Case v. Murdock

528 N.W.2d 386

• Court: South Dakota Supreme Court
• Decided: March 30, 1995
• Docket: 18503, 18505 and 18506
• Status: Published

Opinions

SABERS, Justice

(On reassignment).

In this consolidated appeal, Gary Case appeals a jury verdict in his favor on breach of and tortious interference with his employment contract. Specifically, Case claims the trial court erred in not submitting the issue of punitive damages to the jury on his tor-tious interference claim and in limiting his damages to loss of wages. Craig and Nancy Murdock, Sandra McCroden, individually and derivatively as shareholders of Hickok’s, a South Dakota corporation, appeal the trial court’s failure to instruct the jury on issues regarding Case’s employment. Murdocks and McCroden also appeal the trial court’s decision to appoint a litigation receiver to decide a settlement offer made to the corporation resulting from an earlier lawsuit finding two of Hickok’s officers in breach of their fiduciary duty. Because this issue is determinative and must be resolved first, we reverse and remand the entire case to the trial court for new trials.

FACTS

This appeal involves Hickok’s, a closely-held gaming corporation in Deadwood, South Dakota. Hickok’s has been involved in litigation between the parties to this appeal for four of the five years it has been in existence.¹ In 1992, we decided a case involving Hickok’s and these same parties. Case v. Murdock, 488 N.W.2d 885 (S.D.1992) (Case v. Murdock I). A brief review of that case is necessary to an understanding of this appeal.

In Case v. Murdock I, two of Hickok’s corporate officers and directors, Maxine Case and Judith Sides, brought suit against Hickok’s claiming entitlement to corporate stock. 488 N.W.2d at 886. Hickok’s countersued claiming breach of fiduciary duty by Case and Sides by their purchase of a building for themselves which was leased to Hickok’s. The jury determined the two officers breached their fiduciary duty and found for the corporation, awarding punitive damages but no compensatory damages. The trial court set aside the punitive damage verdict and ordered a new trial on all damage claims, because “the jury’s actions, in failing to award compensatory damages to Hickok’s when awarding punitive damages was, ‘facially inconsistent.’” Case v. Murdock I, 488 N.W.2d at 889. The court then awarded judgment in favor of Maxine Case on the stock issue. We affirmed the trial court on all issues and remanded for trial. Id. at 887.

Following our affirmance and prior to a new trial on Hickok’s compensatory damage claims, Case and Sides made a settlement offer to the corporation. The trial court appointed a receiver, under SDCL 21-21-3, to consider the offer “and all other litigation in which the corporation and its shareholders are involved” following the court’s conclusion that “conflicts and dissension” existing on Hickok’s board of directors left the board unable to exercise its corporate function regarding these matters. The trial court’s appointment of the receiver and subsequent acceptance of the receiver’s decision regarding the settlement offer is the key issue in this consolidated appeal as it must first be correctly resolved before the other issue.²

THE TRIAL COURT WAS WITHOUT AUTHORITY TO APPOINT A LITIGATION RECEIVER FOR THE PURPOSE OF DECIDING A CORPORATION’S CLAIM FOR DAMAGES AGAINST DIRECTORS DETERMINED TO HAVE BREACHED THEIR FIDUCIARY DUTY AS A MATTER OF LAW.

Under Article VI, § 20 of the South Dakota Constitution, “[a]ll courts shall be open, and every man for an injury done him in his property, person or reputation, shall have remedy by due course of law, and right and justice, administered without denial or delay.” This constitutional provision provides that courts have the authority to adjudicate and that individuals have the right to remedy by due course of law in South Dakota courts. Nowhere under the South Dakota Constitution nor the statutes of the State of South Dakota are receivers granted judicial authority to act in place of a court.

Under South Dakota law, there are a number of statutory provisions authorizing the appointment of a receiver. See SDCL 21-21-1 to 21-21-5 and SDCL 47-26-29. “A statute conferring the power to appoint a receiver must be strictly construed[.]” 19 C.J.S. Corporations, § 756. None of these sections provide an arguable basis, under the facts of this ease, for a “litigation” receiver. “[T]he court cannot confer upon the receiver other or greater authority than is conferred by these Code provisions.” Hogg’s Receiver v. Hogg, et. al., 265 Ky. 656, 97 S.W.2d 582, 583 (1936).

In fact, the whole concept of the receivership is contrary to the use of that office in this case. Receiverships are intended to protect “property, funds, or proceeds ... where it is shown that the property or fund is in danger of being lost, removed, or materially injured[.]” SDCL 21-21-1; see 65 Am. Jur.2d, Receivers, § 3. Even in cases where a receiver is empowered to settle creditors’ claims, he must “present[ ] all factual matters and all legal questions ... to the court with ample opportunity for the claimants and objectors to argue the issues [before the court].” In Re E.C. Warner Co., 232 Minn. 207, 45 N.W.2d 388, 394 (1950) (emphasis added). All issues must be “thoroughly litigated” and there must be an adjudication on the merits by the trial court. Id.

SDCL chapter 21-21 does not grant the power to appoint a receiver to usurp the right of parties to a trial on the merits. 65 Am.Jur.2d, Receivers, § 3 provides in part:

The appointment of a receiver certainly is not made for the purpose of destroying the rights of persons, but rather, that their rights may be made more secure.

The trial court mistakenly relied upon SDCL 21-21-3 as authority to appoint a litigation receiver. It merely provides:

A receiver may be appointed by the court in which an action is pending, or by the judge thereof, in the eases where a corporation has been dissolved, or is insolvent, or is in imminent danger of insolvency, or has forfeited its corporate rights; or is unable to exercise its corporate functions because of continued dissen[s]ion between or neglect by its stockholders, directors and officers.

SDCL 21-21-3 governs situations where a receiver may be appointed but does not grant any powers to a receiver beyond those listed in SDCL chapter 21-21. Id. Under SDCL 21-21-5, a receiver may be appointed for “all other cases where receivers have heretofore been appointed by the usages of courts of equity.” There is no indication that the use of a “litigation” receiver has ever been allowed under these circumstances. See 65 Am.Jur.2d, Receivers, §§ 1-489; 4 J.N. Pomeroy, A Treatise on Equity Jurisprudence, § 1334 (5th ed., 1941). “The appointment of a receiver during the pendency of a suit does not determine any rights or title of the litigant parties[.]” Id. at § 1336. The receiver does not act for the benefit of one party or another but impartially for the benefit of the court. Id.

SDCL 21-21-9 provides:

21-21-9. Powers of receiver in collection and management of property.

The receiver has, under the control of the court, power to bring and defend actions in his own name as receiver, to take and keep possession of the property, to receive rents, collect debts, to compound for and compromise the same, to make transfers, and generally to do such acts respecting the property as the court may authorize.

It is obvious that the powers of a receiver of a corporation under this section and in this chapter are limited to control over its own property. No where is a receiver of a corporation given power to control the property of stockholders. Even more so, no power is given to hear and determine conflicting claims among its officers, directors and stockholders. That is the essential breach of authority in this case. Even the trial court judge would not have the power to decide conflicting claims among stockholders in the absence of a trial, so he cannot appoint a litigation receiver to do what he cannot do. SDCL 21-21-9.

The trial court improperly delegated judicial authority to a receiver and abused its discretion by accepting the settlement and dismissal of the case without sufficient knowledge of the settlement agreement. “Judicial power must be exercised by the courts and cannot be delegated or surrendered by a court or judge to a nonjudicial body or person, even with the consent of the parties[.]” 16 Am.Jur.2d, Constitutional Law, § 334.

The trial court’s order gave the receiver authority to act as judge and jury. Through the actions of the receiver, Murdocks and McCroden have been denied any and all derivative rights to trial on the issue of damages. The trial court would not have had authority to dictate the settlement of a case triable to a jury or factfinder under any circumstances. Nevertheless, this trial court granted authority, that it did not possess, to a litigation receiver to dictate settlement without direction or accountability.

We have no alternative but to reverse and remand this entire case to the trial court for new trials based on proper jury instructions.

MILLER, C.J., and KONENKAMP, J., concur. AMUNDSON, J., concurs specially. WUEST, Retired J., dissents.

1 . The litigation involved claims and counterclaims among the corporation’s directors and stockholders, most of whom are related by blood or marriage. The current directors are Maxine Case, Judith Sides, Bret Hamm, Sandra McCro-den, and Craig Murdock. Maxine Case is Gary Case’s mother and Bret Hamm's grandmother. She is also Sandra McCroden’s aunt. Gary Case is Judith Sides' husband. Other involved parties are Bret Hamm’s wife, Angel, and Craig Mur-dock’s wife, Nancy. Although all of these parties have been involved on the trial court level with counsel, some are not involved in this appeal.

2 . The other issue on this appeal involves Gary Case's termination as general manager of Hickok's. Briefly, those facts are:

Gary Case was hired by Hickok's in January 1990 to act as general manager for the corporation for a period of one year. His monthly salary was $1,700. Case had been one of the incorpo-rators and original directors of Hickok's, along with Maxine Case, Judith Sides, and Sandra McCroden. Case had been instrumental in getting the corporation and the casino itself started, handling such matters as initial capitalization, equipment purchases, layout and logo designs, construction work, and licensing. Although the other three original directors were also shareholders, Case was not. Case was involved in divorce proceedings and, pursuant to an oral agreement with at least some of the directors, would purchase stock and become a shareholder in October of 1990, after his divorce became final. At Hickok’s March 1990 annual stockholders' and directors' meeting, however, it was voted and approved that all Hickok's directors would also be shareholders. Since Gary Case was not a shareholder at that time, it followed that he was no longer eligible to be a director of the corporation. At the March meeting Case's title as general manager was also changed to day shift boss but with no change in salary. Although it appears that Case agreed to these changes at the meeting, he felt differently by the next morning and shared his feelings with at least one of the directors, Sandra McCroden. Following the board's refusal on May 10, 1990 of Case’s offer to purchase stock in the corporation. Case tendered his resignation.

Gaiy Case sued the corporation claiming breach of his employment contract. A jury, by special interrogatories, found 1) Hickok's breached its employment contract with Case; 2) Sandra McCroden, Bret and Angel Hamm, and Craig and Nancy Murdock tortiously interfered with Case's employment contract with Hickok’s; and 3) Case was entitled to purchase stock in the corporation.

Following the trial court's filing of the jury verdict, Case filed a motion for a new trial against McCroden, Hamms and Murdocks on grounds that the trial court erred in limiting the measure of damages to Case’s lost wages and in not allowing the jury to consider the issue of punitive damages. McCroden, Hamms, Mur-docks, and Hickok’s moved for a new trial based on insufficient evidence to support the jury's verdict and claiming errors of law in the trial court’s instructions to the jury. Both motions were denied and this appeal follows.

Because determination of Case’s entitlement to purchase stock in the corporation should occur only after the determination of the breach of fiduciary duty question, we remand these issues for trial in appropriate order on appropriate instructions.