JULIE A. ROBINSON, District Judge.
Plaintiff Carlos Teran brings this lawsuit against GB International, S.P.A. ("GB International") and GB Miami, S.R.L. ("GB Miami"), and American Crane & Tractor Parts, Inc. ("ACTP") (collectively "Defendants"), asserting derivative tort claims and individual capacity claims for declaratory relief and breach of contract. Defendant GB Miami also asserts a counterclaim for declaratory relief. This matter is before the Court on Defendants' Motion for Summary Judgment (Doc. 124) and Plaintiff's Motion for Extension of Discovery Deadline (Doc. 156). The Court directed further briefing under Fed. R. Civ. P. 56(f)(2) on why summary judgment should not be granted on Plaintiff's affirmative defenses to Defendant's counterclaim (Doc. 160). The parties have filed supplemental briefs (Docs. 163, 164) and the Court is prepared to rule. For the reasons explained in detail below, the Court grants Defendants' motion and denies Plaintiff's motion as moot.
Summary judgment is appropriate if the moving party "shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
The moving party bears the initial burden of providing the court with the basis for the motion and identifying those portions of the record that show the absence of a genuine issue of material fact.
Finally, summary judgment is not a "disfavored procedural shortcut"; on the contrary, it is an important procedure "designed to secure the just, speedy and inexpensive determination of every action."
The following facts are either uncontroverted, stipulated to, or viewed in the light most favorable to Plaintiff, the non-moving party.
Plaintiff Carlos Teran owned and operated a tractor part supply company, Teran Tractor. On January 9, 2004, ACTP entered into a supply agreement with GB International that requires ACTP to purchase certain products from GB International. At that time, GB International acquired a controlling share in ACTP. In April 2005, GB International acquired a controlling share in Teran Tractor. GB International also owned other tractor part supply companies, including CGR.
In November 2006, Teran Tractor and ACTP were merged and began operating under ACTP's name. At the time of the merger, GB International gave itself the right to redeem 692.723 of its shares of ACTP for $4.2 million; Teran was not permitted to redeem his shares for cash. During the time that Teran worked for ACTP, GB International held a majority of the seats on ACTP's board of directors.
On November 9, 2006, Teran signed the Second Amended and Restated Shareholders Agreement (the "Shareholders Agreement"), an agreement among ACTP, GB International, GB Miami, Teran, and three other individuals, Jeffrey Weiner, Harry Pennington, and Kenneth Stacy who were Continuing Shareholders in ACTP.
Section 1.3 of the Shareholders Agreement states:
The Shareholders Agreement states in Section 2.9(B)(d):
On November 9, 2006, Teran signed and initialed each page of the "Carlos Employment Agreement" referenced in the Shareholders Agreement, under which he served as ACTP's Managing Director of Latin American markets.
The Put Valuation Price is defined under the Shareholders Agreement as "eighty-five percent (85%) of the Future Valuation Price.
In a letter dated July 25, 2010, from Teran to ACTP, he stated that it was his "intention to sever [his] employment relationship with the Company effective at the end of the business day on October 29, 2010."
In response to Teran's letter, ACTP sent a letter dated August 5, 2010, in which it told Teran that his "resignation effective as of the end of the business day on October 29, 2010 is accepted by the Company."
By letter agreement dated October 29, 2010, ACTP extended an offer of employment to Teran, which stated that his employment would begin on November 1, 2010.
By letter dated December 1, 2010, ACTP informed Teran that GB Miami had exercised its Call Right under Section 2.9(B)(d) of the Shareholders Agreement and ACTP requested that Teran complete the closing of the sale by returning Teran's ACTP stock certificates.
The Shareholders Agreement also states in Section 2.9(B)(e):
Although GB Miami and ACTP agree that GB Miami's exercise of its first Call Right was proper, "out of an abundance of caution," on May 24, 2013, GB Miami executed a formal notice that it was exercising its Call Right pursuant to Section 2.9(B)(e) of the Shareholders Agreement. On May 29, 2013, ACTP sent Teran a letter enclosing the exercise notice from GB Miami explaining that GB Miami was exercising its Call Right to purchase all of Teran's shares for the "Call Valuation Price." Both the letter and the exercise notice explained that the Call Valuation Price, as determined by the financial information provided by ACTP's auditor, was zero dollars.
Plaintiff asserts five counts in his Second Amended Complaint. Counts I and II are tort claims that are asserted derivatively on behalf of ACTP, and stem from allegations that Defendants GB International and GB Miami, as majority shareholders of ACTP, harmed the company through their alleged control of ACTP's decision making. Counts III and IV, which Plaintiff asserts in his individual capacity, both relate to GB Miami's exercise of its right to purchase all of Plaintiff's ACTP stock pursuant to its Call Right in Section 2.9(B)(d) of the Shareholder Agreement. Count V is a breach of contract claim asserted in Plaintiff's individual capacity. Defendants move for summary judgment on all five counts. Defendant GB Miami also moves for summary judgment on its counterclaim for declaratory relief, seeking a declaration that GB Miami properly exercised its Call Right under Section 2.9(B)(d) of the Shareholders Agreement and that Teran ceased to own any shares in ACTP when it tendered the $1.00 purchase price; and alternatively, that it properly exercised its second Call Right under Section 2.9(B)(e) of the Agreement; GB Miami also seeks attorney's fees and costs of enforcing its contract rights.
Because Teran's status as a shareholder affects his standing to bring the derivative claims, the Court will first address Counts III and IV and GB Miami's counterclaim.
In Count III, Teran seeks a declaration that GB Miami did not have the right to purchase all of his shares in ACTP for $1.00 under Section 2.9(B)(d) of the Shareholders Agreement. Alternatively, in Count IV, Teran claims that GB Miami breached the Shareholders Agreement by exercising the Call Right when it did not have the right to do so.
The Shareholders Agreement states that Kansas law governs, and the parties agree that Kansas law applies. Generally, under Kansas law, if the language of a written contract "is clear and can be carried out as written, there is no room for rules of construction. To be ambiguous, a contract must contain provisions of language of doubtful or conflicting meaning, as gleaned from a natural and reasonable interpretation of its language."
Here, the dispute between the parties' interpretation of the unambiguous contract surrounds Section 2.9(B)(d) of the Shareholder Agreement and the letter agreement setting forth Teran's November 1, 2010 employment with ACTP. Under the Shareholders Agreement, if the Call Right was triggered, GB Miami was entitled to exercise the Call Right by tendering an exercise notice and $1.00 to Teran. That triggering event, Defendants urge, is Teran's resignation, which they contend was effective October 29, 2010. It is undisputed that Teran wrote to ACTP on July 25, 2010 and stated his "intention to sever [his] employment relationship" under the Carlos Employment Agreement effective October 29, 2010, and that ACTP accepted that resignation to become effective October 29, 2010. On the effective date of his resignation, Teran entered into a letter agreement with ACTP that set out terms for a new, at will employment arrangement, with a start date of November 1, 2010. Nevertheless, Teran argues that as a result of his new employment arrangement, his resignation from the Carlos Employment Agreement did not become effective October 29, 2010, because that agreement was superseded by the new employment agreement. Teran further contends that his employment under the Carlos Employment Agreement did not terminate, because he and ACTP mutually agreed that he would continue to work for ACTP under a new employment agreement.
By applying the principles used to interpret contracts under Kansas law, the Court finds that Defendants' interpretation is correct. ACTP formalized the end of Teran's employment under the Carlos Employment Agreement on October 29, 2010, thus triggering GB Miami's Call Right; the letter agreement setting forth the terms of his November 1, 2010 employment with ACTP clearly and unambiguously was a new contract of employment. Teran's interpretation of the letter agreement would require the Court to read terms into the agreement, specifically: that his previously-accepted resignation from the Carlos Employment Agreement was undone, and that his employment with ACTP would continue uninterrupted, but replaced by the terms of the letter agreement. But the letter agreement makes no mention of these terms and the Court will not read the contract to have the effect Teran claims it has. "When the terms of the contract are plain and unambiguous the meaning must be determined by its contents alone and words cannot be read into the agreement which import an intent wholly unexpressed when it was executed."
Moreover, the language in the letter agreement supports Defendants' interpretation. Consistent with Teran's resignation having become effective October 29, 2010, the plain language of the letter agreement states that Teran's "employment will begin on November 1, 2010," three days after the date the letter was executed. Similarly, the letter states that ACTP was "pleased to extend the following offer of employment" to Teran. And, the letter agreement refers to the Carlos Employment Agreement as the "former" employment agreement between Teran and ACTP. Accordingly, the Court need not look any further than the plain terms of the letter agreement to conclude that Teran's employment under the Carlos Employment Agreement ended on October 29, 2010, that a new employment agreement began on November 1, 2010, and that Teran's resignation triggered GB Miami's Call Right. Indeed, Teran conceded as much during his deposition, but stated that he did not understand it at the time he entered the agreement, and did not pay attention to the terms of the agreement as he thought it was "just a formality." Kansas law is clear, however, that "[i]n the absence of fraud, mistake, or duress, a party who has fairly and voluntarily entered into such a contract is bound by its terms, regardless of the party's failure to read the contract or the inclusion of any terms in it which may be disadvantageous to that party."
Accordingly, the undisputed facts show that because Teran resigned from the Carlos Employment Agreement effective October 29, 2010, GB Miami's Call Right to purchase his shares in ACTP for $1.00 was triggered.
This does not end the matter, however, as GB Miami also moves for summary judgment on its counterclaim, seeking a declaration that GB Miami properly exercised its Call Right under Section 2.9(B)(d) of the Shareholders Agreement and that Teran ceased to own any shares in ACTP when it tendered the contractually-mandated $1.00 purchase price to Teran on December 1, 2010. Teran asserts four affirmative defenses to the counterclaim: 1) the Call Right provision is unconscionable; 2) prior breach of the Shareholders Agreement; 3) the unclean hands doctrine; and 4) waiver.
As an initial matter, the Court addresses Teran's argument that Missouri law should apply to GB Miami's counterclaim and his affirmative defenses. As Teran notes, the Court previously ruled that Teran's claims for breach of fiduciary duty and tortious interference with business relationships are governed by Missouri law because they raise issues regarding the corporate governance of a Missouri corporation, ACTP.
Even if the parties had not already agreed, choice-of-law rules dictate that Kansas law applies. A federal court sitting in diversity jurisdiction should apply the choice-of-law rules of the state in which it is located.
In order to be legally unconscionable, a contract must be so outrageous and unfair in its wording or application that it shocks the conscience or is so one-sided that no reasonable person would view it as just.
Neither of Teran's initially alleged grounds support a finding of unconscionability. Teran relies on Section 2.9(B)(d) of the Shareholders Agreement, which gives GB Miami a Call Right to purchase Teran's shares if he is terminated for cause if he is convicted of a felony that does not materially damage ACTP. Teran argues that this felony Call Right provision would yield a higher purchase price than the $1.00 Call Right that GB Miami exercised, which he characterizes as "grossly unfair and unreasonably favorable to GB Miami." Similarly, Teran alleges that his shares were formerly worth "millions," while the Shareholders Agreement set forth a purchase price of $1.00 for GB Miami's Call Right. The Court finds nothing shocking or unfair about the fact that ACTP's shareholders contracted to incentivize Teran from leaving the company to a greater extent than they contracted to incentivize him to refrain from committing a felony. As Defendants point out, the Call Right was not inevitable—Teran could have kept his shares and avoided exercise of the right by continuing to work for ACTP under the Carlos Agreement until April 2015. Moreover, Section 2.9(B)(d) specifically states that "Carlos hereby irrevocably agrees that such provision is fair and reasonable in light of such circumstances." Teran agrees that his former ACTP shares are now worth nothing, further belying his claim that the $1.00 purchase price was shocking or offensive.
In his surreply, Teran suggests for the first time that he was essentially forced into the Shareholders Agreement because there was unequal bargaining power as between him and the other ACTP shareholders because he was a minority shareholder in a company being merged into ACTP. Teran testified that he had "no choice" but to sign the Shareholders Agreement, and alleges he did not have sufficient time to review the terms of the Agreement before he signed it. Teran also testified, however, that prior to executing the Shareholders Agreement, he understood he was taking a risk because he would have no guaranteed minimum buy-out price for his shares, and chose to enter into the Agreement anyway.
The parties agree that in general, a party who first commits a material breach cannot enforce the contract.
Under the "unclean hands" doctrine, a court of equity may deny relief to a party whose conduct has been inequitable, unfair and deceitful, but it applies only when the reprehensible conduct complained of pertains to the controversy at issue.
Even if the Court accepts as true Teran's allegations that GB Miami and GB International harmed ACTP through alleged control of ACTP's operations, Teran does not point the Court to any evidence in the record that such control was calculated to force him to resign or that he was somehow duped into resigning from ACTP so that GB Miami could exercise its Call Right. Indeed, Teran conceded that he was advised of the consequences of his resignation prior to the effective date, but did not pay attention to the letter from ACTP. The Court finds that the unclean hands doctrine does not apply to this situation.
Finally, Teran contends that GB Miami waived its Call Right "by allowing ACTP to enter into the new employment agreement with Teran on October 29, 2010." Under Kansas law, a waiver is an intentional relinquishment of a known right and intention may be inferred from conduct.
As both parties note, the letter agreement setting forth Teran's new employment makes no mention of GB Miami's Call Right under the Shareholder's Agreement. By contrast, the letter agreement specifically states that the non-compete provision in Section 9 of the Carlos Employment Agreement would remain in effect. Thus, Teran argues, by specifically providing that the non-compete would remain in effect, while not mentioning the Call Right, it is "readily apparent GB Miami gave up the Call Right under Section 2.9(B)(d) of the Shareholders Agreement when ACTP entered into the new employment agreement with Teran."
The Court disagrees. It is not clear how the Court can infer an intent by GB Miami to waive its Call Right in the Shareholders Agreement because ACTP entered into a new employment agreement with Teran—clearly, GB Miami was not a party to the new employment agreement. Although he offers no authority in support of his argument, Teran appears to suggest that ACTP's conduct in entering into the new employment agreement with Teran should be imputed to GB Miami because GB Miami selected some of ACTP's board members and was thus part of ACTP's management. To the extent Teran is attempting to argue that the corporate veil between ACTP and GB Miami should be pierced, however, he falls short of establishing that either corporation is the alter ego of the other.
Teran further argues that if GB Miami wanted to maintain the Call Right, it needed to include a specific reference to that right in the new employment agreement or execute an amendment of the Shareholders Agreement to reflect that the Call Right would apply to the new employment agreement. Teran continues to assert that the new employment agreement with ACTP effectively undid his resignation and the triggering of GB Miami's Call Right. Teran's affirmative claims for declaratory judgment and breach of the Shareholders Agreement have been denied, and thus his claim of waiver on these grounds is also without merit.
The Court finds nothing in the record to support that GB Miami either made statements or took action consistent with abandoning its Call Right. In the August 5, 2010 letter accepting Teran's resignation, ACTP explained that GB Miami's Call Right had been triggered. Shortly after the execution of the new employment agreement, on December 1, 2010, GB Miami and ACTP sent Teran notice that GB Miami had exercised its Call Right based on Teran's resignation of the Carlos Employment Agreement, tendering the $1.00 payment amount called for in the Shareholders Agreement. GB Miami was not a party to the new employment agreement, nor is there evidence that it somehow "allowed" ACTP and Teran to enter into the new agreement. Summary judgment is entered in favor of GB Miami on this defense.
Accordingly, the Court grants GB Miami summary judgment on its counterclaim. The Court finds as a matter of law that GB Miami properly exercised its under Section 2.9(B)(d) of the Shareholders Agreement and that Teran ceased to own any shares in ACTP when it tendered the contractually-mandated $1.00 purchase price to Teran on December 1, 2010.
In Counts I and II, Teran asserts tort claims derivatively on behalf of ACTP based on the allegation that GB International and GB Miami, as majority shareholders of ACTP, harmed the company through their alleged control of ACTP's decision-making. Defendants contend that because GB Miami properly exercised its Call Right to purchase all of Teran's shares in ACTP, he is no longer a shareholder in ACTP and thus has no standing to pursue his derivative claims. As previously held in the Court's order addressing Defendants' motion to dismiss, Missouri law applies to Teran's tort claims, to the extent the causes of action alleged derivative claims.
Under Missouri law, an individual cannot maintain a derivative action on behalf of a corporation if that person is no longer a shareholder in the corporation.
Teran urges that, even if the Court holds he is no longer a shareholder, an "equitable shareholder exception" should apply to allow him to proceed with his derivative claims. Teran relies on Eastwood v. National Bank of Commerce, for the proposition that a plaintiff who has lost his technical shareholder status in a transaction permeated by fraud is an "equitable" shareholder, with standing to sue derivatively.
The court further explained,
As previously noted, Teran's derivative claims are governed by Missouri state law, not federal law. Teran does not cite, nor could the Court locate, any Missouri cases that recognize the "equitable shareholder" exception. But even assuming that Missouri recognized this exception, it is not applicable to this case. As the court in Eastwood explained, this exception applies where the transaction that caused the loss of shareholder status is the subject of a claim of fraud.
Finally, Teran argues that if the Court determines he lacks standing on his derivative claims, he should be granted leave to amend his claims for breach of fiduciary duty and tortious interference with business relationships to assert individual claims. Without providing any specifics, Teran now asserts that he has "new individual claims [that are] different from and not duplicative of the claims this Court found to be derivative" in granting the motion to dismiss, and if summary judgment is granted on the basis that he cannot maintain his claims since he is no longer a shareholder of ACTP, he should be granted leave to bring individual claims.
The Pretrial Order in this matter entered on August 28, 2014,
Undue delay alone is sufficient to deny a motion to amend; there need not be a showing of prejudice.
Teran's request is not well-taken. The Court disagrees with Teran's characterization of Defendants' position as somehow a "gotcha" tactic—it has always been Defendants' position that when GB Miami exercised its first Call Right in December 2010, Teran was no longer an ACTP shareholder and thus lacks standing to pursue derivative claims on ACTP's behalf.
The Court has determined that GB Miami properly exercised its Call Right to purchase all of Teran's shares in ACTP in December 2010. Teran thus lacks the requisite standing to pursue his derivative claims. Defendants are granted summary judgment on Counts I and II.
In Count V, Teran asserts a claim for breach of Section 1.3(b) of the Shareholders Agreement against GB International and ACTP based on the allegation that they unilaterally modified a supply agreement that the Agreement states can only be modified with the consent of ACTP's board of directors and the Continuing Shareholders.
GB International argues that Teran's breach of contract claim fails to allege a contract provision that could have been breached by GB International.
Teran's argument that the introductory portion of Section 1.3 effectively removes "the Company" from paragraph (b)'s description of the decision requiring consent is unavailing. Teran contends that the language that the decisions enumerated in Section 1.3 "shall require the consent of the Board of Directors and the Continuing Shareholders" changes paragraph (b) to mean that "any" amendment or modification to the Supply Agreement requires consent of the Board and Continuing Shareholders. But that is not what Section 1.3(b) states and the Court will not read the contract to have the effect Teran claims it has. "When the terms of the contract are plain and unambiguous the meaning must be determined by its contents alone and words cannot be read into the agreement which import an intent wholly unexpressed when it was executed."
Thus, Count V is limited to a breach of contract claim against ACTP. Defendants urge that Count V is merely a "re-packaging" of Teran's derivative tort claims, and is invalid as a matter of law because it is also derivative in nature—since Teran is not a shareholder in ACTP, he has no standing to pursue derivative claims on ACTP's behalf. Defendants argue that Count V only seeks recovery for harm to ACTP, specifically: Defendants' actions were "detrimental to ACTP," "led to the loss of sales and profits for ACTP," "caused ACTP to lose a great deal of money," "made "ACTP less attractive to customers," made "ACTP's profit margin shr[i]nk dramatically," and caused "ACTP to continuously lose money." The only damages Teran seeks in this claim stem from an alleged decrease in the value of his former ACTP shares as a result of alleged harm to ACTP.
Although the parties agree that Kansas law controls the breach of contract claim in Count V, they do not address whether Missouri law applies to the extent the claim involves corporate governance. Nevertheless, the general law regarding determination of whether a claim is derivative is similar in both states. Both state courts have established the general rule that a corporate shareholder may not bring an action in his or her own name to recover for wrongs done to the corporation or its property.
Teran responds that the Shareholders Agreement sets forth minimum buyout prices for the shares of other ACTP shareholders and thus, the alleged harm to ACTP does not affect all shareholders equally. Teran argues that unlike him, the Call Rights for the Continuing Shareholders had minimum value guarantees, and thus Defendants could "systematically destroy the value of ACTP and cause harm to Teran," separate and distinct from other shareholders. Teran cites no authority for his position, which is at odds with the test for determining when a claim is derivative. The test is not whether all of ACTP's shareholders have been injured to the same extent, or even whether all shareholders have been damaged; instead, the test is whether the damages at issue are only indirectly sustained by the stockholder as a result of injury to the corporation.
As with Counts I and II, Teran asks that should the Court determine Count V is derivative, he should be granted leave to amend to add a claim for individual harm under the same legal theories upon which Count V is based. For reasons set forth with respect to his request to amend his derivative claims, Teran's request is denied—any proposed amendment is made on a theory of recovery not advanced until the primary theory had been dismissed. Defendants are granted summary judgment on Count V.
GB Miami also seeks an award of attorneys fees and costs incurred in enforcing its contractual rights under the Shareholders Agreement. Section 5.1 of the Agreement states: "[A] party that prevails in any such enforcement of the terms and provisions of this Agreement shall be reimbursed by the non-prevailing party(ies) for all costs and expenses, including legal fees, which it may incur in pursuing such enforcement." Kansas law enforces these types of contract terms.