Mathis v. ERA Franchise Sys., Inc.
| Docket Number: | 2008-CA-00620-SCT Linked Case(s): 2008-CA-00620-SCT |
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| Supreme Court: | Opinion Link Opinion Date: 11-12-2009 Opinion Author: Kitchens, J. Holding: Affirmed |
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| Additional Case Information: |
Topic: Fraud - Redress of injuries to corporation - Derivative claims - Direct recovery Judge(s) Concurring: Waller, C.J., Carlson and Graves, P.JJ., Dickinson, Lamar, Chandler and Pierce, JJ. Non Participating Judge(s): Randolph, J. Procedural History: Dismissal Nature of the Case: CIVIL - OTHER |
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| Trial Court: |
Date of Trial Judgment: 03-10-2008 Appealed from: Covington County Circuit Court Judge: Robert G. Evans Disposition: The trial court dismissed the plaintiff's derivative claims for lack of standing. Case Number: 2006-150C |
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| Party Name: | Attorney Name: | Brief(s) Available: | ||
| Appellant: | VENNIT B. MATHIS, II |
SAM STARNES THOMAS, EDDIE JACOB ABDEEN |
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| Appellee: | ERA FRANCHISE SYSTEMS, INC., H. STUART IRBY, MARK WARREN, REAL ESTATE PROFESSIONALS OF CENTRAL MISSISSIPPI, LLC AND REAL ESTATE PROFESSIONALS OF THE PINE BELT, LLC | JOSEPH ANTHONY SCLAFANI, CHRISTOPHER A. SHAPLEY, DENNIS L. HORN, RICK D. PATT | ||
| Appellee #2: | ||||
Synopsis provided by:  If you are interested in subscribing to the weekly synopses of all Mississippi Supreme Court and Court of Appeals hand downs please contact Tammy Upton in the MLI Press office. |
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| Topic: | Fraud - Redress of injuries to corporation - Derivative claims - Direct recovery |
| Summary of the Facts: | Vennit Mathis, II, purchased a fifty percent equity interest in Real Estate Professionals, LLC, a real estate brokerage firm. At the time of Mathis’s acquisition, REP was a licensed ERA franchise. In connection with a franchise agreement between REP and ERA Franchise Systems, Inc., Mathis executed a personal guaranty covering REP’s obligations to ERA. The remaining fifty percent stake in the company belonged to Chip and Pamela Hill. Mathis alleged that the Hills transferred their fifty percent equity interest in REP to H. Stuart Irby but remained REP employees. According to Mathis, in an attempt to exclude him from the business, Chip Hill and Irby fraudulently transferred all of REP’s assets to two other companies, Real Estate Professionals of the Pine Belt and Real Estate Professionals of Central Mississippi, LLC. These entities were owned by Chip Hill, Irby, and Mark Warren, another REP employee. Mathis filed suit against Chip and Pamela Hill, Irby, Warren, REPCentral, REP-Pine Belt, and ERA. Recognizing that some of his claims were of a derivative nature and belonged to the corporation, Mathis sought to obtain an individual recovery to the exclusion of Irby, the other shareholder. All of the defendants, with the exception of the Hills, timely filed answers to Mathis’s complaint. ERA also filed counterclaims against Mathis and cross-claims against the Hills and Irby. ERA also claimed that it was owed more than $300,000 by REP and that its members were personally liable for this amount. In the event that the court determined that Mathis had not sold his interest in REP, ERA alleged that it had a cause of action against the Hills and Irby for fraud, negligent misrepresentation, and fraudulent conveyance. Irby and REP-Pine Belt also filed various counterclaims against Mathis arising from the alleged sale of Mathis’s one-half interest in REP to Irby. After a dispute arose over jurisdiction, the Supreme Court, on interlocutory appeal, held that jurisdiction was proper in the circuit court. More than four years after Mathis commenced this litigation, ERA filed a Motion to Dismiss for Lack of Standing citing the derivative nature of Mathis’s claims. In due course, each of the appellees joined the motion. The judge held that Mathis lacked standing. Mathis appeals. |
| Summary of Opinion Analysis: | In general, an action to redress injuries to a corporation, whether arising in contract or in tort cannot be maintained by a stockholder in his own name, but must be brought by the corporation because the action belongs to the corporation and not the individual stockholders whose rights are merely derivative. Mathis argues that such of his claims as are derivative in nature may be brought in a direct action. In Derouen v. Murray, 604 So. 2d 1086 (Miss. 1992), the Court held that in the case of a closely-held corporation, the trial court in its discretion may treat an action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it finds that to do so will not (i) unfairly expose the corporation or the defendants to a multiplicity of actions, (ii) materially prejudice the interests of the creditors of the corporation, or (iii) interfere with a fair distribution of the recovery among all interested parties. A review of cases from other jurisdictions reveals that the doctrine is almost always employed in purely intracorporate disputes. Although Mathis has filed suit against his current and former business partners, there are four defendants who are not and have never been owners or members of REP. Given the number of parties involved and the existence of several counterclaims and cross-claims, it is likely that a direct recovery would interfere with a fair distribution of the recovery or expose the corporation to a multiplicity of actions. Thus, the trial judge did not abuse his discretion in holding that Mathis could not pursue his derivative claims in a direct action. Mathis also argues that if he is not allowed to proceed directly on the derivative claims, he should be given leave to amend his complaint to assert a derivative action on behalf of REP. He also argues that he should not be required to make demand upon the LLC under section 79-29-1102 because demand would have been futile and the appellees have waived their right to assert lack of compliance with the demand statute as a defense. However, Mathis never presented these arguments to the trial court, and has never asked prior to this appeal to proceed derivatively. The trial court cannot be held in error on an issue that was never put before it. Mathis also argues that, because not all of his claims are derivative in nature, he should be allowed to pursue the claims that belong to him individually. The general rule is that derivative actions seek recovery for injuries to the corporation. In determining whether the action belongs to the corporation or the individual, the focus of the inquiry is whether the corporation or the individual suffered injury. Here, all of the claims against ERA were derivative in nature. The only claims asserted by Mathis which would not require a showing of injury to REP are those raised against Chip Hill, individually, including whether he breached an agreement to transfer certain real property to Mathis, and whether he breached loan agreements between Hill and Mathis. |
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