May 31st, 2019

MOBAR ANNUAL LEGAL UPDATE (June 2019) – Heather Rooney McBride, Esq.

Case Law Update:  Recent Missouri State Cases Touching on Business Law

Sun Aviation, Inc. v. L-3 Communications Avionics Systems, Inc., 533 S.W.3d 720 (Mo. banc Oct. 31, 2017). 

This case involved a dispute between a manufacturer-franchisor of aircraft instruments and its distributor-franchisee; specifically, L-3 had contracted with Sun Aviation to distribute its gyros (part of an aircraft’s instrument panel) and power supplies.  L-3’s parent company was subsequently consolidated with another entity and, as a result, required L-3 to terminate the contractual relationship with Sun Aviation.  Thereafter, Sun Aviation sued, alleging, inter alia, that L-3 had fraudulently concealed its parent company’s consolidation plans, thereby breaching its fiduciary duty to Sun Aviation, and had also failed to provide the statutory notice required to terminate a franchise agreement. 

The Missouri Supreme Court addressed whether there is a fiduciary relationship between a subsidiary company and a party with whom it contracts and determined there is not.  “[M]ere acknowledgment of a mutual trust and confidence between the parties in an ordinary, arms-length business relationship, alone, is insufficient to give rise to the heightened duty to disclose a material fact that accompanies a fiduciary relationship.”  In making this determination, the Court noted that L-3 was not aware of the consolidation plans of its parent company and, further, that L-3 had no role in the parent company’s decision to termination the relationship with Sun Aviation. 

The Court also addressed the amount of damages that can properly be awarded under Missouri’s Franchise Act, RSMo. § 407.405, et seq., for failure to give the 90-day statutory notice required by RSMo. § 407.405, which provides as follows:

No person who has granted a franchise to another person shall cancel or otherwise terminate any such franchise agreement without notifying such person of the cancellation, termination or failure to renew in writing at least ninety days in advance of the cancellation, termination, or failure to renew[.]

The circuit court had awarded Sun Aviation 18 years of lost profits for L-3’s failure to provide the requisite 90-day notice.  In determining that said damages award was improper, the Court considered the express language of RSMo. § 407.410.2:

A franchisee suffering damage as a result of the failure to give notice as required of the cancellation or termination of a franchise, may institute legal proceedings under the provisions of sections 407.400 to 407.420 against the franchisor who cancelled or terminated his franchise in the circuit court for the circuit in which the franchisor or his agent resides or can be located.  When the franchisee prevails in any such action in the circuit court, he may be awarded a recovery of damages sustained to include loss of goodwill, costs of the suit, and any equitable relief that the court deems proper.

Ultimately, the Court held that “[d]amages under § 407.410.2 are limited to damages sustained due to reliance on the expectation that the relationship would continue for at least a 90-day period after notice of termination, and the costs of filing suit.”  The Court considered that the statute allows for a 90-day notice period after which there could actually be damages incurred by the non-terminating party, but that those damages are not recoverable under the statute if the 90-day notice is in fact given.  Thus, while the Court declined to provide that the only permissible damages are those incurred during exact period pursuant to which the notice was short of 90 days, an award of 18 years in lost profits provided an “unintended breadth” to the statute and exceeded what could reasonably be deemed to result from Sun Aviation’s reliance on receiving not less than 90 days’ notice. 

Nicolazzi v. Bone, 564 S.W.3d 364 (MO. App. E.D. Nov. 20, 2018).

This case involved a dispute over the dissolution of a Missouri limited liability company.  The members filed cross-claims against each other, and the main issues for the Court of Appeals were (a) whether soliciting an offer to purchase one’s membership interest violated the express terms of the LLC’s Operating Agreement; and (b) what period of time a member had to make his “initial contribution” to the capitalization of the business, where no time frame was specified in the LLC’s Operating Agreement.

The Non-Assignability of Membership Interest section of the Operating Agreement read as follows:  “Neither of the Members shall, without the written consent of the other Member, sell, assign, pledge, mortgage, or otherwise transfer [his] [her] interest in the LLC….”  Despite this clause, one of the members had approached a competitor about buying his interest in the LLC and did not consult the other member prior to doing so.  The court held that solicitation of an offer to purchase of his membership interest did not violate the terms of the Operating Agreement; specifically, the members were “prohibited from the actual listed actions—i.e. from selling, assigning, pledging, mortgaging, or otherwise transferring their interests”, but were not prohibited from seeking an offer because the court cannot insert language into a contract that is not already there.

Further, the court held that the member who did not contribute the “initial contribution” referenced in the Operating Agreement for five years following formation of the company was in breach.  “At trial, it was established that both parties intended and understood that ‘initial’, as used in ‘initial capital contribution’, meant that the agreed-upon amount of $50,000 would be paid within six months of the execution of the LLC’s operating agreement[.]…Further, under any definition of the word ‘initial’, [the member’s] failure to make the required $50,000 capital contribution within a five-year time span…undoubtedly constitutes breach of the operating agreement.”    

Aughenbaugh v. Williams, 2018 WL 6613404 (Mo. App. E.D. Dec. 18, 2018).

This case provides insight as to what does not constitute a partnership.  Here, Tim Williams and his wife operated a used car dealership.  Williams had purchased the lot from John Taylor, who authorized the Williamses to use his Missouri car dealership license associated with the property in order to buy cars from auctions and operate the dealership.  Lowell Aughenbaugh subsequently went to work with the Williamses and, using the Taylor license, he too began purchasing cars to sell from the lot.  Aughenbaugh paid for vehicles using funds from a bank account owned by the Williamses doing business as “Budget Motors”, but said account was funded by wire transfers from an account owned by Aughenbaugh.  Shortly after they began working together, a dispute arose as to the nature of the parties’ agreement.  The Williamses alleged they had a partnership with Aughenbaugh, but Aughenbaugh believed he owned the cars, and that the profits from his sales were his entirely to keep. 

In analyzing the legal relationship of the parties, the court noted that intent is the “primary criterion for determining whether a partnership relationship exists”, referencing Aughenbaugh’s understanding of the agreement and that the testimony did not show that all of the purported owners “mutually intended to enter an agreement to divide or share any profits and losses.”  Ultimately, the Court held that the relationship between the Williamses and Aughenbaugh was not a partnership.  Rather, it was a “mere association of people in the used car business sharing resources—the lot, the license, the expertise—for the accomplishment of selling used cards for individual profit, but without any community of interest.” 

Guller v. Waks, 550 S.W.3d 505 (Mo. App. E.D. Dec. 26, 2017).

This case affirms that an agreement among shareholders (in this case, a Restrictive Stock Agreement) can contain terms that are more restrictive, and which supersede RSMo. § 351.467, provided it does not contradict applicable law.  This case also provides instruction as to what constitutes a bona fide offer; specifically, a letter that disclosed the amount due to be paid to the seller at closing, financing terms, details on post-closing adjustments, proposed a non-competition and lease agreement along with lease terms, and states a precise closing deadline, constitutes a bona fide offer to purchase.

Exec. Bd. of the Mo. Baptist Convention v. Mo. Baptist Univ., 569 S.W.3d 1 (Mo. App. W.D. Feb. 19, 2019).

In this case, Missouri Baptist University, a Chapter 355 nonprofit corporation, and The Baptist Home, also a Chapter 355 nonprofit corporation, both attempted to amend their articles of incorporation without ratification or approval from the Missouri Baptist Convention, which was expressly prohibited by the articles of incorporation for both organizations.  The amendments of both articles removed the control, oversight, and property rights of the Missouri Baptist Convention that had been included in all prior iterations of both organizations’ articles of incorporation. 

At issue was the language of RSMo. § 355.070, which states:

Where there are no members having voting rights an amendment shall be adopted at a meeting of the board of directors upon receiving the vote of a majority of the directors in office.  (emphasis added).

Missouri Baptist University and The Baptist Home argued that the language of RSMo. § 355.070 meant only a board of directors of the subject organization could properly act to amend the organization’s charter and that, consequently, the language previously contained in their respective articles giving power over the amendment process to the Missouri Baptist Convention was not enforceable.

In analyzing the issue, the Court of Appeals considered the use of the term “shall” at the time of the enactment of the statute, (“‘[It] may be construed as merely permissive or directory…to carry out the legislative intention and in cases where no right or benefit to any one depends on its being taken in the imperative sense, and where no public or private right is impaired by its interpretation in the other sense.’”) (quoting Black’s Law Dictionary (4th Ed. 1951), and ultimately held that RSMo. § 355.070 is directory and imperative only in that it sets minimum standards.  In other words, organizations are free to add further safeguards to the process of amending a Chapter 355 organization’s articles of incorporation which go above or beyond the statute’s “baseline requirements”.   Further, including such additional safeguards furthers public policy in that it allows organizations who have ultimate property rights in the assets of the Chapter 355 organization (i.e. upon dissolution) to ensure their rights will not be extinguished without their prior approval. 

Finch v. Campbell, 541 S.W.3d 616 (Mo. App. W.D. April 3, 2018).

This case involved a dispute over the dissolution of a law firm partnership.  The two-person partnership operated for approximately three years, during which time one of the partners continuously failed to properly bill his clients for work performed and, ultimately, the other partner locked him out of the business premises and opened a new firm utilizing some of the partnership’s assets.

The question of first impression was “whether a partner in a for profit law firm breaches his or her fiduciary duties to his/her partners by refusing to record or bill time worked for the law firm’s clients when demands have been made to that partner by his/her partners and that partner’s clients.”  In determining that said partner did breach his fiduciary duties, the court noted that the partner failed to timely bill his clients, likely in an effort to lower his income for purposes of his simultaneous divorce proceedings.  Thus, the partner “put his personal interests above those of the partnership.”

The court was also asked to consider whether RSMo. § 358.420 permits the partner who was locked out of the business to elect to receive profits from the post-dissolution company formed by the remaining partner.   Said statute provides as follows:

When any partner retires or dies, and the business is continued…without any settlement of accounts as between him and his estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership[.]

The court held that the election provision of RSMo. § 358.420 does not apply where the profits of a post-dissolution partnership are derived from the personal services of the remaining partner.  The partnership at issue was continued only for the purpose of winding up the business, and there was no evidence of concealment or other malfeasance on the part of the remaining partner.  Consequently, the excluded partner had no legal right to the profits of the new law firm.

Lucas Subway Midmo, Inc. v. Mandatory Poster Agency, Inc., 524 S.W.3d 116 (Mo. App. W.D. Aug. 25, 2017).

As a matter of first impression, the Court of Appeals held that preparation of corporate minutes does in fact constitute the practice of law, where the minutes are prepared by a non-attorney unassociated with the organization and a fee for the preparation is charged.