 2.116(C)(10), (G)(4). Quinto v Cross & Peters Co, 451 Mich. 358; 547 N.W.2d 314 (1996). [Maiden v Rozwood, 461 Mich. 109, 120; 597 N.W.2d 817 (1999).]

         In considering a motion for summary disposition, the trial court is not permitted to "weigh the evidence or make determinations of credibility[.]" Innovative Adult Foster Care, Inc v Ragin, 285 Mich.App. 466, 480; 776 N.W.2d 398 (2009). When opposing a properly supported motion for summary disposition under MCR 2.116(C)(10), the nonmoving party cannot rely on mere allegations or denials in his or her pleadings to establish a question of fact. Quinto, 451 Mich. at 362. Rather, the nonmoving party must present evidence that establishes that there is a genuine issue of disputed fact on the issue raised by the moving party. Id. "A genuine issue of material fact exists when the record, giving the benefit of reasonable doubt to the opposing party, leaves open an issue upon which reasonable minds might differ." West v Gen Motors Corp, 469 Mich. 177, 183; 665 N.W.2d 468 (2003).

         This Court reviews de novo whether the trial court properly interpreted and applied the relevant statutes and court rules. Brecht v Hendry, 297 Mich.App. 732, 736; 825 N.W.2d 110 (2012).

         A. THE CREDIBILITY EXCEPTION TO SUMMARY DISPOSITION

         Defendants rely on the decision in White v Taylor Distrib Co, Inc, 275 Mich.App. 615; 739 N.W.2d 132 (2007), aff d 482 Mich. 136 (2008), and indirectly on the decision in Vanguard Ins Co v Bolt, 204 Mich.App. 271; 514 N.W.2d 525 (1994), for the proposition that a reviewing court cannot grant summary disposition on a claim, such as the one stated under MCL 450.1489, when the claim involves motive or intent as an element. These decisions appear to state a rule that summary disposition cannot be granted when an essential element of the claim or defense involves motive or intent. The majority in White, for example, stated that the grant of summary disposition is " 'especially suspect where motive and intent are at issue or where a witness or deponent's credibility is crucial' " White, 275 Mich.App. at 625, quoting Vanguard, 204 Mich.App. at 276. However, if those statements are accepted at face value, summary disposition would rarely be appropriate because one could almost always argue that a finder of fact might disbelieve a witness's testimony involving an essential element of a claim or defense. A review of the authorities, however, shows that Michigan does not apply a rule precluding summary disposition whenever a claim or defense involves an individual's motive or intent.

         The majority of the decisions citing a credibility exception to the grant of summary disposition, such as the one described in White, trace their origin to the plurality opinion by Justice SOURIS in Durant v Stahlin, 375 Mich. 628; 135 N.W.2d 392 (1965). See, e.g., White, 275 Mich.App. at 625, citing Vanguard, 204 Mich.App. at 276, citing Metro Life Ins Co v Reist, 167 Mich.App. 112, 121; 421 N.W.2d 592 (1988), citing Brown v Pointer,390 Mich. 346, 354; 212 N.W.2d 201 (1973), citing Durant, 375 Mich. at 647-648. In Durant, a Republican politician, Richard Durant, sued several other Republicans, including Richard Van Dusen, Arthur Elliott, and George Romney, for allegedly trying to prevent his re-election through improper methods, including a conspiracy that led to libel against him. Id. at 634-635 (opinion by ADAMS, J.). Durant produced proofs showing that a letter was published in newspapers with the signature of John H. Stahlin, which accused Durant of being the leader of an extremist group that resorted to bribery and threats of physical violence, among other things. Id. at 636. Van Dusen, Elliott, and Romney moved for summary disposition under the prior court rules ...