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Danuser v. IDA Marketing Corp.

Supreme Court of North Dakota

October 30, 2013

Reed H. DANUSER, Plaintiff and Appellee
v.
IDA MARKETING CORPORATION; IDA of Moorhead Corporation; James Leach, Steve Leach, David P. Gruenhagen, and Val Tareski, Defendants IDA Marketing Corporation; IDA of Moorhead Corporation; James Leach, Appellants.

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Ronald H. McLean (argued) and Peter W. Zuger (appeared), Fargo, N.D., for plaintiff and appellee.

Michael D. McNair, Fargo, N.D., for defendant and appellant IDA of Moorhead Corporation.

Robert B. Stock (argued) and Vanessa L. Anderson (appeared), Fargo, N.D., for defendant and appellant James Leach.

MARING, Justice.

[¶ 1] James Leach, IDA Marketing Corporation, and IDA of Moorhead Corporation appeal from a judgment holding them jointly and severally liable to Reed Danuser in the amount of $692,671.78 for claims involving Danuser's termination as president and chief executive officer of the corporations and Leach's breach of a fiduciary duty to Danuser and requiring IDA Moorhead to pay Danuser $130,727.99 for loans he made to IDA Moorhead. We affirm.

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I

[¶ 2] Before 1994, Leach was the president and majority shareholder of IDA Moorhead, a corporation he created as the sole shareholder in 1977 to manufacture electronic communications equipment. By 1994, Leach had handed over the day-to-day operations of IDA Moorhead to its four managers, Danuser, John Kruse, Steven Lee, and David Gruenhagen. In 1994, Danuser, Kruse, Lee, and Gruenhagen, as sole shareholders, incorporated IDA Marketing to buy Leach's shares of stock in IDA Moorhead. Several agreements were executed to effectuate the transaction, including a stock purchase agreement, a security agreement, a marketing agreement, and a shareholder control agreement.

[¶ 3] Under the stock purchase agreement between IDA Marketing and James Leach, Leach sold his 2,421,118 shares of IDA Moorhead to IDA Marketing for 31 cents per share. The agreement recognized there were 3,794,500 total outstanding shares of IDA Moorhead. In exchange for Leach's shares of stock in IDA Moorhead, the stock purchase agreement required IDA Marketing to provide a capital debenture for the total purchase price of the stock, which was payable in monthly installments with interest at the rate of eight percent per annum. Under the stock purchase agreement, Leach retained a security interest in his stock sold to IDA Marketing for the unpaid balance evidenced by the debenture. The agreement required the stock to be held by an escrow agent. Under the stock purchase agreement, if IDA Marketing defaulted on any installments and the default remained uncured for 90 days after written notice, all unpaid principal and interest was due immediately and Leach's stock would be returned to him. The stock purchase agreement required IDA Marketing to enter into a shareholder control agreement to protect the interests of Leach and other shareholders selling stock to IDA Marketing.

[¶ 4] The shareholder control agreement between IDA Moorhead and IDA Marketing said the corporations had the same board of directors and the same president and chief executive officer. The shareholder control agreement named Kruse as president and chief executive officer of the corporations and said the president and chief executive officer could be terminated for cause as defined by the agreement. Initially, the five person board of directors consisted of two persons selected by James Leach, two persons selected by Kruse, and Val Tareski. Leach served on the board of directors of both corporations at all times relevant to this action. The shareholder control agreement recognized the remaining shares of IDA Marketing were owned by about 73 other shareholders and IDA Marketing was offering to purchase all the other shares under the terms of a Confidential Exchange Offer Memorandum.

[¶ 5] A marketing agreement between IDA Marketing and IDA Moorhead provided that IDA Moorhead would continue manufacturing specialized mobile radio equipment and IDA Marketing would market and sell the equipment. Under the marketing agreement, IDA Marketing's compensation for marketing the equipment included amounts necessary to meet all of IDA Marketing's obligations, including reimbursement of salaries and expenses incurred by IDA Marketing, amounts necessary to purchase the stock of IDA Moorhead under agreements with Leach and other selling shareholders, and amounts necessary to fund other cash needs required by IDA Marketing.

[¶ 6] IDA Marketing and its shareholders, Kruse, Lee, Danuser, and Gruenhagen, executed a September 13, 1994 buy

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and sell agreement governing payment to departing shareholders for IDA Marketing stock shares " [u]pon the occurrence of a resignation, termination, death, demotion, and/or disability." The agreement outlined a schedule to determine the valuation and redemption price for a departing shareholder's stock and a payment schedule.

[¶ 7] Kruse served as president and chief executive officer of the corporations from 1994 to 2004, and during his tenure, IDA Marketing's debenture payments to James Leach for his shares of stock in IDA Moorhead were sporadic. In March 2004, Leach served IDA Marketing with a written notice of default for the debenture payments due for the purchase of his stock in IDA Moorhead. After some restructuring and a joint resolution by the corporations' directors, Leach withdrew the notice of default and Danuser became the president and the chief executive officer of the corporations. The shareholder control agreement was also amended to allow IDA Marketing shareholders to transfer their shares without board approval. Danuser eventually became the majority shareholder of IDA Marketing, and after 2004, he loaned $97,000 to IDA Moorhead. Nevertheless, between 2004 and 2010, IDA Marketing's debenture payments to James Leach continued to be sporadic, and during the same time, Danuser received only a few payments on his loans to IDA Moorhead.

[¶ 8] In 2010, James Leach claimed IDA Marketing had defaulted on the required monthly debenture payments to him and requested his full payment for August 2011. Danuser informed Leach the corporations were not financially able to make the full payment. A special meeting for the joint board of directors was scheduled for November 17, 2010, and the directors present at that meeting were Tareski, Gruenhagen, Danuser, James Leach, and James Leach's son, Steve Leach. At the November 17 meeting, the board voted to terminate Danuser's employment as president and chief executive officer of the corporations. James Leach, Steve Leach, Tareski, and Gruenhagen voted for a written corporate resolution stating:

that Reed H. Danuser be immediately terminated from his position as President/CEO [and any other positions of employment] in IDA Marketing ... and IDA of Moorhead ... pursuant to ... the Shareholder Control Agreement dated July 1, 1994, for cause due to Reed H. Danuser having made " improper use of Corporate funds or property", and/or " self dealing detrimental to the Corporation." Reed H. Danuser's termination as an employee/officer with respect to either or both corporations is a result of (a) improper issuance of new shares of stock to himself in IDA Marketing Corporation in violation of ... the Shareholder Control Agreement without the consent of four of the five Directors of the Corporation, and (b) assigning, selling or transferring assets (other than inventory), tangible or intangible, in excess of $25,000 per year in violation of ... the Shareholder Control Agreement without the consent of four of the five Directors of the Corporation.
In addition, Reed H. Danuser has repeatedly caused IDA Marketing Corporation, ... to breach its obligations to James Leach [or his assigns] under (a) the Stock Purchase Agreement dated July 1, 1994, (b) the 8% Capital Debenture dated July 1, 1994, (c) the Security Agreement dated July 1, 1994, and (d) the resulting Escrow Agreement(s) involving James Leach's shares in IDA of Moorhead Corporation, all of which has the effect of adversely impacting the financial position and viability of IDA

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Marketing Corporation, a North Dakota corporation.

[¶ 9] According to Danuser, James Leach controlled and orchestrated his termination as president and chief executive officer of the corporations. James Leach testified, however, he pursued that course of action because:

The meeting I had with [Danuser] prior to that said that there will be nothin' left if I foreclose on that 90-day deal. If I would have foreclosed there I would have gotten nothin'. IDA would have been dead. All employees would have been out of a job, we would have had nothin'. So I had to find something that I could do that would make it legal for— to get rid of [Danuser] that all four directors agreed on.

[¶ 10] After Danuser was terminated at the November 17 board meeting, the directors appointed James Leach president and chief executive officer of the corporations. On November 24, 2010, James Leach and other shareholders selling their stock in IDA Moorhead to IDA Marketing declared the payments for their stock were in default, accelerated the money due on the debenture, and asked the board to waive any right to cure the default and to allow redemption of any stock held as security for the debenture. According to Danuser, the total amount necessary to pay James Leach for the IDA Moorhead stock at that time was $252,576.46. The directors waived further notice of default and allowed James Leach and other shareholders to repossess the IDA Moorhead stock pledged as security for IDA Marketing's debt. The IDA Moorhead stock was later sold to a third party for a total purchase price of $1,180,000.

[¶ 11] Danuser sued IDA Moorhead, IDA Marketing, James Leach, and the three other directors of the corporations, Steve Leach, Gruenhagen, and Tareski, alleging Danuser was wrongfully terminated without cause in violation of his employment contract and the shareholder control agreement. Danuser alleged that the individual defendants' actions in removing him without cause and freezing him out of corporate governance breached their fiduciary duty to him and that IDA Moorhead and IDA Marketing were liable for loans Danuser had personally made to the corporations. Danuser also alleged a derivative claim on behalf of IDA Marketing to recover damages caused to the corporations.

[¶ 12] The district court granted Danuser partial summary judgment, concluding he had a valid employment contract that authorized termination only for cause and reserving for trial issues about whether he was terminated for cause. The court also decided Danuser was entitled to partial summary judgment against IDA Moorhead in the amount of $97,000 for the principal due on his personal loans to the corporation and reserving for trial issues about the proper credit for interest.

[¶ 13] After a bench trial, the district court decided Danuser was wrongfully terminated without cause. The court also determined James Leach personally breached a fiduciary duty to Danuser but the other individual directors did not breach a fiduciary duty to Danuser, finding James Leach " was certainly in control of the events that lead to Danuser's termination" and " [a]s a result, Danuser was ‘ frozen out’, and any reasonable expectations to continued economic benefits were destroyed." The court said that between 1994 and 2010, James Leach accepted less than full debenture payments for his stock in IDA Moorhead, but in 2010 he demanded full payments, and the court found:

[James] Leach orchestrated the November 17, 2010, board meeting that resulted in Danuser's termination. Other board members were informed only

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at the last minute, and played no role in shaping the result other than to vote for it....
It is equally clear from his testimony that Leach chose to oust Danuser in this manner because he was concerned the business would be gutted if he gave the 90 day notice required by the controlling agreements. It is less clear what gave rise to this concern. Whether Danuser could have paid the balance due if given the opportunity will never be known with certainty. However, he was entitled to that opportunity, and had paid dearly for it over the years. According to the records maintained by the corporations' internal bookkeeper, by the time of Danuser's termination Leach had received debenture payments totaling $805,209.02. This was more than the total salary Danuser earned during the corresponding period. Furthermore, [James Leach's wife] was paid an additional $469,774.24 [for her stock].
It was not until November 24, 2010, that written notice of default was provided by any shareholder of IDA Moorhead. A special meeting of the joint board was held on November 29, 2010. Although he was still a board member, Danuser was provided with no notice of this meeting. Before it was over, Leach had convinced the other members to remove Danuser from the board, to replace Danuser with a new board member selected by Leach, to waive further notice of default, and to allow him to immediately reclaim possession of his IDA Moorhead stock— free and clear of any claims. ...

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