Hennepin County District Cort File No. CT-03-3493
Considered and decided by Halbrooks, Presiding Judge, Toussaint, Chief
Judge, and Forsberg, Judge.
1. When a minority shareholder is a guarantor of company debt and a co-founder, director, officer, and employee of a company, and the majority shareholder is aware of the minority shareholder's financial position and removes the minority shareholder from the board of directors and terminates the minority shareholder's employment in an effort to force the minority shareholder to sell his shares, the minority shareholder suffers irreparable harm.
2. A minority shareholder has a reasonable expectation of continued employment where the minority shareholder is a co-founder, employee, and a guarantor of company debt and there is evidence that the founders of the company contemplated continued employment for the minority shareholder.
3. A minority shareholder who has a reasonable expectation of continued employment and has his employment terminated by a majority shareholder for reasons other than incompetence or the inability to perform his duties has been treated in a manner that is unfairly prejudicial and is likely to prevail on the merits of a claim under Minn. Stat. § 302A.751, subd. 1(b)(3) (2002).
The opinion of the court was delivered by: Halbrooks, Judge
Dissenting, Forsberg, Judge*fn1
Appellants Dennis and Estelle Forcelle challenge the district court's imposition of a temporary injunction. Appellants argue that (1) the district court abused its discretion in imposing a temporary injunction because the Dahlberg factors do not support injunctive relief and respondents Jack and Brenda Haley have not suffered irreparable harm; (2) respondents are prohibited from asserting a claim for equitable relief because they have unclean hands; and (3) the district court abused its discretion in ordering respondents to post a $25,000 bond. Because we conclude that the district court did not abuse its discretion in imposing the temporary injunction and that the unclean hands and adequacy of the bond issues are not properly before this court on appeal, we affirm.
Appellant Dennis Forcelle (Dennis) has about 40 years of experience in the manufacturing business. Several years ago, he co-founded a manufacturing company known as RMS Company. Respondents Jack Haley (Jack) and his former wife, Brenda Haley (Brenda), were both employees of Quality Components, which was a subsidiary of RMS, owned and operated by appellants Dennis and Estelle Forcelle (Estelle). Quality Components provided services for RMS. During this time, the Forcelles and Haleys came to know one another. Dennis sold his interest in RMS in 1982, but continued as its president. In 1993, Quality Components closed its doors, and the Haleys opened their own manufacturing company, J. and B. Machinery.
In 1994, an individual from Medtronic contacted Dennis. Medtronic was having manufacturing problems with one of their products and Dennis was told that he could have the contract if he could manufacture the product in the manner that Medtronic desired it. Dennis formulated a business plan and reserved the name Stellar Technologies, Inc. with the Minnesota Secretary of State's Office.
At the time Dennis was considering forming Stellar Technologies, Inc. to take advantage of the Medtronic opportunity, he was the subject of a criminal investigation for using RMS funds to pay his personal expenses. Dennis was charged and convicted of mail fraud and interstate transportation of monies obtained by fraud. But his conviction was overturned by the Eighth Circuit Court of Appeals, and the case was remanded for a new trial. Before the second trial, Dennis pleaded guilty and served time in federal prison from May 1997 until June 1998.
Because he was under criminal investigation at the time he was exploring opportunities with Medtronic, Dennis felt he needed a "front man" who was familiar with the manufacturing business to be involved in Stellar Technologies, Inc. Dennis presented the business plan to Jack, and Jack expressed interest in being part of the new company. In April 1995, Dennis asked Jack to attend a series of meetings with Medtronic officials to discuss the manufacturing opportunity. In June 1995, the Forcelles and Haleys agreed that, instead of starting a new company from scratch, J. and B. Manufacturing would be renamed Stellar Technologies, Inc. (Stellar), and the company would handle precision machining work for Medtronic. Currently, Stellar is a precision machining company that manufactures products for the medical device industry and other industries.
Initially, Estelle received 7,000 shares of Stellar stock, Brenda received 1,500 shares, and Jack received 1,500 shares.*fn2 Dennis's shares were put in Estelle's name because of the ongoing criminal investigation. In August 1998, Estelle received an additional 1,173 shares in exchange for the cancellation of a $97,257.84 debt owed to her by Stellar. Accordingly, Estelle owned 8,173 shares, approximately 73% of outstanding shares, and the Haleys each owned 1,500 shares, totaling approximately 27% (13.4% each) of the outstanding shares. The parties never adopted a shareholder-control agreement.
At the February 1997 shareholders' meeting, the shareholders agreed that if any individual shareholder was required by a third party to guarantee the corporation's debts or obligations, that all shareholders would agree to co-guarantee such debt or obligation. As a result, all three shareholders personally guaranteed approximately $4.3 million of company debt. This includes approximately $3.3 million for the acquisition of capital equipment and approximately $1 million for working capital.
Brenda worked for Stellar until 1997, when she resigned. During her employment, she performed administrative tasks, worked in human resources, operated manufacturing equipment, and helped train employees. She remains a shareholder in the company.
Initially, Jack was chief executive officer (CEO) of Stellar and held a position on the board of directors. He led the manufacturing side of Stellar's business operations. Estelle was chief financial officer (CFO), secretary, and also held a position on the board of directors. She focused on human resources, finance, and accounting. Jack and Estelle were each initially paid $60,000 a year. In 1997, Estelle replaced Jack as CEO while retaining her positions as CFO and secretary. The board created the new position of president for Jack at a salary of $120,000 per year. In August 1998, the shareholders also voted to increase Estelle's salary to about $150,000 a year.
Dennis focused on sales and development. In 2001, the board made Dennis an officer of the company with the title of Director of New Technologies. In 2002, Dennis was elected to the Stellar board of directors; the board was then comprised of Jack, Estelle, and Dennis.
In September 2002, Dennis served Estelle with a summons and petition for marital dissolution. The litigation was emotionally charged. Estelle alleged that Dennis had an extramarital affair and that he assaulted her. She also alleged that Dennis stole Stellar records and assets. Each party alleged that the other had used company funds to pay for personal expenses. Jack filed an affidavit that supported Dennis's position in the dissolution proceeding.
Stellar needed to borrow funds in 2002. Initially, Marquette Bank agreed to make the loan, but, after the bank determined that Dennis was a convicted felon, the loan was denied. Stellar was able to obtain financing from another bank, but the new bank did not ask if Stellar had an officer or director who was a convicted felon. At this point, Estelle stated that she became concerned that having Dennis as an officer or director of the company would cause financing problems in the future. Estelle called a shareholders' meeting for February 7, 2003. Without discussion with the other shareholders, using her power as the majority shareholder, Estelle removed Dennis from the board of directors and made his position of Director of New Technologies a non-officer position. She also removed Jack from the board of directors, eliminated the position of president, and changed Jack's title to milling technician. Estelle alleged that her actions were intended to consolidate the control of Stellar during a time of financial crisis.
Estelle terminated Dennis's employment in February 2003. In explanation, she alleged that Dennis was stealing corporate assets and records and using Stellar funds to pay his personal expenses. Dennis has since been rehired by Stellar and is working on a contract basis providing consulting services.
Estelle also terminated Jack in February 2003. She asserted that Jack was using Stellar funds to pay personal expenses. She also asserted that Jack was engaging in conduct disloyal to Stellar when he allegedly told her that he would not work for her and had discussions with other Stellar managers about supporting him in a lawsuit against the company.
The Haleys filed a complaint, for themselves and on behalf of Stellar, against the Forcelles. The Haleys alleged, among other things, breach of contract, breach of fiduciary duties, and fraud and misrepresentation, and requested damages and equitable relief. The Haleys also filed a motion for a temporary restraining order or a temporary injunction, requesting that Dennis and Jack be reemployed by Stellar,*fn3 and that the court order a receiver to control Stellar's checkbook and check ledger. The district court found that (1) Jack had a reasonable expectation of lifetime employment with Stellar; (2) Dennis's affidavits provided conflicting information regarding Jack's position with the company; (3) Jack had no employment issues with Stellar until the commencement of the Forcelles' divorce; and (4) Jack seemed to be an innocent victim of the divorce. The district court granted the Haleys' motion for a temporary injunction. The court ordered Stellar to employ Jack and pay him a salary equal to Dennis's salary and in the same proportion ...