Phillips Brother v. Winstead

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Docket Number: 2011-CA-01846-SCT
Linked Case(s): 2011-CA-01846-SCT

Supreme Court: Opinion Link
Opinion Date: 01-09-2014
Opinion Author: Waller, C.J.
Holding: Reversed, remanded in part, and rendered in part.

Additional Case Information: Topic: Fraud - Breach of fiduciary duty - Corporate freeze-out - Slander per se - Oral agreement - Parol extrinsic evidence - Admission of evidence - Personal knowledge of tax returns - Motion to compel discovery
Judge(s) Concurring: Dickinson and Randolph, P.JJ., Lamar, Kitchens, Chandler, Pierce, King and Coleman, JJ.
Procedural History: Jury Trial

Trial Court: Date of Trial Judgment: 09-22-2011
Disposition: Jury awarded Winstead compensatory damages in the amount of $1,160,000 and punitive damages against Simmons of an additional $100,000. The court also awarded Winstead attorneys' fees and costs in the amount of $464,923, bringing total judgment against Harry Simmons and Phillips Brothers to $1,724.923.
Case Number: 2009-CI58

  Party Name: Attorney Name:  
Appellant: Phillips Brothers, Kilby Brake Fisheries, LLC and Harry Simmons




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Topic: Fraud - Breach of fiduciary duty - Corporate freeze-out - Slander per se - Oral agreement - Parol extrinsic evidence - Admission of evidence - Personal knowledge of tax returns - Motion to compel discovery

Summary of the Facts: Kilby Brake Fisheries, LLC, was formed as a catfish hatchery and farm. An operating agreement was signed by the three members–Harry Simmons, Phillips Brothers, LP, and Ray Winstead. The agreement provided each member a one-third percent ownership stake in Kilby Brake. All members signed bank loans as guarantors. The loans were one in the amount of $300,300 (for the purchase of inventory), one in the amount of $201,040 (the purchase of equipment), and one in the amount of $300,900 (revolving line of credit to be used for operating expenses). Phillips and Simmons purchased an adjacent catfish farm (“the Wise Place”) to be used to support the Kilby Brake operation. The members agreed that Winstead would be the hatchery operator and, for his work, he would receive $30,000 per year from Kilby Brake and use of a company truck, and Kilby Brake would pay for his and his family’s housing on the farm, utilities, and health insurance. Winstead, as hatchery operator, was subject to the direction of Simmons, serving as the manager under the operating agreement. Kilby Brake was profitable for only two of the almost eight years while Winstead was the hatchery operator, and Simmons fired Winstead in late 2007. Winstead filed a complaint against Kilby Brake, Harry Simmons, Chat Phillips, Simmons Farm Raised Catfish, Inc., Five Mile Fisheries, Inc., and H.D. Simmons Corp., alleging that Simmons and Phillips Brothers had failed to pay him his agreed-upon salary, asserting claims of fraud, breach of fiduciary duty, corporate freeze-out, conversion, slander, slander per se, and tortious interference with business relations. He also requested an accounting and dissolution of the LLC. Simmons, Phillips and Kilby Brake filed counterclaims against Winstead asserting theft, conversion, usurpation of corporate opportunities, tortious interference with business relations, conversion, theft by deception, breach of contractual and fiduciary duties, and unjust enrichment. They requested replevin and judicial dissolution. The trial court granted Winstead’s motion to dismiss the claims of tortious interference with Kilby Brake’s business relations and claims that were barred by the three-year statute of limitations. After trial, the jury awarded Winstead compensatory damages in the amount of $1,160,000 and punitive damages against Simmons of an additional $100,000. The court also awarded Winstead attorneys’ fees and costs in the amount of $464,923, bringing the total judgment against Harry Simmons and Phillips Brothers to $1,724,923. Further, the court awarded post-judgment interest at a rate of eight percent. The jury denied three of defendants’ four counterclaims–theft, unjust enrichment, and breach of fiduciary duty. Kilby Brake prevailed on its replevin counterclaim, and the jury ordered that Winstead return the company truck to Kilby Brake. The defendants appeal.

Summary of Opinion Analysis: Issue 1: Oral agreement The trial court allowed Winstead to testify about an alleged oral agreement. Winstead asserted that Simmons and Phillips Brothers had agreed to provide $600,000 in paid-in capital from cash contributions for the purchase of the startup equipment and fish inventory. The defendants argue that the court erred in allowing this testimony. Parol extrinsic evidence is not admissible to add to, subtract from, vary or contradict written instruments, contractual in nature, and which are valid, complete, unambiguous and unaffected by accident, mistake or fraud. If the language in the contract is clear and unambiguous, the intent of the contract must be effectuated. Silence alone does not necessarily create an ambiguity as a matter of law. In this case, the operating agreement is clear. It states “no member shall be required to make any capital contributions” except as provided in Schedule A. Nothing is listed in Schedule A. It is clear the language used in the Kilby Brake operating agreement is not ambiguous. Thus, it was error for the trial court to go outside the operating agreement to interpret the intent of the parties. Because the trial court never should have considered the offer to make cash contributions, the interest expense-savings portion of Winstead’s corporate freeze-out damage award also is without merit. Thus, judgment is rendered in favor of Simmons on this portion of Winstead’s freeze-out damages. Issue 2: Fraud Winstead’s theory of recovery for fraud was based on two claims. The first is that Simmons and Phillips Brothers purchased the Wise Place in their names only, with funds from Kilby Brake. The second is that money was withheld fraudulently from his salary. Simmons and Phillips Brothers argue that Winstead failed to prove all of the elements of fraud by clear and convincing evidence. In order to recover for fraud, a plaintiff must prove: a representation; its falsity; its materiality; the speaker’s knowledge of its falsity; his intent that it should be acted on by the hearer and in the manner reasonably contemplated; the hearer’s ignorance of its falsity; his reliance on its truth; his right to rely thereon; and his consequent and proximate injury. The record contains no evidence that Kilby Brake funds were used to purchase the Wise Place. Further, Winstead’s mere assertion that he thought Kilby Brake owned the Wise Place is not enough to carry his burden that he was defrauded by Simmons and Phillips Brothers. Thus, the trial court erred by failing to grant defendants’ motion for JNOV for the claim of fraud surrounding the purchase of the Wise Place. The jury ruled Winstead was defrauded by Phillips Brothers and Simmons with regard to withholdings from his paycheck over the course of his employment at Kilby Brake. The record shows that Winstead admitting to making personal charges on his Kilby Brake account for some items that were indisputably personal, such as multiple deer-rifle scopes, dog food, and hunting accessories. Winstead’s damages for lost pay were based on testimony that money was taken out of all his paychecks; however, payroll records indicate that Winstead was actually paid in excess of his $30,000 annual salary for four of his eight years with Kilby Brake. What is more, Winstead admitted he had received cash advances on his paycheck and that money subsequently would be taken out to repay the advances. There is no proof of any involvement in the decision making process by Phillips Brothers regarding the execution of Winstead’s checks. Thus, there is no evidence at all that Phillips Brothers fraudulently withheld pay from Winstead’s salary. With regard to Simmons, Winstead admitted at trial that he knew deductions were taken from his paycheck for cash advances and for personal charges he made on his Kilby Brake account. Although Winstead disagreed that some of the charges were personal in nature, there was no dispute that he was aware Simmons was making deductions. There is no clear and convincing evidence in the record that any pay shortage which may have occurred was caused by a fraudulent representation made by Simmons upon which Winstead relied. Thus, the judgment against Simmons for fraud with regard to withheld pay is reversed. However, Kilby Brake may be liable to Winstead for any improper deductions from Winstead’s pay that may have occurred, or Winstead may be liable to Kilby Brake if it is shown he still owes money to Kilby Brake for charges made on his account. Winstead’s own testimony, coupled with other evidence in the record, provides overwhelming evidence, based upon which no reasonable and fair-minded juror in the exercise of fair and impartial judgment could award Winstead the full amount that he alleged was taken from each of his paychecks. This issue is reversed and remanded for a new trial. Issue 3: Corporate freeze-out A freeze-out of the minority shareholders by the majority occurs when the majority purposefully denies the minority member from sharing proportionally in corporate earnings or gains. Although the jury instructions used at trial in this case state there are “elements” to the corporate freeze-out cause of action, no specific elements were set out. Corporate freeze-out is an intentional tort that is committed with willful and wanton disregard for the right of the shareholder who is frozen out. In order to prove a claim of corporate freeze-out, the plaintiff must establish: the existence of a legally defined duty owed to or right of a minority shareholder arising out of his or her ownership interest in a corporation; the intentional or willful breach of that duty by the majority or controlling shareholder(s); that the breach proximately caused plaintiff’s direct injury; and the fact and extent of injury. The court must look to the parties’ agreements and applicable state law. In the case of Kilby Brake, LLC, that would be applicable caselaw, the Kilby Brake operating agreement, and the March 2000 version of the Mississippi Limited Liability Company Act. In his argument for freeze-out, Winstead alleged Simmons and Phillips Brothers took actions to exclude Winstead from his ownership interest in Kilby Brake without justification and in willful disregard of Winstead’s rights. The jury found only Simmons guilty of freezing out Winstead. There is nothing in the record that would lead to the conclusion that Winstead could participate in Kilby Brake as a managing shareholder. Further, Simmons, as the only manager of Kilby Brake, did not use his control of Kilby Brake to violate any terms of the operating agreement, thereby breaching the duty he owed to Winstead. Thus, Winstead’s argument that he was frozen out of the LLC because he was denied participation as “a true managing shareholder” in the company is without merit. There is nothing in the Kilby Brake operating agreement that could be construed as guaranteeing Winstead employment with Kilby Brake. Simmons had designated authority as manager to terminate Winstead. Though not required, Simmons had several arguable causes to fire Winstead. Thus, Simmons presented sufficient evidence to show he acted pursuant to a legitimate business purpose, and Winstead’s firing did not, by itself, constitute a freeze-out of his interest. Winstead never presented any evidence to show he was denied access to Kilby Brake’s offices and records or that he even attempted to “inspect, copy, and audit” the records at his own expense, which, under the operating agreement, he had a right to do without notice to Simmons. However, as manager and keeper of the records, Simmons also had a duty under the operating agreement to furnish his other partners with balance sheets for each accounting period, which he admittedly did not do for Winstead once he was fired. Although Simmons arguably breached his duty to Winstead by not providing the balance sheets to him, Winstead did not present any evidence on how these acts damaged him. And Simmons eventually delivered the voluminous documents to Winstead’s accountant prior to filing suit. Winstead received damages on his mismanagement claim in both his award for freeze-out and breach of fiduciary duty. It is clear from his amended complaint and the jury instruction at trial that these allegations are better viewed as a derivative claim on behalf of Kilby Brake and not a direct cause of action for corporate freeze-out. The derivative claims were tried by implied consent. Winstead claimed the mismanagement of Kilby Brake factored into his freeze-out. Thus, this claim is reviewed in light of the elements for corporate freeze-out, which necessarily include proving the conduct complained of was willful and wanton and that it proximately caused individual damages. Winstead presented evidence that, in the year following his term as hatchery operator, Kilby Brake’s sales decreased by seventy-six percent, from $756,451.64 in 2007 to $181,146.44 in 2008. None of the parties disputes that sales were low in 2008 and, of course, each side blames the other. To carry his claim for corporate freeze-out, Winstead was required to demonstrate that Simmons intentionally and willfully used his control of Kilby Brake in 2008 in a way that harmed Winstead individually. Winstead failed to prove that Simmons “willfully and wantonly” mismanaged Kilby Brake in a manner that harmed Winstead alone. Thus, the judgment of corporate freeze-out against Simmons is reversed and rendered. Issue 4: Breach of fiduciary duty The jury found both Simmons and Phillips Brothers breached a fiduciary duty they owed to Winstead and awarded him $395,000. Simmons and Phillips Brothers argue that they did not breach a duty owed to Winstead or, in the alternative, Winstead’s damages were speculative and amounted to a double recovery. Simmons, as manager, owed a fiduciary duty to the other members of Kilby Brake. However, the operating agreement also indemnified Simmons from any actions he took on behalf of Kilby Brake as long as he “conducted himself in good faith” and reasonably believed “his conduct was in [Kilby Brake’s] best interest.” Thus, for Winstead to succeed on his claim that Simmons’s mismanagement of Kilby Brake in 2008 breached the fiduciary duty Simmons owed Kilby Brake, he must first establish that Simmons was at the very least in breach of the Kilby Brake operating agreement. Phillips Brothers was never involved in decision-making in the day-to-day operations of Kilby Brake. Although as co-members of Kilby Brake, each party owed a fiduciary duty to the other, Winstead presents no evidence that this duty was breached by Phillips Brothers with regard to the mismanaged assets in 2008. Thus, a decision in favor of Phillips Brothers is rendered on this claim. Simmons, as manager of Kilby Brake, owed a duty to Winstead even after he was fired. Winstead received one third of the value of his interest in Kilby Brake as calculated by his expert in his damages for corporate freeze-out. This calculation included one third of the value of the missing fish sales from 2008. Winstead received the other two-thirds of the value of the missing fish sales in his damages for breach of fiduciary duty. Due to the numerous errors in Winstead’s expert’s valuation of what Kilby Brake was worth and the amount of the missing fish sales and because Kilby Brake also was improperly limited in its discovery and cross-examination of Winstead, the claim of breach of fiduciary duty is reversed and remanded for a new trial. The expert erroneously used the alleged promise of cash contributions at the formation of the LLC and cumulative interest savings to help determine a faulty starting value of Kilby Brake. The expert’s valuation of the total amount of lost profits from missing fish sales failed to account for items such as overhead, labor, taxes, or debt. The valuation simply calculated the gross amount of missing fish sales. The expert’s calculations were purely speculative in nature and artificially inflated the value of Kilby Brake. Issue 5: Admission of evidence During discovery, Winstead produced his tax returns from 2006 to 2009 which showed substantial income as coming from the Winstead Cattle Company. The trial court denied Kilby Brake’s motion to compel discovery into Winstead’s finances. While cross-examining Winstead, counsel for Kilby Brake began to question him about the two Forms 1099 Winstead had produced in discovery showing income from a fish farmer named Scott Kiker. The trial court ruled Winstead did not have personal knowledge of the returns and thus, the returns were inadmissable hearsay. Kilby Brake’s attorney made a proffer that he would have questioned Winstead on where the income from Kiker appeared on his income tax return and whether it was indicated under the Winstead Cattle Company entry, because Winstead already had testified Winstead Cattle Company did no business and was merely a hunting camp. Kilby Brake was questioning Winstead about his own tax return. The signature line of the federal income tax return, Form 1040, states that, under the penalty of perjury, the signer has examined the return and believes it to be true and complete. Further, any information used by Winstead’s accountant in calculating Winstead’s income tax return would have come from Winstead. Thus, the trial court’s decision not to allow Kilby Brake to cross examine Winstead on his tax return because he lacked personal knowledge was error. The trial court’s refusal to allow both discovery into the finances of Winstead and questions concerning Winstead Cattle Company on his tax return prevented Kilby Brake and the jury from finding out whether Winstead was selling fish from Kilby Brake and disguising it on his income tax returns, thereby prejudicing Kilby Brake’s ability to present its case. What happened to the fish inventory was central to both parties’ theories of the case. On remand, Kilby Brake should be allowed discovery into the finances of Winstead concerning outside income and specifically the stated income from Winstead Cattle Company. Issue 6: Slander per se The jury found Simmons guilty of slander per se and awarded Winstead $5,000 on this claim. Simmons argues that Winstead never presented any evidence that he made slanderous statements about Winstead prior to judicial proceedings. To prove slander, Winstead had the burden to prove: a false and defamatory statement concerning the plaintiff; unprivileged publication to a third party; fault amounting to at least negligence on the part of the publisher; and either actionability of the statement irrespective of special harm or the existence of special harm caused by the publication. When analyzing a slander claim, Mississippi courts first determine if the occasion called for a qualified privilege and if a qualified privilege does exist, the Court must then determine whether the privilege is overcome by malice, bad faith, or abuse. One of the qualified privileges protects communications between employers and their employees. Winstead asserted claims for slander and slander per se against Simmons. In his count for slander, he accused Simmons of telling members of the catfish farming community that Winstead stole fish from Kilby Brake. In his complaint for slander per se, he asserted the statements which were inherently defamatory were the statements adopted in his slander argument. The trial court granted Simmons’s motion for a directed verdict on Winstead’s slander claim but denied his motion on the slander per se claim. No witnesses testified that Simmons told them Winstead was stealing fish from Kilby Brake. The only evidence in the record of Simmons stating Winstead stole fish was when he read his deposition testimony on the stand. Although Simmons said Winstead was stealing from Kilby Brake, Winstead did not put on any proof that Simmons published these statements to third parties. Simmons’s deposition testimony was about why he fired Winstead. Further, it was in response to a question from Winstead’s attorney. Winstead bore the burden to prove by a preponderance of the evidence that Simmons published the statements to parties outside of those within the circle of privileged individuals and that these statements were indeed false. The statements of Simmons that he probably had expressed his belief to others were insufficient for Winstead to carry the burden that Simmons’s statement were published to unprivileged third parties or that they were even false. Thus, the judgment for slander per se is reversed and rendered.

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