Hansmeyer et al v. Shotkoski et al

Filing 16

MEMORANDUM OPINION AND ORDER denying 10 Motion to Dismiss. Signed by U.S. District Judge Lawrence L. Piersol on 6/21/18. (SLW)

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
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NORMAN HANSMEYER and

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WAYNE HANSMEYER,

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CIV 17-4150

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Plaintiffs,

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vs.

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JEFF SHOTKOSKI and

HERITAGE BUILDERS,INC.,

MEMORANDUM OPINION AND

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ORDER DENYING
MOTION TO DISMISS

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Defendants.

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Pending before the Court is Defendants Jeff Shotkoski and Heritage Builders, Inc.
("Heritage") Motion to Dismiss, Doc. 10. In their motion. Defendants ask that the claims in the

Amended Complaint be dismissed for several reasons: 1) Heritage is the real party in interest as a
plaintiffin a derivative action and inclusion ofHeritage as a plaintiff destroys diversity and divests
this Court ofjurisdiction, requiring dismissal under Rules 12(b)(1) and (b)(7) ofthe Federal Rules
of Civil Procedure; and 2) dismissal of any direct action by Plaintiffs is appropriate under Rule
12(b)(6) for failure to state a claim upon which relief can be granted based upon their lack of
standing to bring a direct suit. For the following reasons. Defendants' motion is denied.

BACKGROUND

Accepting Plaintiffs' allegations as true and giving Plaintiffs the benefit of all reasonable

inferences, the Court lays out the following facts in accordance with the pleadings. See Frey v. City

of Herculaneum, 44 F.3d 667,671 (8th Cir. 1995)(providing the standard for granting a motion
to dismiss under Rule 12(b)(6)). In August 2011, Plaintiffs and Shotkoski formed Heritage for the
primary purpose ofresidential real estate development and construction(^ 7). Specifically,Heritage

would buy residential lots, construct homes on those lots, and sell them for a profit(|8). Shotkoski
owns 50% ofthe shares ofHeritage and Norman and Wayne Hansmeyer each own 25% ofthe shares

ofHeritage(^10). Shotkoski has served as President ofHeritage which,pursuant to its bylaws,made

him responsible to "supervise and control all ofthe business and affairs ofthe corporation."(If 11).
As part of those responsibilities, Shotkoski was and currently is responsible for maintaining all
financial documents and information relative to Heritage (Tf 12). Shotkoski is also President and
owner ofboth Sundance Group,Inc.,("Sundance")and CCI,Inc.("CCI"),two other South Dakota

corporations involved in residential real estate development and construction (Tf]f 13,15).
In 2011,at Shotkoski's insistence. Heritage established a $750,000 line ofcredit, which was

eventually converted to a term loan, with Cattle Bank in Lincoln,Nebraska(1f^ 17,19). At that time,

Shotkoski represented to Plaintiffs that Heritage owned a number of properties (][ 78). In reliance
on this representation. Plaintiffs personally guaranteed the line of credit/loan and pledged their
personal assets as the exclusive collateral for the line ofcredit/loan(f^f76-81).Plaintiffs later learned
that these representations were false, when made, as Shotkoski had apparently already transferred
such properties to one or more third parties without the consent ofthe Plaintiffs (Tf^f 24, 35-40, 43,
44-45, 76-81).

Over the last several years, Shotkoski, acting on behalf of Heritage, purchased numerous
residential real estate lots for purposes ofdevelopment using,in part,the funds available through the
Cattle Bank line of credit/loan(^ 20). Shotkoski has, on behalf of Heritage, also contracted for the

construction ofhomes on many ofthose lots and,in tum,sold such homes(t 21).Inexplicably,such
operations have resulted in a balance on the Cattle Bank line ofcredit/loan in excess of$1,100,000

with virtually no return to Plaintiffs (Tf 22). In August 2017,Plaintiffs learned that properties that at
one time were owned by Heritage had been transferred to Sundance,CCI,and/or Shotkoski's family
members without Plaintiffs' consent (^^f 24, 26). Plaintiffs have not been provided sufficient

information from Shotkoski or Heritage regarding the financial dealings of Heritage to determine
whether sufficient consideration was provided for such transactions(|25).

As shareholders and directors of Heritage, Plaintiffs have, on several occasions, made

demand to inspect the corporate accounting and financial records of Heritage including Heritage's
most recent financial statements showing in reasonable detail its assets, liabilities, and the results

of its operations (]f 26). Plaintiffs' efforts, to date, have been blocked by Heritage and Sbotkoski
(If 27).

Beginning in April of2017,Plaintiffs,through counsel,began demanding formal accountings
from Sbotkoski and Heritage regarding the company's operations(|28). The demands were made
in good faith and with the proper purpose of determining why there seems to be insufficient funds

in Heritage to make payments on the Cattle Bank loan(| Sbotkoski and Heritage authorized the
30).
accountant for Heritage to allow inspection of all records relating to Heritage in the possession of
Heritage's current accountant (If 31). However, the accountant indicated that the information

provided to him by Sbotkoski and Heritage was incomplete and that be made requests to Sbotkoski
and Heritage for the missing financial information and documents but they failed to comply

32,

33).

On August 21, 2017, Sbotkoski, through counsel, indicated that be "sold" or otherwise

transferred numerous properties from Heritage to Sundance(Tf 35).In the August21 letter, Sbotkoski
represented that be bad issued unsecured promissory notes for the transfer ofHeritage's property to
Sundance. That was the first time Plaintiffs bad ever seen the alleged promissory notes (T| 36).
Plaintiffs did not authorize the sale or transfer of any property from Heritage to Sundance(t 37).
Still, Sbotkoski signed each promissory note for both Heritage and Sundance even though be lacked

the authority and right to transfer or sell properties owned by Heritage to Sundance

38, 39). No

payment for any ofthe eight promissory notes has ever been paid to Heritage, even though some of
the promissory notes were purportedly executed in 2015

42).

Plaintiffs' Amended Complaint contains the following counts:
• Accounting

• Breach of Fiduciary Duties
• Negligence

• Fraudulent Misrepresentation
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Fraudulent Concealment

Fraudulent Transfer and/or sale

Negligent Misrepresentation

Tortious Interference with Business Relationship or Expectancy
Shareholder Oppression
Rescission

Breach of Contract

(Doc. 5.)
DISCUSSION

Realignment
The crux of Defendants' motion to dismiss is that all of Plaintiffs' claims are derivative in

nature and Heritage must be realigned as a plaintiff because Plaintiffs have no standing to allege

claims that are derivative. Realignment of Heritage as a plaintiff would destroy complete diversity
and require dismissal for lack ofjurisdiction.'

The seminal ease on the issue ofrealignmentis City oflndianapolis v. Chase Nat7Bank,314
U.S.63(1941), where the Supreme Court established the doctrine ofrealignment,requiring federal
coiuts to examine the issues in dispute and realign each party as plaintiffor defendant ifnecessary.
In Chase, the Supreme Court held, "Diversity jurisdiction cannot be conferred upon the federal
courts by the parties' own determination of who are plaintiffs and who defendants. It is our duty, as
it is that ofthe lower federal courts, to 'look beyond the pleadings, and arrange the parties according
to their sides in the dispute.'"Id. at 69(quoting Dawson v. Columbia Ave. Sav. Fund, Safe Deposit,
Title & Trust Co., 197 U.S. 178, 180(1905)).

' Defendants Shotkoski and Heritage are citizens of South Dakota. Consequently, the
existence of complete diversity (and, thus, of federal jurisdiction) depends on whether Heritage
should be aligned as a plaintiff or a defendant. IfHeritage is a defendant, complete diversity exists.
IfHeritage is a plaintiff, there will be South Dakota citizens on opposing sides ofthe case and,thus,
incomplete diversity.

Defendants argue that because this is a derivative suit on behalfofthe corporation and any
recovery will accrue to it, Heritage should be realigned as a plaintiff? In most cases that would be
the better view because the majority rule in South Dakota "is that an action to redress injuries to a
corporation caimot be maintained by a shareholder on an individual basis but must be brought

derivatively." Landstrom v. Shaver, 561 N.W.2d 1, 12 (S.D. 1997). However, beeause of the
antagonism between Plaintiffs and Defendants,the Court coneludes that the corporation should not
be realigned as a plaintiff.

Because a derivative lawsuit brought by a shareholder is"not his own but the corporation's,"

the corporation "is the real party in interest" and usually properly aligned as a plaintiff. Koster v.
Lumbermens Mut. Cas. Co., 330 U.S. 518, 522-23 (1947). There is an exception, however, when
a eorporation's officers or directors are "antagonistic"to the interests ofthe shareholder plaintiff(s).
Smith V. Sperling, 354 U.S. 91,95-96 n. 3(1957)(citing Doctor v. Harrington, 196 U.S. 579, 587
(1905)("The ultimate interest of the corporation made defendant may be the same as that of the
stockholder made plaintiff, but the corporation maybe under a control antagonistic to him,and made

to act in a way detrimental to his rights.")). To determine whether antagonism exists, the court
should look to "the face ofthe pleadings and the nature ofthe controversy." Id. at 96.

A corporation is generally antagonistic to a shareholder plaintiff where "management is
aligned against the stockholder and defends a course ofconduct which he attacks." Smith, 354 U.S.
at 95. Where management "refuses to take action to undo a business transaction or whenever it so

solidly approves[ofthe transaction]that any demand to rescind would be futile," a court should find
antagonism.Id. at 97. When the corporation is controlled bythe defendant officers who are the target
ofthe derivative suit, the corporation should be aligned as a defendant. See Knop v. Mackall, 645
F.3d381, 382-83 (D.C. Cir. 2011).

^ The only claim alleged by Plaintiffs that is arguably direct is the claim that Shotkoski
unlawfully denied Plaintiffs access to the corporate reeords. With that exeeption,the injuries alleged
in the Amended Complaint result firom injuries to the corporation.

According to the Amended Complaintin the present ease,Shotkoski completely controls the
operation ofHeritage and he has acted wrongfully to devalue the eorporation and deprive Plaintiffs
an opportunity to examine the corporate reeords. Under the eircumstanees alleged in the Amended
Complaint, the Court finds antagonism is present and Heritage is appropriately aligned as a party
defendant. See, e.g., Gabriel v. Preble, 396 F.3d 10(1st Cir. 2005). Thus complete diversity exists
and this Court has jurisdietion. Accordingly,

IT IS ORDERED that Defendants' Motion to Dismiss, doc. 10, is denied.

Dated this ^2j(^ay of June, 2018.
BY THE COURT:

\mmfA
awrence L. Piersol

Jnited States Distriet Judge
ATTEST:

MATTHEW W.THELEN,CLERK

Deputy^