Wednesday, April 24, 2013

Coyle v. Schwartz Returns to the Court of Appeals

Coyle v. Schwartz Returns to the Court of  Appeals
 for Quick Disposal of Remaining Claims

      Coyle v. Schwartz has returned to the Kentucky Court of Appeals, Schwartz continuing to assert a variety of wrongs purportedly done to him by Coyle, his former co-owner of a Kentucky corporation.  The Court of Appeals has quickly disposed of the those remaining claims.  Schwartz v. Coyle, No. 2011-CA-002335-MR, 2013 WL 1701824 (Ky. App. April 19, 2013) (Not to be Published). 
      Schwartz and Coyle were the co-shareholders of American Scale Corporation, a Kentucky corporation, each initially being an equal shareholder.  After an automobile accident involving Schwartz and his passenger, an incident that led to the passenger bringing suit against American Scale, Coyle insisted that Schwartz convey to him a 1% in the corporation’s shares, thereby constituting Coyle the 51% shareholder while leaving Schwartz with 49% of the shares.  Documents to effect that transfer were subsequently executed.  Some two years thereafter, Schwartz and Coyle executed a buy-sell agreement that provided, in part, that the majority shareholder would have a call option on the minority shareholder’s shares at a price determined by the shareholders from time to time.  They initially agreed that the shares would have a value of $250 each; they never subsequently updated that determination.  Twelve years thereafter, Coyle exercised his call option, indicating he would pay to Schwartz the $250 per share agreed to twelve years previously.  Schwartz filed suit, challenging the validity of that buy-sell agreement and the $250 per-price share.  While the trial court held that the $250 per share price was an unenforceable penalty, directing that the shares be re-valued before Schwartz would be compelled to sell, it found the agreement itself enforceable. 
      In a prior review by the Court of Appeals, the determination as to the binding nature of the agreed upon price was reversed to the effect that the valuation mechanism set forth in the buy-sell agreement would be enforced as written.  The Kentucky Supreme Court denied discretionary review of that decision, but as well ordered that the decision of the Court of Appeals not be published.  Coyle v. Schwartz, Nos. 2002-CA-001287-MR, 2002 CA-001574-MR (Ky. App. March 26, 2004).

      On remand to the trial court, there remained a number of claims by Schwartz, namely:
   Wrongful discharge of Schwartz by American Scale;
   Shareholder derivative claim by Schwartz for breach of fiduciary duty;
   A claim by Schwartz against Coyle for breach of fiduciary duty; and
   Schwartz’s claim against Coyle for intentional infliction of emotional distress.
These claims were dismissed by the trail court on a pair of motions for summary judgment.

      On the basis that Schwartz was no longer a shareholder of the corporation, it was determined he lacked standing to pursue the shareholder derivative claim.  In reliance upon Bacigalupo v. Kohlhepp, 240 S.W.3d 155 (Ky. App. 2007), the Court held that one who lost their shareholder status during the pendency of a derivative action lost their standing to pursue that action.  Schwartz’s effort to distinguish that case on the basis that it involved a cash-out merger where his situation involved the sale of his shares to another shareholder was unavailing; the Court focused upon the plaintiff’s status as a shareholder and not the mechanism by which they ceased to be a shareholders.
      Second, in a somewhat confusing passage, the Court held, inter alia, that a shareholder does not, in his or her individual capacity, have a personal cause of action arising out of injuries alleged to be suffered by the corporation.
      With respect to the claim for wrongful discharge, Schwartz argued that his termination was consequent to his effort to inspect company records under KRS § 271B.16-040, arguing, it would appear, that it was a violation of public policy for him to be discharged for exercising his statutory right.  This argument the Court of Appeals rejected, noting that the corporate document inspection statute contains its own remedy, namely a court order of inspection with the recovery of costs and attorney fees, citing in support thereof Grzyb v. Evans, 700 S.W.2d 399 (Ky. 1985).  On that basis, the wrongful discharge claim was rejected.
      As for the remaining charge, namely one of intentional infliction of emotional distress, while there was some confusion as to whether this had been actually dismissed by the trial court on summary judgment, it was determined that the matter was not preserved for appeal, and therefore could be easily set aside.
      At this juncture, it is not known whether Schwartz will seek discretionary review with the Kentucky Supreme Court.
      As to the claim of wrongful discharge from employment, it needs to be remembered that the shareholder and employment relationships are distinct from one another and as defined by distinct documents, agreements and law.  As noted in Releford v. T. Clay Stuart, P.S.C., 2006 WL 1949819 (Ky. App. Nov. 15, 2006), it quoting Shrout v. The TFE Group, 161 S.W.3d 351, 354 (Ky. App. 2005), “[I]mportant to a finding of wrongful discharge is the requirement that the public policy must be defined by statute and directed at providing statutory protection to the worker in his employment situation."

       No appeal of the Court of Appeal's decision was made to the Kentucky Court of Appeals, and this decision became final on June 3, 2013.

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