Sound Infiniti, Inc. v. Snyder

186 P.3d 1107

145 Wn. App. 333

SOUND INFINITI, INC., d/b/a Infiniti of Kirkland, a Washington corporation; ex rel Afshin Pisheyar, a shareholder thereof; Infiniti of Tacoma at Fife, Inc., a Washington corporation, ex rel Afshin Pisheyar, a shareholder thereof; S & I of WA L.L.C., a Washington limited liability company, ex rel Afshin Pisheyar, a member thereof; RDA Properties, LLC, a Washington limited liability company, ex rel Afshin Pisheyar, a member thereof; and Afshin Pisheyar, an unmarried individual, Petitioners, v. Richard M. SNYDER and Jeanne C. Snyder, husband and wife, and their marital community; and David Hannah and Martha M. Hannah, husband and wife, and their marital community, Respondents Richard M. Snyder as Trustee of the Snyder Children's Irrevocable Trust for the Benefit of Zachary Snyder and the Snyder Children's Irrevocable Trust for the Benefit of Travis Snyder. Defendant.

No. 59477-0-I.

No. 59571-7-I.

Court of Appeals of Washington, Division 1.

June 23, 2008.

Daniel Montopoli, James A. Krueger, Lucy R. Clifthorne, Vanderberg Johnson & Gandara, Tacoma, WA, for Appellants.

William C. Rava, Boyd Buckingham, Joseph E. Bringman, Perkins Coie, Seattle, WA, for Respondents.

DWYER, A.C.J.

¶ 1 Richard Snyder and David Hannah, the majority shareholders of two closely held corporations, Sound Infiniti, Inc., and Infiniti of Tacoma at Fife, Inc. (Infiniti of Tacoma), used reverse stock splits to eliminate Afshin Pisheyar's minority interest in those corporations. In this discretionary review proceeding, we are asked to decide whether the statutory appraisal procedure set forth in chapter 23B.13 RCW, which entitles Pisheyar to receive from the corporations an amount of money equal to the fair value of his former interest, is the sole remedy provided to him in this circumstance, or whether he may also maintain independent claims against the majority shareholders in a forum other than the appraisal proceeding. We hold that Pisheyar's sole remedy is provided by the statutory appraisal process. Accordingly, we affirm the trial court's dismissal of Pisheyar's individual claims against Snyder and Hannah. We also affirm the trial court's ruling that most of Pisheyar's other stated claims were derivative of his shareholder status and that Pisheyar thus lost standing to pursue those claims when he ceased to be shareholder. Because the trial court erred, however, by ruling that Pisheyar could maintain independent, personal claims arising out of the loss of in kind "perquisites" to which he asserted an entitlement as an incident of his status as a shareholder, we reverse that ruling and remand this action to the trial court for dismissal of those claims.

I

¶ 2 Snyder and Pisheyar, together with Hannah, formed Sound Infiniti (doing business as Infiniti of Kirkland) to operate an Infiniti automotive dealership. Ultimately, Hannah came to own 51 percent of Sound Infiniti, with Snyder owning 30 percent and Pisheyar owning 19 percent, respectively. There were no other shareholders. When the three men formed Sound Infiniti, they entered into a "Buy-Sell Agreement between Shareholders and Sound Infiniti," which provided that the shareholders who served as officers of the corporation could "only be terminated for cause based on dishonesty, fraud, misappropriation, theft and/or substance abuse."

¶ 3 Snyder independently formed another company, S & I of WA L.L.C. (S & I), to acquire the land where Infiniti of Kirkland was to be located, develop the land, and lease it back to Sound Infiniti. At the time of its formation, S & I had three members: Snyder (together with his wife) and two separate irrevocable trusts benefiting the Snyders' children.

¶ 4 Later, Snyder began to contemplate having S & I sell the property on which Infiniti of Kirkland is located. When Pisheyar and Hannah learned of this, they proposed to Snyder that he instead sell them each a third of S & I in exchange for the same total amount of money he would have received by selling to an outside party. Pisheyar contends, that as part of this transaction, Snyder made an oral agreement to include Pisheyar (as well as Hannah) in any future dealerships that Snyder acquired. Both Snyder and Hannah vigorously dispute that any such agreement was made.

¶ 5 Nonetheless, the following year, the three men (together with another man, Robert Curtis) did form a new corporation, Infiniti of Tacoma, to operate an Infiniti dealership in Fife. Corporate ownership was arranged such that Snyder owned 51 percent, Hannah 25 percent, Pisheyar 19 percent, and Curtis 5 percent of the total shares. Snyder, Hannah, and Pisheyar also formed another company, RDA Properties, LLC, (RDA) to purchase and develop the land for the planned Fife dealership, and then lease it back to Infiniti of Tacoma. Snyder, Hannah, and Pisheyar each owned a third of RDA.

¶ 6 All of the parties agreed that, other than serving as the secretary of Sound Infiniti and as a director of Infiniti of Tacoma, Pisheyar would have no role in the operations or management of the corporations. He was to be strictly an investor. The corporations have always been successful and profitable. Contrary to Pisheyar's assertions to the contrary, the trial court found that the corporations have always met the financial requirements imposed by Infiniti of North America, Inc., and complied with their tax obligations.

¶ 7 In spite of the general good standing of the corporations, the relationship between Pisheyar, on one hand, and Snyder and Hannah, on the other, soured after a confrontation between Snyder and Pisheyar in Snyder's office. Thereafter, Pisheyar began to demand increased information about and increased authority over the day-to-day operations of the dealerships, which Snyder and Hannah declined to provide, pointing out that Pisheyar had never been entitled to operational control. Pisheyar viewed this as Snyder and Hannah excluding him from meetings and decision-making that he had a right to be involved in, notwithstanding his non-managerial role in the corporations. Pisheyar felt particularly aggrieved by the decision to have Sound Infiniti and Infiniti of Tacoma together loan Snyder $900,000 to purchase land for a separate Nissan dealership in which Pisheyar was not invited to participate.

¶ 8 Snyder and Hannah deny excluding Pisheyar from any corporate decision-making in which he was entitled to participate, but agree that by February 2005 they had decided that personal and business conflicts with (and distrust of) Pisheyar had seriously impaired their ability to work with him, prompting their desire to eliminate him as a shareholder.

¶ 9 Pisheyar filed this action in King County Superior Court on March 9, 2005, in both his individual capacity and derivatively as a shareholder of the corporations. He alleged that Snyder and Hannah "engaged in oppression" of him as a minority shareholder, converted corporate assets, otherwise breached their fiduciary duties, and breached both their purported oral agreement to include him in Snyder's new Nissan dealership and the LLC agreements of S & I and RDA. After various amendments of his complaint, Pisheyar included damages claims for loss of corporate perquisites and for unlawful termination.¹

¶ 10 After their motion to dismiss Pisheyar's claims was denied, Snyder and Hannah called a directors' meeting of Infiniti of Tacoma (of which Pisheyar continued to be a director) "to consider (1) indemnifications, (2) a stock split, and (3) such other matters coming before the board." The indemnification referred to was the advance to Snyder and Hannah of their attorney fees incurred in defending this action. The "stock split" mentioned was not a standard stock split. Rather, Snyder and Hannah proposed amending Infiniti of Tacoma's articles of incorporation to institute a reverse stock split, whereby the 100 outstanding shares of the corporation would be reduced to four. Under this arrangement, Pisheyar's interest in the corporation would be reduced to a fractional share, eliminating him as a shareholder in exchange for a cash payout equivalent to the value of his fractional interest. The same arrangement was made for Sound Infiniti by consent of the directors (Snyder and Hannah) in lieu of a directors' meeting.

¶ 11 Pisheyar immediately sought, and was granted by the trial court, a temporary restraining order barring Snyder and Hannah from implementing the reverse stock splits. In its order, the trial court also scheduled a hearing to determine whether its injunction should be "modified, extended, or dissolved."

¶ 12 The trial court held this hearing over two separate days in November and December of 2005. The injunction hearing clarified the alleged bases for Pisheyar's shareholder derivative claims—that Snyder and Hannah had harmed the corporations

(1) by improperly borrowing money from the Corporations; (2) by directing personnel of Infiniti of Kirkland to improperly report fringe benefit expenses on Form W-2s to the Internal Revenue Service ("IRS"); (3) by applying for and being awarded a new Nissan car dealership in their individual capacities; and (4) by purchasing excessive life insurance on Mr. Hannah's life at corporate expense.

It also clarified the alleged bases for Pisheyar's purported individual claims:

(1) the Individual Defendants' having been awarded a new Nissan car dealership without Pisheyar being offered an opportunity to participate in that business; (2) the Individual Defendants' plan to implement reverse stock splits for both corporations, which would result in Pisheyar owning fractional shares, which the Corporations would purchase from him; and (3) the Individual Defendants' plan to have the Corporations advance payments to them for their attorneys' fees incurred in defending this action.

¶ 13 After hearing extensive testimony and reviewing voluminous submissions, the trial court found that the loans made to Snyder by the corporations...