ERNEST LANE, III, AND TRUSTMARK NATIONAL BANK, CO-EXECUTORS OF THE ESTATE OF JAMES OLDRUM SMITH, JR. APPELLANTS
RONALD D. LAMPKIN APPELLEE
DATE OF JUDGMENT: 03/19/2013
WARREN COUNTY CHANCERY COURT TRIAL JUDGE: HON. GEORGE WARD
ATTORNEYS FOR APPELLANTS: HARRIS H. BARNES III J. WILLIAMS JANOUSH
ATTORNEYS FOR APPELLEE: DAVID W. MOCKBEE LANDMAN TELLER JR. DAVID WESLEY MOCKBEE COLEMAN MCCANN MOCKBEE
BEFORE LEE, C.J., CARLTON AND MAXWELL, JJ.
¶1. This case addresses the valuation of a corporation and the related award of damages when one of the corporation's two shareholders dies and the remaining shareholder begins a new corporation to operate the same rock-supply business. In the present case, Limestone Products Incorporated had only two shareholders, Ronnie Lampkin and J.O. Smith Jr. Prior to Smith's death, Limestone operated for ten years with a line of credit personally guaranteed by both shareholders. However, upon Smith's death, his estate (the Estate) refused Lampkin's request to extend a guarantee for Limestone's credit line beyond December 2006. Due to the Estate's refusal to extend the credit line, Limestone lacked the ability to operate and to meet its obligations beyond December 2006. In January 2007, Lampkin began a new corporation, Delta Stone, which conducted the same rock-supply operations previously provided by Limestone.
¶2. Giving rise to the instant appeal, Lampkin filed a complaint for a declaratory judgment against Ernest Lane III and Trustmark National Bank, as co-executors (the Executors) of the Estate. Lampkin requested that the Warren County Circuit Court declare the following: that he possessed the right to independently invest in and operate a rock-supply business; that he violated no corporate fiduciary duties to Limestone; that he possessed the right to continue to sell Limestone's existing inventory; and that he possessed the right to continue to collect Limestone's accounts receivable and apply them to the corporation's debts. The circuit court transferred the matter to chancery court. The chancellor found that Lampkin breached his fiduciary duty of loyalty by usurpation of a corporate opportunity when he started Delta Stone in January 2007, which operated the same rock-supply business and served the same function as Limestone.
¶3. After determining liability based on Lampkin's breach of his fiduciary duty of loyalty and his usurpation of a corporate opportunity, the chancellor then addressed and awarded damages for the offending conduct. In so doing, the chancellor determined that, even after establishing a new corporation and borrowing $400, 000, Lampkin continued to fulfill a contract initiated with Limestone and to ensure that the profits went to Limestone. The chancellor also determined that Lampkin credited Limestone with rock purchased or delivered to Limestone. After reviewing the evidence, including differing testimony from the parties' experts in business valuation, the chancellor awarded damages by considering Limestone's net value as of December 31, 2006, and December 31, 2007, less expenses, but with the added value of the remaining corporate assets, such as an aged front-end loader and a heating and air-conditioning unit.
¶4. Upon appellate review, we find that the chancellor's analysis was supported by evidence in the record. In calculating the award of damages, the chancellor relied on expert opinions and financial reports to assess the corporation's net book value and its total net income for 2008 through 2012. The chancellor determined the corporation's total net book value to be $125, 546.32. Based on the information provided, the chancellor also found Limestone's average net income to be $20, 914, which amounted to a total net income of $104, 570 for 2008 through 2012. However, on appeal, the Executors seek lost profits instead of lost income.
¶5. In the court below, the Executors also sought attorneys' fees and expert-witness fees, but the chancellor denied the request for fees, finding that Lampkin acted without malice or gross negligence and did not co mm it fraud. The chancellor found that, even though Lampkin usurped a corporate opportunity, Lampkin believed Limestone could not operate without the line of credit. The chancellor also found credible Lampkin's testimony that the Estate refused to cooperate with guaranteeing the line of credit. The chancellor further found that Lampkin acted in the interest of Limestone by completing the corporation's contracts and accounting for its profits and debts.
¶6. The Executors now appeal the judgment rendered by the Warren County Chancery Court in assessing damages owed to the Estate for Lampkin's breach of fiduciary duty and usurpation of a corporate opportunity. The Executors appeal the award of damages by raising the following issues: (1) whether the chancellor erred by admitting and relying on testimony from Lampkin's expert; (2) whether the chancellor properly assessed the amount of damages due to the corporation; and (3) whether the chancellor erred by refusing to award attorneys' fees and expert-witness fees. Finding no error in the chancellor's ruling, we affirm.
¶7. In 1995, Lampkin and Smith formed Limestone, which they operated on land they jointly owned in Warren County. Lampkin and Smith each owned a one-half interest in the corporation, which bought and sold rocks. Lampkin also owned Lampkin Construction, which became one of Limestone's biggest customers.
¶8. For ten years, Limestone operated on a line of credit personally guaranteed by both Lampkin and Smith. The line of credit was set to expire in September 2006. In August 2006, Smith died, and his stock in the corporation and his interest in the real property transferred to the Estate. Prior to the expiration of Limestone's line of credit, Lampkin secured an extension until December 8, 2006, to provide the Estate with time to determine whether it would guarantee the loan. Between September 2006 and December 2006, the parties discussed renewing the line of credit. However, the Estate failed to provide a guarantee before the deadline. Lampkin then formed a new corporation, Delta Stone, which began operating in January 2007. Delta Stone performed the same functions as Limestone, and through his new company, Lampkin completed Limestone's contracts and satisfied its debt obligations.
¶9. Lampkin filed a lawsuit against the Executors in Warren County Circuit Court. Lampkin asked the circuit court to find the following: (1) that Lampkin had the right to independently invest in and operate a rock-supply business; (2) that he was not in violation of his fiduciary duties as a director and officer of Limestone; (3) that he possessed the authority as an officer of Limestone to continue to sell the corporation's existing inventory, collect accounts receivable, and apply the monies received to the corporation's debt; and (4) that he should receive compensation for his actions and should be paid interest on any monetary advances made on the corporation's behalf. The Executors filed a counterclaim against Lampkin for present and future profits the corporation lost due to Lampkin's actions and for attorneys' fees. Lane, one of the co-executors, also filed a motion to transfer the matter to Warren County Chancery Court.
¶10. The circuit court judge entered an order finding the matter to be proper for a declaratory judgment. Further finding that the chancery court possessed proper jurisdiction over the subject matter of the declaratory-judgment action, the circuit court judge granted the motion to transfer the matter to chancery court. In an order entered by the Warren County Chancery Court, all the chancellors recused themselves from the case, and the Mississippi Supreme Court appointed a special judge to preside over the proceedings. Several of Smith's beneficiaries filed a motion to intervene in the lawsuit, which the specially appointed judge granted.
¶11. Lampkin filed a motion for separate trials on the issues of liability and damages. He also asked the chancellor to stay discovery on damages pending the outcome on the trial as to liability. The chancellor granted Lampkin's motion and bifurcated the trial. The chancellor held a hearing on the issue of liability in November 2009. The main issue before the chancery court was whether Lampkin breached his fiduciary duty to Limestone by usurping a corporate opportunity when he started Delta Stone. In determining whether Lampkin breached his fiduciary duty to Limestone, the chancellor considered the following: (1) whether the business opportunity was "reasonably related to the existing or prospective business activities of the corporation"; and (2) whether the corporation had the financial ability to seize the opportunity. See Aqua-Culture Tech. Ltd. v. Holly, 677 So.2d 171, 183 (Miss. 1996) (Mississippi courts apply a two-part test to determine whether a party has established a prima facie case of conflict of interest arising from a business opportunity in question being a corporate opportunity).
¶12. In his order, the chancellor noted Lampkin's concession that the business ventures and activities of Delta Stone and Limestone were the same. The chancellor further noted that Delta Stone operated on the same property as Limestone, used the same facilities and equipment as Limestone, and sold rock to the same customers as Limestone. In determining whether Limestone had the financial ability to seize the corporate opportunity, the chancellor noted that "[t]here is no dispute amongst the parties that the bank would not renew the line of credit without the personal guarantees of both the Estate and Lampkin." The chancellor continued:
From a review of the documentary evidence, and from listening to the testimony of the parties and their experts, the [c]ourt is not convinced that Limestone could function without the need for the line of credit. However, the [c]ourt is also not convinced that the Estate was given ample information or time to decide whether [it] wanted to renew the line of credit.
¶13. In reaching a determination as to Lampkin's liability, the chancellor considered the events that occurred between Smith's death in August 2006 and the December 2006 deadline for renewing the line of credit. W ithin his discussion of these events, the chancellor provided a summary of the correspondence exchanged by the parties. After reviewing the evidence, the chancellor found that Lampkin failed to timely provide financial information to the Estate and to give the Estate ample time to review Limestone's corporate records. As noted in the chancellor's order, the Estate requested this information to decide whether to provide a guarantee for Limestone's line of credit, and without the requested information, the Estate was unable to make an informed decision prior to the line of credit's expiration.
¶14. The chancellor stated that, if the line of credit was crucial to operating Limestone, then Lampkin, who was aware of the upcoming deadline, possessed a fiduciary duty to Limestone to cooperate with the Estate to meet the deadline. The chancellor found that Lampkin's failure to timely provide the necessary financial information to the Estate prevented him from prevailing in his argument that the Estate's failure to renew the line of credit relieved him of any further fiduciary duty to Limestone. According to the chancellor, "[t]he Estate should have been provided more time to make the determination [of whether to guarantee the line of credit], even if that meant allowing the line to mature and letting the line sit for a few more weeks or months while Limestone's documents were inspected."
¶15. Although Limestone's balance sheets showed the corporation to be solvent, the chancellor noted that the corporation apparently lacked "a substantial amount of equity with which to continue on with the business." The chancellor found that the line of credit had been Limestone's primary source of funds with which to purchase inventory for the past ten years. He therefore agreed with Lampkin that, without the guaranteed line of credit, Limestone could not continue to operate. The chancellor found that Lampkin was an officer and director of Limestone and thus owed a fiduciary duty to the corporation. By forming Delta Stone, Lampkin breached his fiduciary duty to Limestone. In addition, the chancellor found that Lampkin's failure to timely provide the Estate with the requested financial information hindered Limestone's financial ability to continue its business operations. As a result, the chancellor granted the Executors' motion to dismiss and denied Lampkin's request for declaratory relief.
¶16. Following the chancellor's ruling that Lampkin breached his fiduciary duty to Limestone by starting Delta Stone and usurping a corporate opportunity, the parties presented evidence as to the damage that resulted from Lampkin's breach of duty. Both parties hired an expert to testify as to the valuation of Limestone. Lampkin hired Brent Saunders, and the Executors hired James Koerber. The chancellor accepted both experts as certified public accountants and experts in the field of business valuation.
¶17. After considering both experts' testimony, as well as the testimony provided by Lane and Lampkin, the chancellor entered his findings of fact. The chancellor stated that any damages owed by Lampkin should be paid to Limestone rather than to individual shareholders. As part of his analysis, the chancellor considered the profits Lampkin made because of the usurpation; Limestone's assets; both Limestone's and Delta Stone's income and profit; and the debts and other expenses associated with the operation of both Limestone and Delta Stone. The experts' testimony varied greatly as to the proper valuation for Limestone, and the chancellor found that the experts were "just splitting hairs" and getting "bogged down" in an argument over the proper terminology to describe Limestone's valuation. The chancellor stated, "Whether you call it asset based or net book value or lost profits, this [c]ourt is merely concerned with how and when to value this business." ¶18. With regard to damages, the Executors claimed that the Estate w as entitled to one-half of the lease payments owed to Limestone since 2007. While the chancellor found that the lease was still in effect, he also noted Lampkin's testimony that no lease payments had been made in five years. In addition, the chancellor found that, as the only two shareholders of Limestone, Lampkin and Smith w ere equally responsible for any lease payments and equally entitled to one-half of any lease proceeds. He therefore found that the issue "create[d] a wash."
¶19. The chancellor next considered testimony by Koerber, the Executors' expert, that 649, 203 tons of rock purchased by Limestone was diverted from the corporation's accounting system and remained unreported. The chancellor found that Lampkin and his expert,
Saunders, accounted for this allegedly unreported rock in their testimony. As to this issue, the chancellor stated the following:
The [c]ourt does not find merit in the argument of the Estate and its expert as it relates to "unreported rock." The business was a closely held business where rock was delivered to different locations and was billed on occasion to Lampkin himself. Saunders and Lampkin were able to readily account for the alleged unreported rock. Therefore, the [c]ourt will not take into consideration any purported "unreported product." The [c]ourt does not find that this constitutes "lost profits" of the businesses.
¶20. The chancellor next looked at the actual profit of Limestone and Delta Stone as reported in the companies' financial records. He found the following:
There is no question, from the testimony of the parties, of the inability of the parties to get along, and therefore, the Estate and Lampkin would not have continued to do business together for a prolonged period of time [after Smith's death]. If the [c]ourt were to carry its business assessment forward to the year 2012, based on the financial records of both companies, the [c]ourt would merely be placing a net loss in the hands of the corporation. A corporation is responsible for not only the profits of a business, but also the liabilities. . . . [T]here is no doubt from the financial records of the business that Limestone . . . relied heavily on an operating line of credit and was never all that profitable. It is the opinion of the [c]ourt that an award of damages after 2007 would be more equitable were the [c]ourt to look to past performance of Limestone . . . . Taking into consideration the value of the business as of December 31, 2007, the [c]ourt agrees with the findings made by Saunders in "Exhibit L" to his expert report. In this exhibit[, ] Saunders takes the value of the year[-]end net book values for 2006 and 2007 and backs out all expenses, all erroneously placed personal expenses of Lampkin[, ] as well as accounts receivable from the partners. After deductions, Saunders added the value of the corporation's remaining assets . . . . He arrived at a total net book value of $125, 546.32.
¶21. In determining Limestone's lost profits since January 1, 2008, the chancellor found "historical lost net profits" to be an appropriate method for assessing damages. The chancellor began his analysis with Koerber's average-net-income figure of $20, 914 for the years 2000 through 2007. The chancellor then multiplied this amount by five, which accounted for each year in the disputed period from 2008 through 2012. This calculation amounted to a total net income of $104, 570 for 2008 through 2012. Adding the sum of these historical costs to the net book value of $125, 546.32 provided by Saunders, the chancellor concluded that the total damages owed to Limestone amounted to $230, 116.32. The chancellor also ordered that the Estate, as one of Limestone's two shareholders, would receive $115, 058.16, which amounted to half of the total damages awarded to Limestone.
¶22. After determining the damages owed to Limestone, the chancellor next considered the Executors' claim for attorneys' fees and expert-witness fees. Although Lampkin usurped a corporate opportunity, the chancellor found that the parties and their attorneys had repeatedly corresponded in the several months after Smith's death and prior to the expiration of the line of credit. Therefore, the chancellor found that the Estate was well aware of Limestone's situation. The chancellor also noted Lampkin's belief that Limestone could not continue to operate without the line of credit, as well as Lampkin's efforts in completing Limestone's contracts and keeping the profits from Limestone separate from Delta Stone's profits. Based on the evidence presented, the chancellor found that Lampkin's actions failed to show malice or gross negligence or that he committed fraud. The chancellor therefore denied the request for attorneys' fees. Aggrieved by the chancellor's judgment, the Executors now appeal to this Court.
STANDARD OF REVIEW
¶23. When supported by substantial evidence, a chancellor's findings of fact will not be disturbed on appeal unless the chancellor abused his discretion, was manifestly wrong, was clearly erroneous, or applied an erroneous legal standard. Biglane v. Under the Hill Corp., 949 So.2d 9, 13-14 (¶17) (Miss. 2007). As the reviewing court, we examine the entire record and accept as true all "evidence which supports or reasonably tends to support the findings of fact made below, together with all reasonable inferences which may be drawn therefrom and which favor the lower court's findings of fact. That there may be other evidence to the contrary is irrelevant." Par Indus. Inc. v. Target Container Co., 708 ...