Stoller v. Funk et al
Filing
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ORDER granting in part and denying in part 37 38 Defendant's Motion to Dismiss Plaintiff's First Amended Complaint. Signed by Honorable Robin J. Cauthron on 1/13/12. (lg, )
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF OKLAHOMA
WILLIAM H. STOLLER,
Plaintiff,
vs.
ROBERT A. FUNK and the ROBERT A.
FUNK TRUST.,
Defendants.
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Case Number CIV-11-294-C
MEMORANDUM OPINION AND ORDER
The plaintiff, Bill Stoller, a 50 percent shareholder of Express Services Inc. (“ESI”),
brings this action against Robert Funk, a 50 percent shareholder of ESI, acting President and
Chairman, and the Robert Funk Trust for breach of fiduciary duty, breach of the covenant
of good faith, and for declaratory relief. Arguing the Complaint fails to state a claim for
relief, Defendants1 filed the present Motion to Dismiss.
ESI was formed in 1983, and Defendant Funk currently serves as President, CEO, and
Chairman of the Board, while Stoller is Vice President and Director. The Board of Directors
of ESI is currently composed of four members, Funk, Stoller, Fellinger, and Craig. In 2006,
Funk decided to buy the UU Bar Ranch. Funk financed the purchase of the ranch with an
original loan; however, one of the loan terms required that ESI guarantee the loan. As a
result of the required guarantee, it was necessary for Plaintiff to consent to the guarantee.
1
The parties do not differentiate between claims brought against Robert A. Funk from
those brought against the Robert A. Funk Trust. Therefore, the Court will refer to both parties as
Defendant.
In an effort to obtain Plaintiff’s consent, Funk entered into an Agreement with Stoller, the
2006 Agreement2, in which Funk promised:
to use all resources reasonably available to him, taking into account all of his
assets and liabilities, to timely perform all duties and pay all amounts owed by
him on the Loan and the Loan Documents, so that no payment or performance
will be required by ESI under the Guaranty.
2006 Agreement ¶ 2 (Am. Cplt., Dkt. No. 31, Ex. 1). The 2006 Agreement was solely
between Stoller and Funk and did not involve ESI. The parties later amended the 2006
Agreement with what is now known as the 2007 Shareholders Agreement.3 Pertinent to this
action, Stoller argues Funk has engaged in actions and received payments that are improper
under the UU Bar Agreement4 and the rights under the Shareholders Agreement of 2007.
According to Plaintiff, despite Funk’s agreement to use his best effort to pay the loan, Funk
has yet to make direct payments on the loan, and ESI has made all the payments to this point.
Seeking resolution of his concerns and to recover an equal distribution under the terms of the
2006 Agreement, Stoller objected to the ESI Board and made a demand for equal treatment.
2
According to the Amended Complaint, the 2006 Agreement was between Stoller and
Funk and required Funk to reduce his personal expenses so that he could make payments on the
UU Bar Ranch loan. This portion of the Agreement was memorialized as set forth herein. The
2006 Agreement did not authorize ESI to accept any other obligations Funk would incur and
treated any payments made by ESI under the Guaranty as interest-bearing loans from ESI to
Funk, unless Stoller exercised his right to force ESI to treat the payments as distributions.
3
According to the Amended Complaint, the 2007 Agreement arose from the 2006
Agreement and confirmed the understanding between Stoller and Funk that the two were entitled
to equal distributions from ESI.
4
The UU Bar agreement was between Funk and another party and allowed for purchase
of the UU Bar Ranch.
2
The ESI Board hired counsel who investigated the allegations. Unsatisfied with the ESI
Board’s actions in response to the investigation, Stoller filed this action to recover damages
based on what Stoller contends are distributions received by Funk, but not paid to Stoller in
breach of their contractual agreements.
In response to the motion to dismiss this Complaint, the Court dismissed all but one
of Stoller’s claims against Funk on July 12, 2011, without prejudice.5 Stoller filed an
Amended Complaint which raises claims against Funk and the Robert Funk Trust for breach
of fiduciary duty (premised on Funk’s allegedly clear and total control of ESI), breach of the
covenant of good faith, and declaratory relief under the Declaratory Judgment Act. Stoller
voluntarily dismissed his claim for breach of the covenant of good faith, but argues he retains
his right to appeal the dismissed count from the July 12, 2011, order.
The claims brought by Stoller are brought as a direct action against Funk, and not as
a derivative action. Stoller has also filed a separate derivative action which is currently
pending before the undersigned.
Funk first challenges Stoller’s request for declaratory relief. According to Funk,
Stoller’s request is improper and should be dismissed. Analysis of the Amended Complaint
reveals that Stoller wants the Court to issue an order stating that he is entitled to take equal
5
Specifically, the Court dismissed Stoller’s claims: that Funk should be required to
return certain of the distributions that Funk allegedly took from ESI; that Funk breached the duty
of good faith and fair dealing by withdrawing more from ESI than he was allowed under the
parties’ agreements; and that Funk breached a fiduciary duty owed to Stoller and ESI by
removing money from ESI at a rate that prevented ESI from honoring its obligations to Stoller.
The Court found that Stoller’s claim for breach of contract against Funk arising from the alleged
breach of the 2006 Agreement should survive.
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benefits from ESI under the agreements and that ESI was only allowed to guarantee the loan
for Funk, but not the further Interest Swap Agreement.6
1. Declaratory Relief
The Tenth Circuit has set out factors to be considered by the Court to resolve the
question of whether the discretion to grant declaratory judgment ought to be exercised.
Surefoot LC v. Sure Foot Corp., 531 F.3d 1236, 1248 (10th Cir. 2008). After reviewing
those factors measured against the allegations in Stoller’s Amended Complaint, the Court
finds as follows: to prevail in his quest for declaratory relief, Stoller must prove he is owed,
and entitled to receive, equal payments based on the allegations which comprise the direct
damages suit. Because 1) the rights of the parties, 2) payments made by ESI, and 3) whether
those payments are distributions are all questions of fact that must be resolved in order to
grant relief in the direct damages claim and in the declaratory judgment claim, to grant relief
on the declaratory judgment claim would be duplicative. Granting declaratory relief would
not clarify the legal relations in any way which would not have been already resolved. The
Court finds that by allowing Plaintiff’s claims to proceed, the rights and obligations sought
will ultimately be resolved without the need of declaratory judgment. Thus, this Court
declines to entertain these claims for declaratory judgment.
6
According to the Amended Complaint, the Interest Swap Agreement was an agreement
between Funk and Rabo Finance, which Stoller argues he did not approve, but which allowed
Funk to remove a substantial sum from ESI.
4
2. Applicable Law
At the outset, the Court must determine the applicable law for resolution of the
parties’ disputes. In undertaking that analysis the Court finds that ESI is organized under the
law of Colorado. The parties each rely on Colorado law in their briefs, and appear to agree
that the laws of that state govern this dispute. Accordingly, the Court will apply Colorado
law in resolving the issues in the case.
3. Direct vs. Derivative
The dispositive issue in resolving the Motion to Dismiss is whether Stoller’s claims
are direct, i.e., that he is entitled to recover money directly, or derivative, i.e., that any money
recovered must first go to ESI and then flow through ESI to Stoller, other creditors of ESI,
or simply retained by ESI. Because this matter is at the pleading stage, the Court must first
consider what must be pleaded to bring a direct claim and what burdens of proof and/or
persuasion apply.
Under Colorado law, a plaintiff making a direct claim must only plead damages which
arise as a result of corporate mismanagement, and the party seeking to show that damages
are not direct, and therefore that the claim is actually derivative, will have the burden of
proof of establishing that damages are not separate and distinct from any harm that occurred
to the corporation. In re Stat-Tech Int’l Corp., 47 F.3d 1054, 1059 (10th Cir. 1995)
(Colorado is a notice pleading state; there is no requirement that the plaintiff plead his
damages with specificity). Damages are separate and distinct when they are not shared by
the corporation or other shareholders generally. Nicholson v. Ash, 800 P.2d 1352, 1357
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(Colo. Ct. App. 1990). It is not necessary that the harm be distinct from the derivative suit,
but merely distinct from other shareholders. Id. Further, the harm complained of must arise
from the plaintiff’s status as a shareholder and not from some other capacity he may occupy.
Combs v. PriceWaterhouse Coopers LLP, 382 F.3d 1196, 1200 (10th Cir. 2004).
Here, the harm alleged by Stoller deals specifically with monies allegedly improperly
taken from ESI by Funk. Stoller classifies these monies received by Funk as distributions.
Under the 2006 Agreement and the 2007 Shareholders Agreement, Stoller alleges that he was
to receive the same monies as were distributed to Funk. Thus, the distributions, if they are
in fact distributions, would not be harm to the corporation as it is the right of a corporation
to make distributions to its shareholders. See Colo. Rev. Stat. § 7-106-401(1)-(7). Thus,
Stoller’s allegations – that Funk has received money, as a distribution, and that Stoller has
not received a like sum – are sufficient to show that Stoller’s damages are separate from
those of ESI at this stage of the proceedings. Because the distributions would be harm that
is separate and distinct from other shareholders generally, since Funk has received his
distribution, Stoller has pleaded a claim that is distinct and therefore a valid direct claim.
4. Breach of Implied Covenant of Good Faith and Fair Dealing
A. Equal Benefits
Stoller concedes that in light of the Court’s reasoning and analysis in the July 12,
2011, Order that this claim should be dismissed, but retains his right to challenge the Court’s
decision on appeal. Accordingly, Funk’s Motion will be granted on this issue.
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B. UU Bar Ranch Payments
Stoller asserts that Funk breached a duty of good faith and fair dealing in failing to use
his best efforts to make payments on the UU Bar Ranch.7 Funk argues this claim, and the
breach of contract claim, should be dismissed as any monies that Stoller recovers under this
claim must necessarily be returned to ESI and not Stoller.
Initially, the Court notes that Funk has failed to offer any fact or argument that was
not previously considered and rejected related to the breach of contract claim. That issue will
not be considered further at this stage. As for the breach of duty claim, the reasoning and
analysis applied to the breach of contract claim is equally applicable, and the Court adopts
that reasoning as if fully set out here.
5. Breach of Fiduciary Duty
Stoller alleges that Funk breached a fiduciary duty owed to him. Stoller bases this
claim on his allegation that Funk has established sole and complete control of ESI, and that
breach of this fiduciary duty has caused Stoller individual harm. At this stage of the
proceedings, the Court finds that Stoller has pleaded facts which, if proven, would establish
that Funk has sufficient control over ESI to give rise to a breach of fiduciary duty.
According to the Amended Complaint, over time Funk has used the terms of the Voting
Agreement to erode Stoller’s rights as an equal shareholder. Under the terms of that
Agreement, if the two shareholders disagreed, the matter would be decided by the directors.
7
Stoller’s claim for breach of contract related to the UU Bar Ranch payments survived
the earlier Motion to Dismiss and remains pending.
7
Stoller alleges that Funk has offered incentives such as monetary payments to the other
directors to ensure their agreement with Funk’s proposals. If Stoller can prove these facts,
under the applicable law he would establish the right to pursue a breach of fiduciary duty
claim. See Michaelson v. Michaelson, 939 P.2d 835, 836, 841-42 (Colo. 1997) (en banc).
Funk’s Motion to Dismiss will be denied on this issue.
CONCLUSION
For the reasons set forth herein, Defendants’ Motion to Dismiss Plaintiff’s First
Amended Complaint (Dkt. No. 37, 38) is GRANTED in part and DENIED in part. The
motion is granted with respect to the Plaintiff’s claim for declaratory judgment and that
claim is dismissed with prejudice. A separate judgment will issue at the close of these
proceedings.
IT IS SO ORDERED this 13th day of January, 2012.
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