2004-340, ROLAND DURHAM v. GARY DURHAM & a.

Orford. The plaintiff and the defendants are directors of the corporatio n. The 2,000 shares. The corporation owns and operates the Sunset Ranch Camp in plaintiff owns 4,000 shares of the corporation’s stock and each defendant owns shareholders of Sunset Ranch Camp, Inc., a Ne w Hampshire corporation. The three defendants, Gary Durham, Martha Styer and Peter Durham, are the sole The plaintiff’s petition alleged the following facts. The plaintiff and the

and for lack of standin g to sue. We affirm in part, vacate in part and remand. Superior Court (Houran, J.) dismissing his petition for failure to state a claim DUGGAN, J. The plaintiff, Roland Durham, appeals an order of the

brief), for the defendant. DesMeules, Olm stead & Ostler, of Norwich, Vermont (Tim A. Clark on the

the brief and orally), for the plaintiff. Whittington Law Associates, PLLC, of Hanover (W. E. Whittington, IV on

No. 2004 - 340 Grafton

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proper because the plaintiff failed to bring a derivative action pursuant to the remaining shareholders. The defendants argue that the trial court’s ruling was because the plaintiff is the sole aggrieved shareholder and is suing all the allowing a direct, as opposed to derivative, action against the defendants On appeal, the plaintiff argues that practical and policy reasons justify

plaintiff’s summary statement dated February 6, p. 2 2004. the petition, requesting access to corporate records, was moot based upon the direct action against the defendants. The trial court also found that count I of because he did not have standing as an individual shareholder to pu rsue a through direct action by a shareholder,” and dismissed the plaintiff’s petition claims are to be prosecuted either by the corporation or derivatively, but not against the defendants. The trial court applied the “general rule that corporate separate from those suffered by the corporation, thus precluding a direct suit owed him any special duty and that the plaintiff did not suffer any injuries The trial court found that t he plaintiff did not allege that the defendants

plaintiff did not name the corporation as a party to the action. distributions, breach of fiduciary duty and willful and wanton conduct. The access to corporate records and an accounting, and alleged unlawful shareholders, directors and officers of the corporation. His petit ion requested The plaintiff alleged five counts directly against the defendants as

percent of its shares and is a director. from management of the corporation, even though the plaintiff owns forty property. Furthermore, the defendants have actively excluded the plainti ff on the property and have failed to maintain adequate insurance on the failed to protect the camp’s lake shore land, have permitted illegal tree cutting In addition, the plaintiff alleged in his pet ition that the defendants have

$17,600 since July p. 2 2000. The corporation’s financial reserves have been reduced by approximately however, the plaintiff resides in Orford and the cabin has little value to him. One cabin has been made available to the p laintiff for his personal use; have rented other cabins to their friends at substantially below - market rates. summer without paying rent to the corporation. In addition, the defendants camp property for their own and their families’ personal use during the Defendants Martha Styer and Peter Durham have both used cottages on the the camp his year - round residence without paying rent to the corporation. for camp use. Starting in 2000, defendant Gary Durham made two cabins in Since 1974, the camp has rented its facilities at mark et rates to families

president and defendant Gary Durham was elected. president from July 1996 through July p. 2 2000, when he was voted out as defendants are also officers of the corporation. The plaintiff served as p. 3 3

interest. Palmer, 1 p. 3 31 N.H. at 438. is named as a defendant in the suit even though it is actually the real party in A ny recovery from the derivative proceeding accrues to the corporation, which corporation, the trial court must dismiss the suit. RSA 293 - A:7.4 4 (1999). determines that the derivative proceeding is not in the best interests of the the derivative suit. Id. If a majority of the corporation’s independent directors corporation’s board of directors, or ninety days h ave passed, before bringing The shareholder must wait until the demand has been rejected by the demand upon the corporation to take suitable action. RSA 293 - A:7.42 (1999). Hampshire Busine ss Corporation Act requires a shareholder to make a written P rior to the commencement of a derivative proceeding, the New

(rev. perm. ed. 1984)). Fletcher, Fletcher Cyclopedia of the Law of Private Corporations § 5911, at 421 dist inct from that suffered by other shareholders.’” Id. (quoting 12B W. and the shareholder’” or (2) “‘the shareholder suffered an injury separate and “‘there is a special duty, such as a contractual duty, between the wrongdoer directly affected. Appeal of Richards, 1 p. 3 34 N.H. at 155. This occurs when (1) own behalf, and not as a derivative suit, when the sharehol der’s rights are 433, 438 (1989). Third, a shareholder may bring a direct claim on his or her wronged the corporation. Palmer v. U.S. Savings Bank of America, 131 N.H. the nominal plaintiff in a cause o f action against persons who have allegedly the corporation may bring a derivative suit in which the shareholder acts as Second, when the corporation fails to enforce a claim directly, a shareholder of bring an actio n against the wrongdoer. Appeal of Richards, 134 N.H. at 155. be remedied. First, the corporation, acting through its board of directors, may In general, there are three ways in which an injury to a corporation may

(2004). m otion to dismiss. Cambridge Mut. Fire Ins. Co. v. Crete, 150 N.H. 67 p. 3 3, 675 fail to constitute a basis for legal relief, we will uphold the granting of the that tests the facts in the petition against the applicable law. Id. If the facts those facts in the plaintiff’s favor. Id. We then engage in a threshold inquiry by the plaintiff are true, and we construe all reasonable inferences dr awn from v. Gunstock Area, 146 N.H. 495, 496 (2001). We assume that all facts pleaded reasonably susceptible of a construction that would permit recovery. Rayeski ascertain whether the allegations pleaded in the plaintiff’s petition are In reviewing the trial court’s grant of a motion to dismiss, our task is to

denied, 502 U.S. 899 (1991). We agree with the plaintiff. against corporate fiduciaries. See Appeal of Richards, 1 p. 3 3 p. 4 4 N.H. 148, 155, cert. 2004), and the plaintiff failed to meet the requirements for a direct action New Hampshire Business Corporation Act, RSA chapter 293 - A (1999 & Supp. 4

direct, rather than a derivative, action: determining when a shareholder of a close corporation may proce ed with a 133. The American Law Institute (ALI) has proposed the following standard for action must be brought as a direct or derivative suit is often difficult.” Id. at 9 - We recognize that “[i]n a close corpora tion, determining whether an

200 p. 4 4). Corporations and LLCs: Law and Practice § 9:22, at 9 - 138 to 9 - 140 (3d ed. rev. unlikely. See 2 F. O’Neal & R. Thompson, O’Neal and Thompson’s Close not have a disin terested board of directors and a multiplicity of suits is proceeding may be impractical and unnecessary because the corporation does disinterested. In these circumstances, the formalities of the derivative purposes of this analysis that the corporation’s board of directors is not drawn from the well - pleaded facts below in the plaintiff’s favor, we conclude for Thomas, 301 S.E.2d at 51. In addition, construing all reasonable inferences himself from the corporation by selling his shares on the open market. See plaintiff as a minority shareholder does n ot have the opportunity to extricate n.15 (S.D. 1997). Because the corporation’s shares are not publicly traded, the business as officers or directors. See Landstrom v. Shaver, 561 N.W.2d 1, 13 number, know e ach other, and actively serve in the management of the here is typical of other close corporations in that the shareholders are few in a direct suit against other members of a close corporation. The corporation The plaintiff urges us to expand a minority shareholder’s ability to bring

1987); Barth v. Barth, 659 N.E.2d 559, 561 (Ind. 1 995). corporation. See, e.g., Caswell v. Jordan, 362 S.E.2d 769, 773 (Ga. Ct. App. and there is significant overlap between the ownership and management of the corporations because suc h corporations have a small number of shareholders that many of these principles do not apply to closely - held (or “close”) Thomas v. Dickson, 301 S.E.2d p. 4 49, 51 (Ga. 1983). Some courts have observed

by increasing the value of his shares. the suit; and [ p. 4 4] ade quately compensates the injured shareholder by one shareholder to prejudice the rights of others not a party to increasing the value of their shares, instead of allowing a recovery the corporation; [3] protects the interests of all shareholders by corporate creditors by putting the pr oceeds of the recovery back in [1] prevents a multiplicity of lawsuits by shareholders; [2] protects

because the derivative proceeding: to a direct, suit against corporate officers to redress injuries to the corporation Courts generally require a shareholder to br ing a derivative, as opposed p. 5 5

when a mi nority shareholder seeks to redress wrongful behavior by the proceeding involves burdensome, and often futile, procedural requirements that consistency in the law is important, we also recognize that the derivative Wessin, p. 5 529 N.W.2d at 466; Landstrom, 561 N.W.2d at 14. While we agree do so to promote consistency and predictability in corpor ate law. See, e.g., Courts that continue to require a derivative proceeding in this context generally direct claim against the corporate officers. See Barth, 659 N.E.2d at 561. the trial court should have the discre tion to allow the plaintiff to pursue a one, where the principles underlying the derivative proceeding are not served, Thompson, supra at 9 - 138 to 9 - 139 (quotation omitted). In cases such as this the debate ov er derivative status can become purely technical.” O’Neal & shareholders, one who is in control and the other who is not. In this context, sense when the only interested parties are two individuals or sets of We are persuaded that “[t]he derivative/direct distinction makes little

value of hi s shares. See id. adequately compensating the injured shareholder through an increase in the recover according to their contractual and statutory obligations while it ensures that all of the corporation’s shareholders, creditors, and employees growth. Id. In some cases, a derivative proceeding may be preferable because differ from those of the majority, such as short - term profits over long - term not take into account the fact that the goals of the minority shareholder may derivative. See Landstrom, p. 5 561 N.W.2 d at 14. For example, the ALI rule does relevant considerations in determining whether a suit should be direct or The ALI factors have been criticized, however, for not including all

legislature”); Landstrom, p. 5 561 N.W.2d at 14 - 15 (rejecting ALI rule). is still a corporation with all of the rights and limitations proscribed b y the 1999) (declining to adopt exception and noting that “a closely held corporation shareholder). But see Wessin v. Archives Corp., 592 N.W.2d 460, 466 (Minn. rule for breach of fiduciary duty by majority shareho lders toward the minority Schumacher v. Schumacher, 469 N.W.2d 793, 799 (N.D. 1991) (adopting ALI Johnson & Sons’ Farms, Inc., 537 S.E.2d 248, 258 (N.C. Ct. App. 2000); Richards v. Br yan, 879 P.2d 638, 648 (Kan. Ct. App. 1994); Norman v. Nash Recommendations § 7.01(d), at 17 (1994); see, e.g., Barth, 659 N.E.2d at 562; American Law Institute, Principles of Corporate Governance: Analysis and

distribution of the recovery among all interested persons. interests of creditors of the corporation, o r (iii) interfere with a fair defendants to a multiplicity of actions, (ii) materially prejudice the finds that to do so will not (i) unfairly expose the corporation or the only to derivative actions, and order an individual recovery, if it action, exempt it from those restrictions and defenses applicable discretion may treat an action raising derivative claims as a direct In the case of a closely - held corporation . . . , the court in its p. 6 6

refusing to allow the inspection. RSA 293 - A:1 p. 6 6.04(c) (emphasis added). the order” unless the corporation proves that it had a good faith basis for the shareholder’s costs, including reasonable counsel fees, incurred to obtain and copying of the records demanded, it shall also order the corporation to pay 293 - A:16.04(a). The statute further provides, “If the court orders inspection order inspection and copying of the records at the corporation’s expense. RSA shareholder to inspect and copy the records requested, the superior court may records. RSA 293 - A:16.02(a) (1999). If the corporation does not allow a least five business days before the date on which he wishes to inspect the (1999). The plaintiff must give the corporation written notice of his demand at records as described in RSA 293 - A:16.01(e) (1 999) and RSA 293 - A:16.02(b) regular business hours at the corporation’s principal office, various corporate As a shareholder, the plaintiff has the right to inspect and copy, during

the records. See RSA 293 - A:1 p. 6 6.04 (1999). his claim without addressing his request for legal fees expended i n obtaining Furthermore, the plaintiff contends that the trial court improperly dismissed compel answers to interrogatories demonstrates that the issue was not moot. defendants to produce documents in res ponse to the plaintiff’s motion to dispute.” The plaintiff argues that the fact that the court later ordered the plaintiff now has access to corporate records. All other matters remain in stateme nt, dated February 6, 2004, which stated, “Concerning Count I, dismissing count I, the trial court relied upon the plaintiff’s summary hard - and - fast rules. Petition of Thayer, 145 N.H. 177, 182 (2000). In question of mootness is one of convenience and discretion and is not subject to moot, count I of his petition requesting access to corporate records. The Finally, the plaintiff argues that the trial court improperly dismissed, as

allowing the plaintiff to pursue a direct action against the defendants. example, whether any o f the corporation’s creditors would be prejudiced by RSA 293 - A:7.44. On the other hand, the trial court should consider, for whether a derivative proceeding is in the best interest of the corporation. See c orporation does not have a disinterested board of directors that could evaluate corporation to a multiplicity of actions. Furthermore, it appears that the defendants; thus, there is no risk that a direct suit would expose the the corporation’s shareholders are before the court as either the plaintiff or determination. A direct action may be appropriate in this case because all of all of the above factors, including those suggested by the ALI, in making its pursue his claims in a direct suit against the defendants, taking into account On remand, the trial cour t may, in its discretion, allow the plaintiff to

wrongdoers. goes to the corporation and thus would be under the control of the alleged majority shareholders. Furthermore, any recovery from a derivative proceeding p. 7 7

concurred. BRODERICK, C.J., and NADEAU, DALIANIS and GALWAY, JJ.,

further proceedings in accordance with this opinion. In light of the foregoing, we remand this matt er to the trial court for

not entitled to attorney’s fees under RSA 293 - A:16.04(c). access to documents under RSA 293 - A:16.02(a) was moot, the plaintiff also is and 59. Bec ause the trial court properly found that the plaintiff’s request for plaintiff’s requests for attorney’s fees and costs under Superior Court Rules 36 documents in response to the plaintiff’s interrogatories but denied the order dated March 26, 2004, the trial court ordered the defendants to produce this matter. Compare RSA 293 - A:16.02(a) with Super. Ct. R. 35(a), 36. In its from his right to production of documents through discovery as a litigant in The plaintiff’s right as a shareholder to inspect corporate records differs