Potthoff v. Kornegay

SANDRA J. POTTHOFF, INDIVIDUALLYAND DERIVATIVELY ON BEHALF OF RIVER CANYON, INC.,A NEBRASKA CORPORATION, AND AS PERSONAL REPRESENTATIVEOF THE ESTATE OF ELVIRA M. POTTHOFF, DECEASED, APPELLEE, v. MARIANNE K. KORNEGAY AND RIVER CANYON, INC.,A NEBRASKA CORPORATION, APPELLANTS.

No. A-19-947.

NEBRASKA COURT OF APPEALS

June 9, 2020

MEMORANDUM OPINION AND JUDGMENT ON APPEAL

(Memorandum Web Opinion)

NOTICE: THIS OPINION IS NOT DESIGNATED FOR PERMANENT PUBLICATION AND MAY NOT BE CITED EXCEPT AS PROVIDED BY NEB. CT. R. APP. P. § 2-102(E).

Appeal from the District Court for Red Willow County: RICHARD A. BIRCH, Judge. Affirmed.

Steven W. Hirsch for appellant Marianne K. Kornegay.

Terry L. Rogers for appellant River Canyon, Inc.

James R. Korth, of Reynolds, Korth & Samuelson, P.C., L.L.O., for appellee.

MOORE, Chief Judge, and RIEDMANN and PIRTLE, Judges.

MOORE, Chief Judge.

INTRODUCTION

Shareholders of a closely held family farm corporation brought an individual and a derivative action against the corporation and another shareholder, setting forth claims for an accounting, breach of fiduciary duty, tortious conversion, and shareholder's right to dissent. The claim for an accounting was dismissed prior to trial, pursuant to a summary judgment motion. The defendants brought a counterclaim, alleging fraudulent misrepresentation, fraudulent concealment, conversion, waste and mismanagement, and self-dealing. Following a bench trial, the district court for Red Willow County entered judgment in favor of the plaintiffs with respect to the claim for breach of fiduciary duty and in favor of the defendants on their claim of conversion. The defendants appealed. For the reasons set forth herein, we affirm.

BACKGROUND

River Canyon, Inc., is a family farming corporation, incorporated in 1976, by Lloyd Potthoff's mother. The shares of the corporation were subsequently transferred, so that Lloyd had 26,001 shares; his wife, Elvira Potthoff, had 26,000 shares; and their five children, Stephen Potthoff, Larry Potthoff, Darrell Potthoff, Sandra Potthoff, and Marianne Kornegay, each had 9,600 shares. Darrell has not been a stockholder since he filed a Chapter 7 bankruptcy in 1992, which resulted in his shares of stock being absorbed by the corporation.

At some point, Lloyd and Elvira began dissolution of marriage proceedings. A letter from Lloyd, addressed to "Dear Stockholders" and dated December 24, 2001, states his belief that there might be a takeover of River Canyon at the annual meeting to be held in January 2002 and that he did not have enough votes to hold off the takeover. Minutes from a board of directors meeting held on January 4, list the directors present as Elvira, Sandra, and Stephen. A motion to remove "the current slate of officers who have served since the Special Board of Directors meeting held Dec. 11, 2001," was passed. The minutes do not specify who the current officers prior to removal were. The new slate of officers elected to serve, "until the next annual meeting is called," were Elvira, President and Treasurer; Stephen, Vice President; and Sandra, Secretary. Other actions taken at the meeting included passing a resolution to notify the present listed operator of River Canyon (Lloyd and Elvira, a coproducer) that River Canyon was appointing Elvira "as operator for the proceeding years until removed by written notification to the Farm Service Agency (FSA) of Red Willow County." Notification of "the change of control" of River Canyon to appropriate service providers of the corporation was discussed, voted on, and approved.

In 2003, while the divorce was pending, Lloyd died. Elvira continued to run River Canyon after Lloyd's death. In 2004, Keith Arterburn was appointed personal representative of Lloyd's estate, of which Marianne is the sole beneficiary.

Certain orders from the Red Willow County Court in Lloyd's estate were entered into evidence in the present matter. In a 2006 order, the county court found that River Canyon had not paid real estate taxes on lands owned by it, had failed to lease the pasture ground it owned until the day of a July 13 hearing, and that waste was occurring with respect to River Canyon. In a March 2008 order with respect to an inventory in Lloyd's estate, the county court found that certain notes due from Larry and Stephen to River Canyon were uncollectable, beyond the statute of limitations, and of no value to the corporation. It determined, however, that a note from Elvira to River Canyon was an asset of the corporation. Finally, the court determined that the balance on a note from River Canyon to Lloyd was still due and payable and had a value of $36,792.85 as of the date of his death.

At some point in 2006, Arterburn filed a motion in Lloyd's estate, seeking to liquidate the assets of River Canyon. A special meeting of the corporation's board of directors was held on October 5. According to the minutes of that meeting, the directors at that time were Elvira, Stephen and Sandra. At that meeting, the board authorized filing a Chapter 12 bankruptcy as a means of preserving River Canyon's assets. A Chapter 11 bankruptcy was filed but was subsequentlydismissed. The board again authorized a Chapter 12 bankruptcy filing in November 2009. The second bankruptcy filing was dismissed as well at some point.

In 2009, Arterburn, as Personal Representative of Lloyd's estate, filed an action against River Canyon and its stockholders in the district court case (No. CI 09-70), alleging, among other things, that Elvira had been in full control of River Canyon since Lloyd died, that assets had been dissipated and wasted, that Arterburn had been unable to obtain an accounting regarding River Canyon, and that there was a deadlock in the management of the corporation. Arterburn requested relief on behalf of Lloyd's estate, including the appointment of a receiver.

On June 16, 2010, the district court entered an order in case No. CI 09-70, appointing a receiver to run the affairs of River Canyon "until such time as the affairs of the business of the corporation can be wound up." The receiver's first report to the court in that case documented Elvira's lack of cooperation and transactions she made without his approval.

On March 5, 2013, pursuant to an order from the district court in case No. CI 09-70, a special meeting of the River Canyon shareholders was held. At that meeting, a new board of directors was elected, consisting of Marianne, Sandra, and Arterburn, and newly elected officers were Marianne (President, Secretary, and Treasurer) and Arterburn (Vice President). The new board passed motions to sell all of the land owned by River Canyon and to authorize a particular company to sell the land at public auction. The board also passed corporate resolutions to offset the shares of Stephen and Larry against debts each owed the corporation (Stephen's, principal in excess of $45,944.94; Larry's, principal in excess of $40,462.08).

Following the March 2013 meeting, the land owned by River Canyon was sold. The net proceeds of the sale, $710,268.72, were deposited into River Canyon's bank account on May 24, 2013. Prior to that deposit, the account had a balance of $11,490.33, resulting in a total after the deposit of $721,759.05. At that point the total assets of River Canyon consisted of the bank account, a pasture rent payment of $5,400, and a promissory note owed by Elvira with a remaining balance of $11,284.24. After the real estate proceeds were deposited, Marianne made distributions totaling $641,951.02 from River Canyon's bank account to Lloyd's estate ($417,797.75) and to Marianne ($224,153.27).

Stephen died in 2014, and Elvira inherited his estate.

In November 2015, the Articles of Incorporation of River Canyon were amended to permit reducing the number of directors to one, and Marianne became the sole director. By that time, Lloyd's estate had been completed, and Marianne, who was the sole beneficiary of Lloyd's estate, had replaced Arterburn as its personal representative.

On April 6, 2015, Sandra and Elvira (both individually and derivatively on behalf of River Canyon) commenced this action against Marianne and River Canyon. In their complaint, they alleged that distributions Marianne made to Lloyd's estate and herself following the sale of River Canyon's real estate were improper, and they set forth claims for an accounting, breach of fiduciary duty, tortious conversion, and shareholder's right to dissent. Elvira died in 2016, and Sandra was appointed personal representative of her estate. After Elvira's death, the district court entered an order of reviver, reviving Elvira's claims in Sandra's name as Personal Representative for her estate. The plaintiffs' claim for an accounting was subsequently dismissed with prejudice, pursuantto a motion for partial summary judgment, after the parties agreed that the defendants had provided the accounting and records requested in that claim.

In their answers, Marianne and River Canyon denied the allegations that Marianne's actions were improper. Marianne and River Canyon also filed a counterclaim against the plaintiffs, alleging fraudulent misrepresentation, fraudulent concealment, conversion, waste and mismanagement, and self-dealing.

Trial was held in May 2019. In addition to the background summarized above, evidence was adduced showing that during the period from 2002 through 2013, Elvira and Sandra excluded the defendants from operation of the corporation, did not provide any accounting, denied access to corporate records, and did not hold annual meetings after January of 2002. The only minutes of board meetings produced at trial were the January 2002 minutes referenced above, as well as the corporate resolutions from when the officers voted to file bankruptcy; there were no minutes of any meeting of the shareholders during that period of time. The record shows that Elvira did not properly file income tax returns or pay real estate taxes, and was spending money...