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Tope v. Greiner

Court of Appeals of Iowa

December 6, 2017

TIMOTHY TOPE, on behalf of Peripheral Solutions, Inc. and VendPrint, Inc., Plaintiff-Appellee,

         Appeal from the Iowa District Court for Polk County, Scott D. Rosenberg, Judge.

         Defendants appeal the district court decision awarding damages, punitive damages, and equitable relief to plaintiff in a shareholder derivative action.

          Sarah E. Crane and Stanley J. Thompson of Davis, Brown, Koehn, Shors & Roberts, P.C., Des Moines, for appellants.

          Harley C. Erbe of Erbe Law Firm, Des Moines, for appellee.

          Heard by Vogel, P.J., and Tabor and Bower, JJ.

          BOWER, JUDGE.

         Defendants appeal the district court decision awarding damages, punitive damages, and equitable relief to plaintiff in a shareholder derivative action. We find the nominal plaintiff does not have clean hands, and the corporations are not entitled to relief for the time period from October 1, 2010, to April 1, 2011. We reverse the district court's grant of damages on these grounds. We determine Kris Greiner is liable to the corporations for damages arising during the time period from April 1, 2011, until August 9, 2012. We conclude Greiner's decision to accept the settlement of a lawsuit is protected by the business judgment rule and also reverse the district court's award of damages on this ground. We determine the case must be remanded to the district court for a calculation of compensatory damages for the time period of April 1, 2011, until August 9, 2012, for each corporation. Because we are remanding on the matter of compensatory damages, we are also remanding on the issue of punitive damages. We affirm the award of equitable relief, as modified in this opinion. The district court decision is affirmed as modified in part, reversed in part, and remanded.

         I. Background Facts & Proceedings

         Timothy Tope and Greiner incorporated Peripheral Solutions, Inc. (PSI), in 1994. Tope and Greiner each owned fifty percent of the stock and were the sole directors and officers in the corporation. PSI sold computer systems to automotive dealers. Tope, Greiner, and Charlton Hernandez incorporated VendPrint, Inc., in 1997. Each man owned one-third of the stock and was a director and officer in the company. VendPrint primarily sold computer systems to universities and libraries. The businesses were operated together out of an office in Grimes. Greiner managed the businesses, including doing the bookkeeping, while Tope was the salesman.

         At one point the companies had fifteen employees, but by 2010 there were four employees-Tope, Greiner, Danielle Nichols, and Brad Haley. The business relationship between Tope and Greiner deteriorated, with each blaming the other for the financial difficulties of the businesses. PSI did not generate much revenue, and VendPrint's sales had plateaued. Greiner took outside employment to supplement his income, although he continued to work part-time for PSI and VendPrint. Both men charged some personal expenses on their corporate charge accounts, increasing their financial problems.

         On September 11, 2010, Tope purchased Hernandez's shares in VendPrint for one dollar, making him the majority shareholder in VendPrint. Tope did not inform Greiner of the sale, knowing it would cause further friction. Nichols testified Tope told her on September 30, 2010, "I'm going to try to get rid of Kris." Greiner discovered the sale of Hernandez's shares to Tope and Tope's desire to get rid of him that day. He incorporated a new business, Sirk, Inc., also known as SirkTech. Greiner called Nichols and Haley, stating he could no longer work with Tope and asked if they wanted to work with him, and both agreed. During the night, Greiner took the computer servers and some equipment from the office in Grimes and brought them to his home.[1]

         On October 1, 2010, Greiner, Nichols, and Haley began operating PSI and VendPrint from Greiner's home. The companies continued to use the same 800 number and website. Greiner used some funds, $3089.55 from one account and $8950.64 from another account, for operating expenses and opened new bank accounts for the corporations. Greiner stated he took these actions because he wanted to keep Nichols and Haley employed and he felt responsibility to the companies' customers to keep the businesses going, although he did not want to work with Tope any longer. Tope took the remainder of the money from the bank accounts and closed the accounts. Tope forwarded the corporations' mail to his home and collected $40, 000 payable to the corporations.

         Tope demanded the return of the corporations' computer servers, which were returned to the Grimes office in November 2010. Tope stated he never turned the computers on or tried to use them. He never attempted to operate PSI or VendPrint. Tope remained in control of the corporate office in Grimes, including all of the equipment remaining in the office, until December 31, 2010, when Greiner terminated the lease. Tope was told to take what he wanted from the office, but he left several items, which Greiner then placed in storage.

         In April 2011, Greiner began operating the business of PSI and VendPrint through his corporation, SirkTech. SirkTech used the 800 number and website associated with PSI and VendPrint. SirkTech had about the same amount of business as PSI and VendPrint had in the past and had many of the same customers. Greiner testified SirkTech was not very profitable. Nichols also testified the business was about the same as it had been in the past, and she stated PSI and VendPrint did not make much money. SirkTech operates from an office in Des Moines.

         In the past, PSI had obtained a judgment against a former employee, Shaun Felderman, for $28, 690.70, plus attorney fees and interest. During settlement negotiations, Greiner's attorney stated, "There is also a judgment PSI holds against Shaun Felderman as an asset. It is estimated to be valued at approximately $125, 000." On July 3, 2012, Greiner, on behalf of PSI, settled the case for $15, 000. Of this amount, $14, 000 was used to pay attorney fees and $1000 went to PSI. Greiner testified the settlement was not only as to the amount of the judgment but also as to the amount of attorney fees.

         PSI and VendPrint were administratively dissolved by the Iowa Secretary of State on August 9, 2012. Neither Greiner nor Tope took any steps to revive the corporations.

         On October 1, 2012, Tope, on behalf of PSI and VendPrint, brought a shareholder derivative suit, claiming Greiner breached his duties as a director and acted against the interest of the corporations.[2] Tope sought damages, punitive damages, and injunctive relief. Greiner brought counterclaims against Tope for conversion and tortious interference with prospective business advantage.

         A trial was held on October 21 and 22, 2014. Tope testified he was only seeking damages on behalf of PSI and VendPrint, not for himself individually. He testified Greiner did not do enough to promote the business and claimed revenue should have been higher. He also claimed the expenses of the companies were too high, and should only have been $115, 000 per year. Tope also took issue with the Felderman settlement. Greiner testified he believed he was acting in the best interests of the companies. He stated he wanted to keep the employees working and to service the companies' customers.

         The district court filed its ruling on April 4, 2015.[3] The court entered judgment against Greiner for $682, 223.20 in compensatory damages and $275, 365.34 in punitive damages, for a total judgment of $975, 588.54 in favor of PSI and VendPrint. The award did not distinguish between the amount awarded to PSI and the amount awarded to VendPrint. The court also awarded PSI and VendPrint equitable relief, requiring Greiner to provide the companies with certain information and to cease using the 800 number and website.

         Greiner filed a motion pursuant to Iowa Rule of Civil Procedure 1.904(2).[4]Greiner claimed the district court should have found Tope was not entitled to relief under the doctrine of clean hands. He also stated the court had improperly calculated compensatory damages, punitive damages were not appropriate, and the equitable relief was excessive and confusing. The court determined the clean hands doctrine did not apply because Tope's purchase of Hernandez's shares for one dollar did not relate to Greiner's misconduct. The court denied Greiner's rule 1.904(2) motion. He now appeals.

         II. ...

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