Case No. 1:96cv178.
Filed Date: January 13, 1999.
After a non-jury trial in the above-styled case on November 17-19, 1997, counsel for the parties were directed to submit proposed findings of fact and conclusions of law. Having heard the testimony and reviewed the exhibits offered at trial and the post-trial submissions by the parties, the court is prepared to issue the following findings of fact and conclusions of law in accordance with the provisions of Fed.R.Civ.P. 52(a).
Plaintiffs Worldwide Forest Products, Inc. ("Worldwide") and Treat-All Products, Inc. ("Treat-All") filed this action against defendants Winston Holding Company ("WHC"), M.W. Equipment Company, David Wise, Marilyn Webb, Tom Kinkaid, Edwin Generes d/b/a Generes Associates, and Bill Garner on June 10, 1996. Plaintiffs alleged twelve separate causes of action against some or all of the named defendants. Plaintiffs filed an amended complaint on January 31, 1997, which comprised ten claims against the defendants: (1) Securities fraud in violation of federal law; (2) securities fraud in violation of state law; (3) conversion; (4) fraud; (5) slander of title; (6) negligent misrepresentation; (7) breach of fiduciary duty; (8) corporate waste and mismanagement; (9) civil conspiracy; and (10) unjust enrichment. Defendants WHC and Kinkaid have asserted counterclaims against plaintiffs for breach of contract and for foreclosure on the promissory note at issue. Defendant Wise has stated the following counterclaims against the plaintiffs: (1) securities fraud in violation of federal law; (2) securities fraud in violation of state law; (3) conversion; (4) fraud; (5) defamation of character; (6) negligent misrepresentation; (7) civil conspiracy; (8) breach of contract; (9) unjust enrichment; (10) filing of false and fraudulent tax returns and failure to pay withholding taxes; and (11) malicious prosecution.
Plaintiffs and defendants Garner, Webb, M.W. Equipment Co., and Generes d/b/a Generes Associates have settled their claims against one another, leaving only Wise, Kinkaid and WHC as defendants.
The court has jurisdiction of this action under 28 U.S.C. § 1331 in that there are federal questions raised in the pleadings, and the court has supplemental jurisdiction of the parties' state claims pursuant to 28 U.S.C. § 1367. In accordance with the provisions of 28 U.S.C. § 636(c), the parties consented to have a United States magistrate judge conduct all proceedings in this case, including an order for entry of a final judgment. T his opinion and the accompanying final judgment in this case follow from that authority.
Much of this litigation centers around two real estate transactions. In 1988, Wise formed Treat-All for the sole purpose of purchasing the business of Superior Wood Products, a wood treatment plant in Louisville, Mississippi, and Wise was at various times a shareholder, officer, director and employee of Treat-All and its parent company Worldwide. The purchase of Superior Wood Products did not include the land upon which the plant was located, however. Wise then conceived the idea of forming WHC to purchase the land itself, which comprised 120 acres, twenty of which consisted of a hazardous waste impoundment area. Although WHC was Wise's idea, he asked defendant Kinkaid to incorporate WHC. According to Wise, the role of WHC was to acquire the entire 120-acre tract, then convey only the 100 uncontaminated acres to Treat-All, so as to "immunize" Treat-All, Wise and the shareholders of Treat-All from liability for the costs of any environmental cleanup associated with the contaminated 20 acres.
Treat-All became a wholly-owned subsidiary of Worldwide in March 1991.
The real property upon which the plan t was situated was owned by Savings Life Insurance Corporation of Louisville, which had foreclosed on the property.
The site was contaminated with creosote.
Savings Life sold the 120 acres to WHC on December 6, 1990 for $100,000, then WHC retained the 20 contaminated acres and sold the remaining 100 acres to Treat-All in February 1991 for $775,000. A closing statement for the sale of the 100 acres signed by Kinkaid, as president of WHC, and Wise, as president of Treat-All, indicates that WHC actually received $100,000 in cash, a $362,500 real estate note secured by a deed of trust, and a stock swap valued at $312,500.00. (Ex. P-10.)
Wise entered into an employment agreement with Worldwide after it acquired Treat-All on May 1, 1991. (Ex. D-20(DW).) Pursuant to that agreement, which Wise signed on behalf of himself and as President of Worldwide, Wise was to conduct and supervise the day-to-day operations of Worldwide for a period of five years. In return, Wise was to receive a base salary of $10,000 per month, in addition to sales commissions, a stock option and other benefits. The plan was ultimately to take Worldwide public by way of a public stock offering.
Brian Sorrentino first became involved with Treat-All as a member of a group of investors Wise contacted to raise $100,000 as a down payment to WHC for the land. Sorrentino was aware that the price of the real estate was $775,000, represented by the $100,000 down payment, the stock swap and the $362,500 note, and he testified that he was well aware that he would probably not realize a return on his investment unless and until the company went public. After Worldwide acquired control of Treat-All in March of 1991, Sorrentino assisted Wise in raising approximately $2,500,000 for an initial public offering of Worldwide stock. Worldwide came to Sorrentino's attention again in September 1992 when he learned that the company had failed to provide appropriate information to NASDAQ to keep the company listed on that stock exchange. In December 1992, NASDAQ changed its market listing of Worldwide to indicate that the company was delinquent, which Wise testified caused the value of the stock to drop and the company to virtually "evaporate" within minutes. Sorrentino testified that Generes, as Chief Financial Officer of Worldwide, solicited his involvement again in January 1993 to infuse capital into the company. Finally, in late 1993, an agreement was reached whereby Sorrentino's company, International Financial Industries, would underwrite Worldwide for $1,200,000 and invest up to an additional $1,500,000 in return for a controlling interest in the company and additional consideration.
(Ex. D-61(DW).) The agreement was designated "engagement letter." Sorrentino effectively assumed control of Worldwide with the execution of that agreement in November 1993, although Wise retained a non-managerial ownership interest in the company after a reverse stock split. Wise also remained entitled to $4000 per month in salary, plus expenses of $50 per day pursuant to the engagement letter.
Wise later entered yet another employment agreement with Worldwide effective July 1, 1994. (Ex. D-79(DW).) Pursuant to that agreement, Wise became Chief Operating Officer, General Manager and Secretary of the Board of Directors for Worldwide, and he was to receive a $36,000 annual salary, plus incentives. Worldwide also agreed to reimburse Wise for "out-of-pocket" expenses from time to time.
Wise's employment relationship with Worldwide was terminated pursuant to an agreement dated September 30, 1994 and executed by Wise and Sorrentino. (Ex. D-90(DW).) The agreement, often referred to at trial as the "settlement agreement," recited that "the controlling interests on the Board of Directors and Wise have come to odds over conflicts in management style," and it operated as a settlement of the amounts due Wise and Worldwide pursuant to the engagement letter and the July 1, 1994 employment agreement. Upon the payment of monies, Wise agreed, inter alia, to the mutual termination of his employment agreement, to sell certain personal property to Worldwide, and to cancellation of a 1993 promissory note from Worldwide in favor of Wise.
Slander of Title
Plaintiffs contend that defendants "falsely and maliciously, through the use of slanderous words, encumbered and disparaged the title of Treat-All to the land upon which the wood treatment plant is located [when they] filed for record an instrument they know to be false and inoperative." (Amended Complaint, ¶¶ 86-87.) "The malicious filing for record of an instrument known to be inoperative, and which disparages the title of land, is a false and malicious statement for which damages may be recovered." Dethlefs v. Beau Maison Development Corp., 511 So.2d 112, 117 (Miss. 1987) (citation omitted). However, actions for slander of title must be brought within one year of discovery of the offense, and defendants have raised the statute of limitations as a bar to this claim. Miss. Code Ann. § 15-1-35 (1995); Stubblefield v. Walker, 566 So.2d 709, 711 (Miss. 1990). Plaintiffs' slander of title claim arises from the 1991 real estate transaction whereby Treat-All acquired the 100-acre tract from WHC for $775,000. The only instrument of record to which plaintiffs can point as being slanderous of the title to the 100 acres is the deed of trust, (Ex. P-12), filed in the office of the Winston County Chancery Clerk on May 7, 1991.
Wise, as presid ent of Treat-All, had hired attorney Richard Ballard to assist in acquiring the 120-acre tract from Savings Life Insurance Company. Ultimately, Wise also asked Ballard to file the deed of trust, which was actually executed on February 28, 1991. Ballard blamed the delay between execution and filing on "discrepancies" between the deed of trust itself and other documents pertaining to the sale.
Plaintiffs correctly contend that the statute of limitations was tolled until plaintiffs discovered or through the exercise of reasonable diligence should have discovered defendants' tortious conduct. Plaintiffs have not shown to the court that Worldwide and Treat-All, as individual entities, could not have discovered the alleged claim based upon the conduct of Wise while Wise was in control of the companies. Even if they could not have done so, however, once Sorrentino assumed control of Worldwide in late 1993 he was certainly in a position to determine whether the deed of trust was slanderous. Plaintiffs, in their own proposed findings of fact and conclusions of law, acknowledge that Sorrentino discovered the alleged real estate fraud at least by 1994 during the course of audits of Worldwide books when auditors discovered that no payments had ever been made on the note. Because the slander of title claim was not filed until June 10, 1996, it is barred by the statute of limitations.
See Ventress v. Wallace, 71 So. 636, 642 (Miss. 1916); see generally 18 Am. Jur. 2d Corporations § 1820 (1985).
Plaintiffs also contend defendants are guilty of securities fraud in connection with the offer and sale of Treat-All stock in violation of Miss. Code Ann. § 75-71-501. This statute makes it unlawful for any person, in connection with the offer, sale or purchase of any security, directly or indirectly, (1) [t]o employ any device, scheme or artifice to defraud; (2) [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or (3) [t]o engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person. Id. Plaintiffs further charge defendants with violations of the Securities Exchange Act of 1934 and Rule 10b-5, for which they could be jointly and severally liable pursuant to section 20(a) of the Act. Defendants counter that plaintiffs' securities claims are barred by the applicable statutes of limitations. Plaintiffs' allegations of securities fraud are vague and poorly supported by proof of specific facts which would give rise to liability of defendants. Nevertheless, it is clear that actions under § 10(b) of the Securities Exchange Act of 1934 must be brought "within one year after the discovery of the facts constituting the violation and within three years after such violation." 15 U.S.C. § 78i(e). Plaintiffs' claims under the 1934 Act, specifically § 10(b) of the Act, were filed well beyond three years after the sale of Treat-All securities to Worldwide, thus they are time barred. Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S. Ct. 2773, 115 L. Ed. 2d 321, reh'g denied, 501 U.S. 1277, 112 S. Ct. 27, 115 L. Ed. 2d 1109 (1991); see Aizuss v. Commonwealth Equity Trust, 847 F. Supp. 1482 (E.D. Cal. 1993). Finally, "since Rule 10b-5 does not specify a statute of limitation, the state statute of limitation applies." Stewart v. Germany, 631 F. Supp. 236, 247 (S.D. Miss. 1986). The Stewart court held that the Mississippi statute governing limitations of actions under Rule 10b-5 is Miss. Code Ann. § 75-71-725, which provides a two-year limitations period for these actions. Id. Federal law governs accrual of the cause of action, which triggers the statute of limitations, and "a cause of action under Rule 10b-5 accrues and the statute of limitation begins to run when a party has `notice of facts which, in the exercise of due diligence, would have led to actual knowledge of the violation.'" Id. (quoting Azalea Meats v. Muscat, 386 F.2d 5, 8-9 (5 th Cir. 1967)). As in the case of plaintiffs' slander of title claim, plaintiffs have not established that they could not have discovered the facts giving rise to any securities fraud claim through the exercise of due diligence upon Sorrentino's coming to power in Worldwide in 1993. The court finds, therefore, that all plaintiffs' claims for securities fraud are barred by the applicable statutes of limitations.
Plaintiffs also allege in their amended complaint, their trial brief and their proposed findings of fact and conclusions of law that defendants violated Miss. Code Ann.§ 75-71-604. There is no section of the Mississippi Code which corresponds to that section number.
15 U.S.C. § 78a-78mm.
17 C.F.R. § 2 40.10b-5. Miss. Code Ann. § 75-71-501 is Mississippi's version of what is commonly called Rule 10b-5.
15 U.S.C. § 78t. This section of the Act imposes liability on "controlling persons" and those who aid and abet violations of securities laws without acting in good faith. See Borden, Inc. v. Spoor Behrins Campbell Young, Inc, 735 F. Supp. 587 (S.D. N.Y. 1990); Felts v. National Account Systems Association, Inc., 469 F. Supp. 54 (N.D.Miss. 1978).
Defendant Wise submits a proposed conclusion of law that plaintiffs' federal securities fraud claim is barred by the statute of limitations contained in 15 U.S.C. § 77m, which provides that actions to enforce liability under 15 U.S.C. § 77k, 77l(1) or 77 l(2) must be brought no later than three years after a security was offered to the public or sold. See Shotto v. Laub, 635 F. Supp. 835 (D. Md. 1986). These statutes are portions of the Securities Act of 1933, 15 U.S.C. § 77a-77aa, but plaintiffs make no allegation that defendants are liable to them under that Act. The United States Supreme Court has noted that "the various 1- and 3-year periods contained in the 1934 and 1933 Acts differ slightly in terminology. To the extent that these distinctions in the future might prove significant, we select as the governing standard for an action under § 10(b) the language of § 9(e) of the 1934 Act, 15 U.S.C. § 78i(e)." Lampf, Pleva, Lipkind, Prupis Petigrow v. Gilbertson, 501 U.S. 350, 364 n. 9, 111 S. Ct. 2773, 115 L. Ed. 2d 321, reh'g denied, 501 U.S. 1277, 112 S. Ct. 27, 115 L. Ed. 2d 1109 (1991). Thus, Wise's protestations regarding § 77m are inapposite.
This language is substantially similar to that found in 15 U.S.C. § 78r(c) .
Plaintiffs' conversion claim is based on the fact that defendant Wise instructed Liz Kelly, a secretary and bookkeeper at Treat-All/Worldwide, to cash several company checks and then turn the money over to him. "Conversion results from conduct intended to affect property. Conversion requires an intent to exercise dominion or control over goods inconsistent with the true owner's rights." Masonite Corp. v. Williamson, 404 So.2d 565, 567 (Miss. 1981) (citing Mississippi Motor Finance, Inc. v. Thomas, 149 So.2d 20 (Miss. 1963). The checks in question were written on various Treat-All accounts between November 1993 and July 1994 and were signed by Wise, plant manager Rodney Nicholas or by Kelly herself. (Exs. P-74, -75.) The checks introduced into evidence totaled $15,550 for that period of approximately nine months.
Kelly testified that she would sometimes sign Nicholas' name on a check for Wise and inform Nicholas of this fact afterward.
Plaintiffs make much of the somewhat unusual procedure by which Wise instructed Kelly to cash the checks and return the proceeds to him. However, plaintiffs bear the burden of proving that Wise intended to exercise dominion over those funds in disregard of plaintiffs' rights. Plaintiffs have not sustained this burden. Under the employment agreement in effect from 1991 through November 30, 1993, Wise was clearly entitled to a base salary of $10,000 per month. (Ex. D-20(DW).) Between November 30, 1993 and July 1, 1994, Wise was entitled to $4000 per month, plus expenses. Wise testified that he was paid $36,000 in 1992, $6300 in 1993, $30,000 in 1994 and $15,000 in consulting fees. Plaintiffs have not presented evidence that the checks at issue were not, in fact, meant to cover Wise's salary, reimbursements for expenses incurred on behalf of the company and other employment compensation as Wise contends. As such, the conversion claim must fail.
There is in the evidence of record a letter from Wise dated April 20, 1994 wherein he agrees, in light of the poor performance of the company through September 30, 1993, to reduce his salary to "the amounts actually paid" through that date. (Ex. D-74(DW).) The letter also bears the signature of a Worldwide representative, executed May 12, 1994, indicating the company's agreement with the terms of the salary reduction. This letter would appear to have no effect on salary due Wise after September 30, 1993 under the original employment agreement or the subsequent employment agreement effective July 1, 1994.
Wise introduced into evidence a document styled "David Wise Payroll History," (Ex. D-29(DW)), but the document does not aid the court in determining the exact amounts Wise earned. Plaintiffs did not introduce evidence to contradict Wise's testimony about amounts earned, however.
Fraud, Negligent Misrepresentation, Breach of Fiduciary Duty, Corporate Waste and Mismanagement and Civil Conspiracy
Plaintiffs' state law fraud claim does not present a statute of limitations problem, as that cause of action is governed by Mississippi's 3-year residual statute of limitations. Miss. Code Ann. § 15-1-49; see Nichols v. Tri-State Brick and Tile Company, Inc., 608 So.2d 324, 331-33 (Miss. 1992). The elements of fraud under Mississippi law are:
(1) a representation; (2) its falsity; (3) its materiality; (4) the speaker's knowledge of its falsity or ignorance of its truth; (5) the speaker's intent that the representation should be acted upon by the hearer and in the manner reasonably contemplated; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on the representation's truth; (8) the hearer's right to rely thereon; and (9) the hearer's consequent and proximate injury. Singing River Mall Co. V. Mark Fields, Inc., 599 So.2d 938, 945 (Miss. 1992) (citations omitted). Plaintiffs contend that the fraud arises from Wise's representation to Sorrentino's group that the $100,000 he solicited from them to buy the 100 acres from WHC in 1991 was a "down payment." Plaintiffs maintain that $100,000 actually represented full, and therefore adequate, consideration for the property, and the $362,500 note was fraudulent.
The $775,000 price Treat-All paid WHC for the 100 acres was grossly inflated, according to the plaintiffs, in light of the fact that $100,000 is listed as the option price for the entire 120 acres in the original lease from American Creosote Works Mississippi, Inc. to American Wood Treatment, Inc., (Ex. P-2), and the subsequent lease to Superior Wood Products, Inc. (Ex. P-2A). Richard Ballard, the attorney Wise retained to close the sale of the property, testified that Wise told him the $362,500 note was not a "legitimate debt" and was merely an attempt to make Treat-All appear "judgment proof" to its creditors. Wise vehemently contradicted Ballard's version of events, arguing that Treat-All had no creditors, was in good financial condition and had no motive whatsoever to make itself appear judgment proof. The contract of sale listed the purchase price as $100,000 in the body of the instrument, but Wise and Kinkaid executed an addendum listing the note, (Ex. P-11), and the stock swap as additional consideration. (Ex. P-3.) The Board of Directors of Treat-All unanimously consented to the sale and the entire $775,000 consideration on January 30, 1991. (Ex. P-7.)
Ballard testified at one point that he was surprised when he learned of the additional $362,500 consideration at a deposition in 1997, but he also indicated that Wise had first told him about the note before Treat-All bought the property in 1991 and that he had also been surprised about the debt when it was referenced in a July 27, 1995 letter from a WHC representative. (Ex. P-50.) Ballard had issued a title certificate listing the deed of trust securing the note as an encumbrance to the property, (Ex. D-22(DW)), but the copy of the title certificate offered into evidence is undated.
Although the first payment on the note came due on March 28, 1991, neither Treat-All nor Worldwide has ever made any cash payments to WHC. Kinkaid testified that the only value received on the note was some 50,000 "worthless" shares of Worldwide stock Wise transferred to Kinkaid and WHC in late 1991. (Ex. P-18.) Wise transferred an additional 125,000 shares of Worldwide stock to cover payments on the note which came due between October 1991 and April 1993. (Ex. P-76.) After Wise left Worldwide, Kinkaid instituted foreclosure proceedings on the note in 1995.
Defendants contend that the consideration in excess of $100,000 represents compensation for the risk WHC incurred in retaining the 20 contaminated acres. The only appraisal admitted into evidence valued all 120-plus acres of the real property, without improvements, at $598,000. (Ex. WH-17.) This appraisal, however, makes no mention whatsoever of the potential liability for environmental cleanup and its concomitant effect on the value of the land. Sorrentino testified regarding an appraisal which was dated December 1990 and was attached as an exhibit to the motion of Savings Life, which was in receivership in Louisiana, for leave to sell the property for $100,000. Sorrentino also testified that based upon his familiarity with the land values in the area, he could not conceive of land selling for in excess of $1,000 per acre. Although the court may consider the testimony of a layman as it relates to land value under Mississippi law, see Pearl River Valley Water Supply Dist. v. Wood, 172 So.2d 196, 204 (Miss. 1965), Sorrentino did not establish a basis for his knowledge of land values in Winston County, Mississippi at trial, and the court is not convinced that his testimony was entirely credible as a result.
Plaintiffs also make vague allegations of negligent misrepresentation by all the defendants. Claims of negligent misrepresentation and intentional misrepresentation are different in that "[t]he basis for damages resulting from negligent misrepresentation is the lack of care; the basis for damages resulting from fraud is the want of honesty." First Money, Inc. v. Frisby, 369 So.2d 746, 750 (Miss. 1979). Although the court is unaware of any Mississippi case directly on point, the court considers it axiomatic that actions which are clearly intentional cannot provide the basis for a claim of negligent misrepresentation. See Miller v. Fairchild Industries, Inc., 629 A.2d 1293 (Md.App.), cert. denied, 634 A.2d 46 (1993).
The claims of breach of fiduciary duty and corporate waste and mismanagement are made against defendant Wise only. "[T]he elements of a negligent misrepresentation claim are: (1) a misrepresentation or omission of fact; (2) materiality; (3) the failure to exercise ordinary care; (4) reasonable reliance; and (5) injury." Clark v. St. Dominic-Jackson Memorial Hospital, 660 So.2d 970, 974 (Miss. 1995) (citing Berkline Corporation v. Bank of Mississippi, 453 So.2d 699, 702 (Miss. 1984)). Again, the claim hinges on the representations made regarding adequacy of consideration for the sale of the 100 acres to Treat-All in 1991.
See Spragins v. Sunburst Bank, 605 So.2d 777, 780 (Miss. 1992) ("In order to recover in a cause of action based on negligent misrepresentation, [plaintiffs] must prove by a preponderance of the evidence: (1) a misrepresentation or omission of a fact; (2) that the representation or omission is material or significant; (3) that the person charged with the negligence failed to exercise that degree of diligence and expertise the public is entitled to expect of such persons; (4) that they reasonably relied upon the bank officer's misrepresentation or omission; (5) that they suffered damages as a direct and proximate result of such reasonable reliance") (citations omitted).
Although plaintiffs contend that Wise's acts allegedly constituting conversion also amounted to actionable negligent misrepresentation, because the court finds today that the conversion claim is baseless, the claim of negligent misrepresentation based upon the same grounds is also baseless.
The court is concerned with the fiduciary relationship Wise had with Treat-All and the wide discrepancy between the price WHC paid for the 120 acres and the price Treat-All paid to WHC for the 100 non-contaminated acres, although plaintiffs' claim in this respect is, again, inartfully pleaded. "Axiomatic in our law is the proposition that corporate officers and directors, as fiduciaries, owe to their corporation the duty to exercise the utmost good faith and loyalty." Ellzey v. Fyr-Pruf, Inc., 376 So.2d 1328, 1332 (Miss. 1979) (citing American Empire Life Insurance Co. v. McAdory, 319 So.2d 237 (Miss. 1975); Cooper v. Mississippi Land Company, 220 So.2d 302 (Miss. 1969)); see Derouen v. Murray, 604 So.2d 1086, 1092 (Miss. 1992) (officer has "duty of loyalty and good faith in discharge of corporate office"). Corporate officers, in turn, have the benefit of the "business judgment rule," which states that a "director or officer who makes a business judgment in good faith fulfills the duty [of care] if the director or officer: (1) is not interested . . . in the subject of the business judgment; (2) is informed with respect to the subject of the business judgment to the extent the director or officer reasonably believes to be appropriate under the circumstances; and (3) rationally believes that the business judgment is in the best interests of the corporation." Omnibank of Mantee v. United Southern Bank, 607 So.2d 76, 85 (Miss. 1992) (citing Miss. Code Ann. § 79-4-8.42).
In general, "where a confidential or fiduciary relationship exists between parties to a deed, a presumption of invalidity arises." Patterson v. Merchants Truck Line, Inc., 448 So.2d 288, 290 (Miss. 1984). However, the Mississippi Supreme Court has also held, in overwhelmingly descriptive language, that
[g]rossly inadequate consideration is not fraud per se, but is germane to the question of the damages incurred by the deceived party. Shockingly inadequate consideration is to fraud as a bad smell is to a putrefying carcass. Just because there is a bad smell in the air doesn't necessarily mean that there is a carcass nearby, but if the smell is bad enough it is strongly suggestive. Similarly speaking, if the consideration in a transaction is grossly inadequate, such inadequacy constitutes a powerful glue which binds together other factors, other pieces of the puzzle which constitutes an overall fraudulent scheme.Johnson v. Brewer, 427 So.2d 118, 125 (Miss. 1983).
Here, plaintiffs have presented evidence of grossly inflated consideration in exchange for the purchase price of the 100 acres Treat-All acquired from WHC in 1991, but plaintiffs chose not to introduce credible, definitive evidence, expert or otherwise, of the true value of the risk associated with WHC's retaining the contaminated land or the possibility of liability for cleanup costs, or even the current fair market value of the land. The court concludes, however, that the nature of the transaction, the fiduciary duty Wise owed to Treat-All, the fact that Wise was the moving force behind incorporation of WHC for the express purpose of serving as the "middle man" for the land transaction, the absence of payments on the $362,500 note, and the absence of legal action taken to foreclose on the note until after Wise left Treat-All/Worldwide strongly support the presumption of invalidity referred to in Patterson. Plaintiffs direct the court to the Mississippi Supreme Court's decision in Rhoads v. Borden, 584 So.2d 409 (Miss. 1991), in support of their argument that under these circumstances it is incumbent upon Wise to prove that the consideration was, in fact, adquate. Although Rhoads and the precedents upon which it rests primarily involve will contests, the court finds the reasoning of the Mississippi Supreme Court persuasive in the case at bar.
There clearly was a confidential, fiduciary relationship between Wise and Treat-All, WHC was Wise's brainchild, and the transaction giving rise to this lawsuit was the result of his machinations. The terms of the real estate transaction are extremely favorable to WHC, and Kinkaid acted in concert with Wise even though he did not fully investigate the sale so as to determine whether Wise was acting fraudulently. Although he had every opportunity to do so at the trial of this matter, Wise did not present credible evidence that the risk associated with retention of the contaminated land justified the vast difference in consideration. "The burden is on the director or officer charged to show that heacted in good faith." Johnny C. Parker, Mississippi Law of Damages 164 (1990) (citing Knox Glass Bottle Co. v. Underwood, 89 So.2d 799, 799 (Miss. 1956), cert. denied, 353 U.S. 977, 77 S. Ct. 1060, 1 L. Ed. 2d 1137 (1957)). Wise did not carry his burden, and on the basis of the evidence presented at trial, the court finds that Wise committed fraud and breached his fiduciary duty to Treat-All, and Kinkaid conspired with Wise in this endeavor as president of WHC.
As stated earlier in this opinion, the only appraisal admitted into evidence valued the property at $598,000, but this valuation apparently included all 120-plus acres and improvements. (Ex. WH-17.) Wise contends that he should not be held liable for breach of duty to the corporation because he was entitled to rely upon appraisals and financial data prepared by reasonably competent persons. Fought v. Morris, 543 So.2d 167 (Miss. 1989); Miss. Code Ann. §§ 79-4-8.30, -8.42 (1996). However, on cross-examination Wise acknowledged that the appraisal makes no reference to the potential environmental liability. Wise indicated he knew what the liability was and had no need for an appraiser to tell him. The court simply cannot divine, from this appraisal, the risk value associated with the contaminated property itself; thus, it cannot conclude that Wise acted in good faith. In fact, it displays a lack of good faith or good business judgment for Wise to have relied upon the appraisal to assign monetary value to the environmental risk when the appraisal was silent as to that issue. Contrary to Wise's assertions, plaintiffs are not estopped from asserting that Wise breached his fiduciary duty on the ground that Treat-All knew of and acquiesced in the transaction. See Morton v. Resolution Trust Corporation, 918 F. Supp. 985 (S.D. Miss. 1995). The evidence establishes that Wise, for all practical purposes, was Treat-All at all relevant times, and the corporation was realistically in no position to knowledgeably acquiesce to anything Wise proposed to do, whether or not it was in the best interests of the corporation.
As to the conspiracy claim, the Mississippi Supreme Court has held that in the civil context "a conspiracy is `a combination of persons for the purpose of accomplishing an unlawful purpose or a lawful purpose unlawfully.'" Roussel v. Hutton, 638 So.2d 1305, 1315 (Miss. 1994) (quoting Shaw v. Burchfield, 481 So.2d 247, 255 (Miss. 1985) (citations omitted)). Plaintiffs contend that the defendants Wise, Kinkaid and WHC conspired to commit fraud, theft, conversion and embezzlement, as well as to commit insider transactions, acts of self-dealing, corporate waste and mismanagement and other breaches of their fiduciary duties to plaintiffs. The evidence established that the defendants agreed for Kinkaid to act as president of WHC in the land deal with Wise as president of Treat-All. As to Kinkaid's duty, he testified that he conducted some preliminary investigation to determine the risk WHC would assume by retaining the 20 acres, and he suggested a purchase price to Wise of $600,000 to $700,000, although he admitted at trial that this amount was "totally speculative." To the court, this appears to be a situation akin to that addressed by the Fourth Circuit in Clagett v. Hutchison, 583 F.2d 1259 (4 th Cir. 1978). Where an officer in a corporation is selling stock in the corporation and is "in a position to foresee the likelihood of fraud on the corporation . . . at the hands of the transferee, their fiduciary duty imposes a positive duty to investigate the motives and reputation of the would-be purchaser (or purchasers); and unless such a reasonable investigation shows that to a reasonable man no fraud is intended or likely to result, the sellers must refrain from the transfer of control." Id. at 1262 (quoting Swinney v. Keebler Co., 480 F.2d 573, 578 (4 th Cir. 1973)). Although whatever duty Kinkaid owed, he owed it to WHC as an officer of that corporation and not to Treat-All, the Mississippi Supreme Court has recognized as fundamental the theory that "where a stranger participates with the officer of a corporation in the commission of an act of manifest bad faith or breach of duty to it, he, equally with the officer, commits a wrong and ought not to be allowed to derive profit from it." Knox Glass Bottle Co. v. Underwood, 89 So.2d 799, 819-20 (Miss. 1956), cert. denied, 353 U.S. 977, 77 S. Ct. 1060, 1 L. Ed. 2d 1137 (1957). The court concludes that Kinkaid, acting as WHC, and Wise did conspire to commit acts which constituted fraud and a breach of Wise's fiduciary duty to the plaintiff corporations. The very fact of WHC's and Kinkaid's involvement in the sale was the result of Wise's scheme to defraud, and Kinkaid intentionally remained ignorant of the circumstances of the sale. Plaintiffs are thus entitled to relief against Kinkaid, WHC and Wise for "all damages naturally flowing from the conspiracy." 16 Am. Jur. 2d Conspiracy § 70 (1998).
The court must now turn its attention to the appropriate remedy available to plaintiffs for the actions of Wise, Kinkaid and WHC. In the amended complaint plaintiffs sought compensatory damages, punitive damages, interest, attorneys fees, costs and "other relief" for Wise's fraud and breach of duty to the corporation, as well as for the alleged civil conspiracy. In making the demand for relief they did in this case, plaintiffs have by necessity elected to affirm the contract of sale of the land and seek damages. See Johnny C. Parker, Mississippi Law of Damages 228-29 (1990) (citations omitted). As stated earlier, coconspirators are liable for all damages flowing from the conspiracy, and Mississippi law is in accordance with the majority of jurisdictions in holding that the "benefit-of-the-bargain" is the correct measure of damages in cases of fraud. Davidson v. Rodgers, 431 So.2d 483, 485 (Miss. 1983) (quoting Lloyd Ford Co. v. Sharp, 192 So.2d 398, 400 (Miss. 1966) (citation omitted)). This rule allows the "party defrauded to recover the difference between the real and the represented value of the property." Id.
Even if not expressly demanded, it is the court's duty to award appropriate relief based on the evidence. Fed.R.Civ.P. 54(c); see Schnabel v. Philadelphia American Life Ins. Co., 795 F. Supp. 816, 824 n. 25 (S.D. Tex. 1992).
In plaintiffs' post-trial brief, however, they request more specific relief: (1) void the promissory note, deed of trust and all other consideration in excess of $100,000 Treat-All paid to WHC for the property; (2) void all stock held by Wise, Kinkaid and WHC and obtained by fraud or constituting unjust enrichment; (3) compensatory damages of $1 million for mismanagement of the corporation and for instituting the involuntary bankruptcy proceeding, $300,000 for audits that were necessary to prepare financial statements for Worldwide's registration statements because of Wise's mismanagement, and $15,350 Wise embezzled from plaintiffs; (4) punitive damages; (5) attorneys' fees, costs and interest; and (6) "any other relief the court deems appropriate."
"It is axiomatic that when fraud has induced a contract the defrauded party may affirm the contract and sue at law for his damages or he may disaffirm the contract and seek its rescission." William Whitman Co. v. Universal Oil Products Co., 125 F. Supp. 137, 152 (D. Del. 1954). See Fleet National Bank v. Anchor Media Television, Inc., 831 F. Supp. 16, 38 (D. R.I. 1993), aff'd, 45 F.3d 546 (1 st Cir. 1995).
A word about proof of damages. In the court's view, all parties in this case — Kinkaid and WHC excepted — failed to offer satisfactory, i.e., credible, evidence of the amount of damages which each claims against the other. Each side in this dispute must be considered to be knowledgeable and sophisticated, as must the counsel of record. Indeed, Wise himself is a licensed attorney. The failure to offer such evidence of damages disturbed the court, particularly in light of the time and expense involved in preparing for trial and trying the case.
In an effort to finally resolve the case with as much accurate information as possible, the court appointed a real estate appraiser, Alex R. Smith, to make a preliminary inspection of the subject property in order to report a market value estimate as of the retrospective date of February 26, 1991. After Smith was inappropriately contacted by an individual with ties to the plaintiffs, the court dismissed Smith and appointed Hugh Hogue to conduct the preliminary investigation on August 12, 1998. Hogue's preliminary report read, in part,
See Worldwide Forest Products v. Winston Holding Company, Civil Action No. 1:96cv178-A (N.D.Miss. Aug. 12, 1998) (order disqualifying Smith as court-appointed expert and sanctioning plaintiffs and their counsel). This order also served to appoint another individual, Mr. Hugh Hogue, to carry out the appraisal.
In my opinion the subject property is not currently marketable and likely has a negative value. No formal appraisal can be made of the site at present without an environmental inspection and cleanup cost estimate performed by someone knowledgeable in these fields. No one would want in the "chain of title" because it remains an open case with respect to prior pollution and uncertain total cleanup costs.
It was Hogue's opinion, albeit as a real estate appraiser and "not an environmental expert," that a cleanup of the property could likely cost as much as $150,000,000.00.
After receiving the report, the court conducted a status conference on October 7, 1998 to determine how the parties wished to proceed and as a final, yet unsuccessful attempt to foster settlement. The parties have now submitted briefs in support of their respective positions. The plaintiffs have suggested a court-directed inquiry into the actual cost that would be associated with an environmental cleanup of the property, with the cost of the inquiry to be borne equally by all the parties. Kinkaid and WHC urge the court not to appoint an environmental expert, but to render a ruling on the evidence submitted at trial. Wise concurs with the other defendants that the plaintiffs have not carried their burden of proof, and he urges the court to dismiss their claims. After having reviewed the parties' positions, the court concludes that it should issue a decision on the merits of this case without receiving additional evidence in light of the immense cost and extensive time which gathering that evidence would demand. It is manifestly clear that this matter needs to be drawn to a close. The relationship between the plaintiffs and Wise soured long ago, and the parties and interested non-parties alike have deep emotional involvement here. Because substantial time and effort have been invested in this case thus far, both by the interested parties and the court itself, it is incumbent upon the court not to dismiss the case without issuing a final ruling on the merits, if that is at all possible, in spite of the dearth of relevant evidence of damages.
The problem, however, is one of fashioning appropriate relief. As discussed above, it is clear that Wise and the other remaining defendants conspired to and did commit fraud upon the plaintiffs, and the benefit of the plaintiffs' bargain would generally be the correct measure of damages in such a case. The burden is on the plaintiffs, however, to prove damages to a reasonable degree of certainty. Finkelberg v. Luckett, 608 So.2d 1214, 1222 (Miss. 1992) (citation omitted). "It is a basic concept of damages that they must be proved by the party seeking them." Servicios-Expoarma, C.A. v. Industrial Maritime Carriers, Inc., 135 F.3d 984, 995 (5 th Cir. 1998) (citing Prunty v. Arkansas Freightways, Inc., 16 F.3d 649, 652 (5 th Cir. 1994); Pizani v. M/V Cotton Blossom, 669 F.2d 1084, 1088 (5 th Cir. 1982)). And while a party need not prove the amount of damages with absolute certainty, Amiker v. Brakefield, 473 So.2d 939, 940 (Miss. 1985), a "damage award cannot be based on mere speculation." Par Industries, Inc. v. Target Container Co., 708 So.2d 44, 50 (Miss. 1998). As the Fifth Circuit stated in Prunty, 16 F.3d at 652 (citations omitted), It is truistic, indeed elementary, that one who seeks compensatory damages must present evidence of those damages. Hence, when one of the prima facie elements of a claim is damages and the claimant fails to introduce evidence of those damages, he or she commits a fatal error. In such cases, the district court has no choice but to deny the monetary relief requested.
The court does not believe that the plaintiffs and their counsel comprehend to this day that theirs alone is the duty to prove the amount of their damages. As recently as November 16, 1998 they filed a document incorporating by reference their earlier position statement which read, in part, "Plaintiffs are prepared to pay their pro rata share of all costs associated with the retention of a qualified expert to conduct the necessary environmental analysis. . . ." This offer to share in the expenses which plaintiffs had the burden of shouldering in the first instance evidences a continued misapprehension of the allocation of the burden of proof. Had the plaintiffs submitted credible and sufficiently definite evidence of the value of the subject property, appointment of an environmental expert would not have become an issue.
The only appraisal in the record is one introduced by defendants which sets the value of the land at $598,000 as of May 10, 1989. This amount represented the value of the entire 120 acres without taking into consideration the risk associated with possible future environmental cleanup costs. Absent other evidence, an award of damages would be pure conjecture. Although plaintiffs have succeeded in proving that Wise and Kinkaid conspired to and did act fraudulently as described above, the court is unable to determine an appropriate amount of compensatory damages. Nominal damages, which may constitute an appropriate remedy for fraud when the plaintiff fails to carry the burden of proving an amount of compensatory damages with certainty, Mercer v. Davis Berryman International, Inc., 834 F.2d 922, 929 (11 th Cir. 1987), are all that the court may award to the plaintiffs in this case. Morrow v. Barron Motor Co., 90 So.2d 20, 24 (Miss. 1956) (citation omitted) ("nominal damages may be recovered where a cause of action for a legal wrong is established, but there is no proof of actual damages").
The court's expert believed the risk could run into the tens of millions of dollars. This opinion, however, it neither in evidence nor, in its current form, admissible under Fed.R.Evid. 702 and 703.
"Nominal damages may be awarded in a fraud case if there was malicious and willful conduct, and some injury, loss, or detriment has occurred, but there is an absence of proof needed for an award of compensatory damages." 22 Am. Jur. 2d Damages § 22 (1988).
"The term nominal damages means a trivial sum — usually one cent or one dollar — awarded to a plaintiff whose legal right has been technically violated but who has proved no real damage." Chesapeake Potomac Telephone Co. v. Clay, 194 F.2d 888, 890 (D.C. Cir. 1952). See ACI Chemicals, Inc. v. Metaplex, Inc., 615 So.2d 1192 (Miss. 1993). In determining the appropriate amount of damages to award, the court must keep in mind that such an award must be "truly nominal." Matherne v. Wilson, 851 F.2d 752, 762 (5 th Cir. 1988). In this case, the court finds that plaintiffs are entitled to nominal damages in the amount of one dollar only.
However, this very court, applying Mississippi law in a diversity case, awarded nominal damages in the amount of $500 where a plaintiff did not prove compensatory damages to a certainty. Cook Industries, Inc. v. Carlson, 334 F. Supp. 809, 817 (N.D.Miss. 1971).
On a related note, Kinkaid and WHC state as a counterclaim that they are entitled to an award of $362,500, plus interest and attorneys' fees, or to foreclosure upon the 100 acres WHC sold to Treat-All, because plaintiffs have defaulted on the note at issue. They also assert a claim for breach of the land sale contract. This court refuses to enforce the note, however, as it was procured through fraud, and the counterclaims must fail. Indeed, the court considers this an appropriate case for abatement of the purchase price for the land to the extent that it exceeded $100,000. The Mississippi Supreme Court has held "[a]batement of purchase price, at times, is considered an appropriate remedy where recission is denied, and this form of damages has rested upon [a] prayer for general relief." Hamilton v. McGill, 352So.2d 825, 830 (Miss. 1977). Here, the plaintiffs sought, in their claim against the defendants for fraud, not only compensatory and punitive damages, but "such other relief that the court deems appropriate." (Amended Complaint, ¶ 84(f).) Plaintiffs do not seek recission of the contract for the sale of the 100 acres of land, but damages. Although plaintiffs have not provided sufficient evidence for an award of actual compensatory damages, they have presented proof sufficient for the court to grant general relief in the form of abatement of a portion of the purchase price. The court finds that abatement of the purchase price in excess of $100,000 is relief that is equitable and just. As such, the transfer of the $362,500 real estate note and the certificates of stock transferred as payment of the purchase price and interest on the note should be set aside and held for naught.
Plaintiffs introduced evidence of other acts by Wise which, plaintiffs claim, could be construed as corporate waste or mismanagement. Wise, as an officer of Treat-All, "owe[d] the corporation a duty of care, a duty to perform [his] functions in good faith, in a manner that he . . . reasonably believe[d] to be in the best interest of the corporation, and with the care that an ordinarily prudent person would reasonably be expected to exercise in a like position and under similar circumstances." Derouen, 604 So.2d at 1092. Thus, Wise may be held liable to the shareholders of the corporation for breach of that duty and mismanagement of the corporation's business or waste of corporate assets if the proof supports such a claim. See Turner v. Wilson, 620 So.2d 545, 548 (Miss. 1993) (quoting Wilson v. Stevens, 29 So. 678 (Ala. 1901)). Plaintiffs contend Wise failed to pay a workers compensation carrier, sold corporate assets at a loss, allowed default judgments to be entered against the corporation and involved the corporation in unwise business deals. On the basis of the evidence, however, the court cannot conclude that plaintiffs met their burden of proving breach of duty with respect to these acts by Wise. Plaintiffs had "the burden of production and persuasion on the issues of breach, cause, and damage to the corporation." Omnibank of Mantee, 607 So.2d at 84. Plaintiffs offered only the vaguest proof of each of these breaches, and plaintiffs failed to offer any proof at all of damages to the corporation for the alleged acts of Wise in contravention of his duty.
Plaintiffs assert a claim for unjust enrichment. In their proposed findings of fact and conclusions of law, plaintiffs contend "[u]njust enrichment occurs where a party possesses money or property of another party that he should not be permitted to retain in good conscience and justice." Omnibank of Mantee, 607 So.2d at 92. The measure of recovery for unjust enrichment is the return of the property wrongfully retained, Koval v. Koval, 576 So.2d 134, 136 (Miss. 1991) ("recovery in unjust enrichment is that to which the claimant is equitably entitled") (citations omitted), but in no event is a party entitled to such recovery if it would constitute a "windfall or double recovery." See Ciba-Geigy Corp. v. Murphree, 653 So.2d 857 (Miss. 1994). Aside from the fact that Kinkaid and WHC unjustly benefitted from the transaction to the extent that they received inordinate consideration in the land deal as a result of the conspiracy and subsequent fraudulent conduct, plaintiffs have not proven that defendants have wrongfully obtained or kept property belonging to plaintiffs. Without an adequate measure of the value of the subject property, the court is again left without a means to calculate any damages to which the plaintiffs would be entitled under an unjust enrichment theory.
Lastly, the court turns to the issue of punitive damages. In Mississippi, punitive damages are not favored by the courts generally. Jackson v. Johns-Manville Sales Corp., 727 F.2d 506, 526 (5 th Cir. 1984), cert. denied, 478 U.S. 1022, 106 S. Ct. 3339, 92 L. Ed. 2d 743 (1986) (citations omitted). Plaintiffs in this case seek an award of punitive damages under Miss. Code Ann. § 11-1-65 (Supp. 1998). This statute does not allow an award of punitive damages "if the claimant does not prove by clear and convincing evidence that the defendant against whom punitive damages are sought acted with actual malice, gross negligence which evidences a willful, wanton or reckless disregard for the safety of others, or committed actual fraud." Miss. Code Ann. § 11-1-65(1)(a) (Supp. 1998). Defendants have acted intentionally or with gross negligence in carrying out the acts complained of in this case, and the court believes the facts before it could justify an award of punitive damages. Nevertheless, counsel for plaintiffs did not introduce evidence sufficient for the court to make a well-reasoned calculation of an appropriate amount of punitive damages.
Moreover, even though an award of punitive damages is discretionary, Andrew Jackson Life Ins. Co. v. Williams, 566 So.2d 1172, 1190 (Miss. 1990), and not wholly dependent upon the claimant having introduced evidence of defendant's net worth and financial condition, C C Trucking Co. v. Smith, 612 So.2d 1092, 1102-03 (Miss. 1992), an award of punitive damages is improper without an award of compensatory damages. Miss. Code Ann. § 11-1-65(1)(c) (Supp. 1998). Generally, "[a] finding of actual damages is necessary to support an award of exemplary damages . . . [and a]ctual damages may not be presumed merely because the defendants engaged in a conspiracy." Tompkins v. Cyr, 995 F. Supp. 664, 686 (N.D. Tex. 1998) (citing Nabours v. Longview Savings Loan Association, 700 S.W.2d 901 (Tex. 1985)). Interpreting Mississippi law, this court has stated that a plaintiff is entitled to recover nominal damages only . . . because of defendants' invasion of [plaintiff's] rights. Nominal damages are not actual or compensatory damages, and the court may not consider an award of punitive damages, even if defendants' act be regarded as deliberate and reckless, inasmuch as punitive damages are not recoverable in the absence of allowable actual damages. Cook Industries, Inc. v. Carlson, 334 F. Supp. 809, 817 (N.D.Miss. 1971) (citations omitted). The Fifth Circuit Court of Appeals, also applying Mississippi law, held that "absent actual damages arising from a legally cognizable cause of action, Mississippi would not allow punitive damages. Exemplary or punitive damages are additional to compensatory damages. They are, as the Mississippi Supreme Court has said, `added damages.' There being no actual damages, there can be no addition." Vidrine v. Enger, 752 F.2d 107, 110 (5 th Cir. 1984). Plaintiffs' demand for punitive damages, therefore, shall be denied.
But see Hurst v. Southwest Mississippi Legal Services, 708 So.2d 1347, 1349 n. 2 (Miss. 1998) ("punitive damage award was without basis because no showing was made of the defendants' financial condition and net worth pursuant to § 11-1-65(1)(e).").
The court's refusal to award punitive damages is dispositive of plaintiffs' demand for attorneys' fees as an elements of damages. In Mississippi, "in the absence of contractual provisions or statutory authority, attorneys' fees may not be awarded as damages in a case unless punitive damages are also proper." Central Bank of Mississippi v. Butler, 517 So.2d 507, 511(Miss. 1987) (citing Grisham v. Hinton, 490 So.2d 1201, 1205 (Miss. 1986); Gardner v. Jones, 464 So.2d 1144, 1150 (Miss. 1985); Aetna Casualty Surety Co. v. Steele, 373 So.2d 797, 801 (Miss. 1979)). Plaintiffs' request for their attorneys' fees is denied.
Wise presents the court with a counterclaim for securities fraud similar to that made by plaintiffs against him — that plaintiffs are liable to him for securities fraud pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5 and state securities law. At trial, however, Wise did not introduce evidence of any such fraud. In fact, Wise's claims are even more vague and poorly supported by specific allegations of facts giving rise to liability than those of the plaintiffs discussed above. Wise introduced the minutes of a March 10, 1993 meeting of the Board of Directors of Worldwide attended by Wise, the Chairman of the Board, and Ed Generes, the Secretary. (Ex. D-44(DW).) The minutes place blame for the company's dire financial straits on the lack of working capital, "mostly due to the failure of. . . Sorrentino [and his company] to achieve the exercise of the Company's Class A and B Warrants." This entry, however, is insufficient to carry Wise's burden of proving a securities fraud claim, either under federal or state law. Wise also makes bald, otherwise unsupported allegations in his amended complaint that plaintiffs committed fraud in connection with the sale of Worldwide stock by, inter alia, overestimating the value of the corporation by misrepresenting the amount of capital received from Sorrentino and other investors; entering the settlement agreement, a component of which was a stock transfer, with no intent to honor the agreement; falsely representing that plaintiffs would acquire a company called Kemper Pressure Treated; and failing to register Wise's common stock in Worldwide. Wise did not introduce evidence of these acts at trial, nor did he explain how they constituted fraud. Moreover, Wise did not introduce evidence of what, if any, damage he suffered as a result of the alleged fraud. As such, the court refuses to engage in conjecture and finds that Wise's claims of securities fraud are without merit.
A third director was absent from the meeting.
Wise contends plaintiffs' exercise of control over property, namely cash due him in accordance with the various employment agreements, gives rise to a claim for conversion. The final agreement in the record is the September 30, 1994 settlement agreement, which provided, inter alia, that Worldwide and Wise agreed to "settle all amounts due to one another for any reason under the [employment agreements] for a total of $8,500. . . ." (Ex. D-90(DW).) It also provided for payment of other monies by Worldwide, for Wise to remove certain items of property stored on Worldwide premises, and for Wise to receive additional shares of stock following the reverse stock split. Under Mississippi law, [t]o make out a conversion, there must be proof of a wrongful possession, or the exercise of a dominion in exclusion or defiance of the owner's right, or of an unauthorized and injurious use, or of a wrongful detention after demand. [An a]ction of tort cannot be maintained without proof that the defendant either did some positive wrongful act with the intention to appropriate the property to himself, or to deprive the rightful owner of it, or destroyed the property. [I]n order to maintain an action for conversion, there must have been, on the part of the defendant, some unlawful assumption of dominion over the personal property involved, in defiance or exclusion of the plaintiff's rights, or else a withholding of the possession under a claim of right or title inconsistent with that of plaintiff. . . .
PACCAR Financial Corp. v. Howard, 615 So.2d 583, 588 (Miss. 1993) (citations omitted). "Conversion requires an intent to exercise dominion or control over goods which is inconsistent with the true owner's right." Terrell v. Tschirn, 656 So.2d 1150, 1153 (Miss. 1995) (quoting Walker v. Brown, 501 So.2d 358, 361 (Miss. 1987)). Although the court is unaware of a Mississippi case directly on point, other courts have held that "money can be the subject of a conversion claim as long as the allegedly converted money is specific and identifiable." Hudspeth v. A H Construction, Inc., 495 S.E.2d 322, 323(Ga.Ct.App. 1997); see Newsome v. Charter Bank Colonial, 940 S.W.2d 157, 161 (Tex.App. 1996) ("conversion of money will lie where the money is (1) delivered for safe keeping; (2) intended to be kept segregated; (3) substantially in the form in which it is received or an intact fund; and (4) not the subject of a title claim by its keeper"). The situation currently before the court does not fall within that category. Wise contends that plaintiffs converted monies allegedly due him under a contract. Because Wise does not contend that these are specifically identifiable funds, the court finds no "exercise of a dominion in exclusion or defiance of the owner's right, or of an unauthorized and injurious use" such as would amount to conversion in Mississippi. PACCAR Financial Corp., 615 So.2d at 588. Thus, although Wise may have a claim for breach of contract, plaintiffs prevail on the conversion claim as it relates to funds due Wise under the settlement agreement or any other employment agreements.
Insofar as the settlement agreement provided for Worldwide to convey particular items of personal property to another company owned by Wise, it now appears that Wise contends this did not occur, and plaintiffs are liable for conversion of the property. However, once again there is insufficient evidence to permit the court to determine which items are being wrongfully retained; consequently, the court cannot find plaintiffs liable for conversion of these items. Even if plaintiffs were found liable for conversion, "the value of the personal property at the time and place of conversion must be shown to prove the extent of damages." Terrell, 656 So.2d at 1153 (citing PACCAR, 615 So.2d at 590; Masonite Corporation v. Williamson, 404 So.2d 565 (Miss. 1981); Georgia-Pacific Corp. v. Blakeney, 353 So.2d 769, 773 (Miss. 1978)). Because Wise did not put on evidence of the value of any property he contends is being wrongfully retained by plaintiffs, any award of damages would be speculative and malapropos.
In Wise's proposed findings of fact and conclusions of law, he states "[t]he evidence is undisputed that [Worldwide] retained certain personal property of Wise and exercised control and dominion over such personal property. . . . The reasonable value of the personal property converted by the plaintiffs is $1,000.00." Wise does not direct the court to evidence, documentary or otherwise, which supports this claim.
"There must be a reasonable basis for a verdict. Surmise and speculation are inadequate." American Cas. Co. v. Myrick, 304 F.2d 179, 183 (5 th Cir. 1962) (citation omitted); see Moore v. Chesapeake Ohio Ry. Co., 340 U.S. 573, 578, 71 S. Ct. 428, 95 L. Ed. 547 (1951) (citation omitted) (" Speculation cannot supply the place of proof.").
Plaintiff's claim of defamation of character also suffers a similar deficiency. In Mississippi, "[a] claim of defamation requires that the following elements be established: (1) a false and defamatory statement concerning the plaintiff; (2) an unprivileged publication to a third party; (3) fault amounting at least to negligence on the part of the publisher; and, (4) either actionability of the statement irrespective of special harm or the existence of special harm caused by the publication." Blake v. Gannett Company, Inc., 529 So.2d 595, 602 (Miss. 1988) (citing Chatham v. Gulf Publishing Company, Inc., 502 So.2d 647, 649 (Miss. 1987)). Wise states in paragraph 71 of his counterclaim that plaintiffs "slandered [Wise] by uttering and publishing untruths and outright lies similar to the allegations in the Amended Complaint" (emphasis added). Wise did not introduce evidence at trial of which statements he contends are false, and the court will not engage in supposition and guesswork in order to rule on this claim.
"Truth is a complete defense to [a defamation] action for libel . . . [and] the plaintiff has the burden of proving falsity." Blake, 529 So.2d at 602 (citations omitted).
Breach of Fiduciary Duty, Corporate Waste and Mismanagement
Wise contends in paragraphs 85 and 86 of his counterclaim that Brian Sorrentino, Charles Sorrentino and Morris Ingram, as officers and directors of Worldwide and Treat-All, breached their fiduciary duty to the corporations and to Wise as a shareholder. He contends, specifically, that these three men "engaged in a pattern of fraud, theft, embezzlement, corporate waste and mismanagement, insider transactions, self-dealing and other gross breaches of their duties and responsibilities. . . ." Wise did not effect service upon Morris Ingram, however, and the court does not have personal jurisdiction of Ingram. Attwell v. LaSalle Nat. Bank, 607 F.2d 1157, 1159 (5 th Cir. 1979), cert. denied, 445 U.S. 954, 100 S. Ct. 1607, 63 L. Ed. 2d 791 (1980) ("It is axiomatic that in order for there to be in personam jurisdiction there must be valid service of process."); see also 4 Charles A. Wright Arthur R. Miller, Federal Practice and Procedure § 1063 (2d ed. 1987). Summons was returned executed as to counter-defendants Brian Sorrentino and Charles Sorrentino on August 25, 1997, but neither party answered or otherwise formally responded to the counter-claim in this action, nor did Wise seek entries of default as to them. Brian Sorrentino appeared to give testimony at the trial. Nevertheless, Wise did not introduce evidence to support the breach of duty claim against Ingram or the Sorrentinos, and this counterclaim shall be dismissed.
This reasoning also applies to any of Wise's counterclaims which he makes regarding International Financial Industries ("IFI"). The docket shows that there was no return of service on IFI, IFI did not appear in this action and Wise did not seek entry of default as to IFI; thus, IFI is not before the court, and the claims against it should be dismissed as well.
Wise also asserts counterclaims for fraud and negligent misrepresentation which are substantially similar to his counterclaims for securities fraud and breach of contract. It is Wise's position that plaintiffs entered the settlement agreement with him with no intention of performing, and he contends he is entitled to, inter alia, an award of the salary he was due under the employment agreements. The court addresses these claims as part of its treatment of the breach of contract claim.
Wise contends that Worldwide has breached the May 1, 1991 and July 1, 1994 employment contracts, (Exs. D-20(DW), -79(DW)), as well as the settlement agreement. (Ex. D-90(DW).) Specifically, Wise alleges Worldwide failed to pay monies and benefits due him under the employment contracts, and it failed to pay monies, register stock and transfer title to two vehicles as provided in the settlement agreement. Wise argues that he is owed $300,000 under the 1991 agreement, $9000 under the 1994 agreement, and $31,200 under the settlement agreement. On cross-examination, Wise acknowledged that he had no documentary evidence to support these amounts, and Worldwide produced no evidence of compensation Wise received under the agreements. Although there is undisputed testimony to the effect that Wise is owed these amounts, Wise has the burden of proving each element of his counterclaim by a preponderance of the evidence, and the court "is not compelled to accept a [party's] testimony even if uncontradicted." Matter of Decker, 595 F.2d 185, 190 (3 rd Cir. 1979) (quoting Santana v. United States, 572 F.2d 331, 335 (1 st Cir. 1997)). Wise contends he is owed some $340,000 under the agreements, but he has not convinced the court that this is so, and his claim shall be denied.
Under the settlement agreement Worldwide was to continue making payments on two vehicles which Wise had been using, then to transfer title to the vehicles to Wise. The $31,200 Wise demands under the settlement agreement represents compensation of $22,000 for the vehicles, which Wise contends were repossessed after Worldwide allowed the payments to lapse, plus seven monthly consulting payments of $1300 each he contends he did not receive. This leaves $100 for which Wise does not provide an evidentiary basis.
Again, Wise has nothing but his word to support this claim of unjust enrichment. Wise testified that he invested approximately $1,000,000 in Treat-All, but when asked on cross-examination to produce evidence of this amount, Wise answered "I didn't bring it with me." There is insufficient evidence that Treat-All/Worldwide "possesses money or property of [Wise's] that [it] should not be permitted to retain in good conscience and justice." Omnibank of Mantee, 607 So.2d at 92. Wise, as a counterplaintiff, had the burden to prove every element of his counterclaims by a preponderance of the evidence. He also had the burden to prove his damages, which "may be recovered only where and to the extent that the evidence removes their quantum from the realm of speculation and conjecture and transports it through the twilight zone and into the daylight of reasonable certainty." Wall v. Swilley, 562 So.2d 1252, 1256 (Miss. 1990) (citing Kaiser Investments, Inc. v. Linn Agriprises, Inc., 538 So.2d 409, 415 (Miss. 1989); Lovett v. E.L. Garner, Inc., 511 So.2d 1346, 1352 (Miss. 1987); Thomas v. Global Boat Builders Repairmen, Inc., 482 So.2d 1112, 1116-17 (Miss. 1986)). The court declines to award Wise damages on his counterclaim for unjust enrichment absent sufficient proof of his investment; any award of damages under the circumstances would be mere guesswork.
Filing False and Fraudulent Tax Returns and Failure to Pay Withholding Taxes
Wise contends that after he left his position with Worldwide in 1994, plaintiffs filed income tax returns and Forms 1096 containing false and fraudulent information concerning the amount of salary Wise had been paid. He also contends that plaintiffs withheld amounts from his salary purportedly as taxes, but they did not submit these amounts to the Internal Revenue Service. On this claim, Wise submits absolutely no evidence whatsoever. He has not presented the court with the allegedly fraudulent tax returns and forms, nor has he introduced into evidence any documentary evidence of his salary payments, aside from the "payroll history" indicating he was paid only $22,322.79 between March 1992 and May 1993, which the court finds insufficient to carry Wise's burden of proof. These claims have no merit based upon the evidence of record, and they shall be dismissed.
The same holds true with regard to Wise's counterclaim for malicious prosecution in the institution of the instant civil action. The elements of such a claim include:
(1) the institution or continuation of original judicial proceedings, either criminal or civil; (2) by or at the insistence of the defendants; (3) the termination of such proceeding in plaintiff's favor; (4) malice in instituting the proceeding; (5) want of probable cause for the proceedings; and (6) the suffering of damages as a result of the action or prosecution.Joiner Insurance Agency, Inc. v. Principal Casualty Insurance Co., 684 So.2d 1242, 1244 (Miss. 1996) (quoting Page v. Wiggins, 595 So.2d 1291, 1293 (Miss. 1992)). In this case, Wise has not carried his burden to prove plaintiffs maliciously instituted this action without probable cause, nor that he suffered damages after it was terminated "in his favor." Wise also has not presented proof that plaintiffs conspired against him "for the purpose of accomplishing an unlawful purpose or a lawful purpose unlawfully." Roussel, 638 So.2d at 1315. Thus, the counterclaims for malicious prosecution and civil conspiracy should be dismissed.
ConclusionBased upon the proof submitted at trial, the court finds that the only claims which have merit are those against defendant Wise for breach of his fiduciary duty and against defendants Wise, Kinkaid and WHC for fraud and civil conspiracy. Nevertheless, the parties to this action wholly failed to proffer evidence of damages suffered. After careful consideration, the court finds for plaintiffs on their claims of breach of fiduciary duty against defendant Wise and conspiracy and fraud against defendants Wise, Kinkaid and WHC. The court awards the plaintiffs nominal damages only because proof of actual damages remains lacking. The defendants' counterclaims are without merit and shall be dismissed.
A separate final judgment in accordance with this opinion shall issue this day.
This the 8 th day of January 1999.
In accordance with the memorandum opinion issued this day, it is ORDERED:
(1) That plaintiffs' claims for slander of title, securities fraud, conversion, negligent misrepresentation, corporate waste and mismanagement and unjust enrichment are dismissed with prejudice.
(2) On the plaintiffs' claims for fraud and civil conspiracy against all the defendants, as well as the claim against defendant Wise for breach of his fiduciary duty, the court finds in favor of the plaintiffs.
(3) The plaintiffs are awarded nominal damages in the amount of $1.00. Plaintiffs' demands for punitive damages and an award of attorneys' fees are denied. The transfer of the $362,500.00 real estate note and the certificates of stock transferred as part of the purchase price and in payment of interest on the note are set aside and held for naught.
(4) Defendant Wise's counterclaims for securities fraud, conversion, defamation, breach of contract, unjust enrichment, filing of false tax returns and failure to pay withholding taxes, fraud and negligent misrepresentation, malicious prosecution and civil conspiracy, as well as his claims for breach of fiduciary duty, corporate waste and mismanagement, are dismissed with prejudice.
(5) The counterclaims of defendants Kinkaid and WHC for breach of contract and foreclosure of the promissory note are dismissed with prejudice.
(6) All costs, with the exception of the statement of Alex Smith, shall be taxed to the defendants.