JACK K. LEAVITT, DOROTHY M. LEAVITT and JACK K. LEAVITT, as Receiver of ASPEN INN CORPORATION, Appellants, v. LEISURE SPORTS INCORPORATION, a Nevada Corporation; MT. HOLLY SKI CORPORATION, a Utah Corporation; CONRAD H. KONING and AMY J. KONING, Individuals, Respondents
Leavitt v. Leisure Sports Inc.
Young and Springer, JJ., concur.
JACK K. LEAVITT, DOROTHY M. LEAVITT and JACK K. LEAVITT, as Receiver of ASPEN INN CORPORATION, Appellants, v. LEISURE SPORTS INCORPORATION, a Nevada Corporation; MT. HOLLY SKI CORPORATION, a Utah Corporation; CONRAD H. KONING and AMY J. KONING, Individuals, Respondents.
JACK K. LEAVITT, DOROTHY M. LEAVITT and JACK K. LEAVITT, as Receiver of ASPEN INN CORPORATION, Appellants, v. LEISURE SPORTS INCORPORATION, a Nevada Corporation; MT. HOLLY SKI CORPORATION, a Utah Corporation; CONRAD H. KONING and AMY J. KONING, Individuals, Respondents.
No. 15324
March 30, 1987
734 P.2d 1221
Gifford & Vernon and Steven Glade, Las Vegas, for Appellants.
Combs, Curtas & Smith, Richard Segerblom, Las Vegas, for Respondents.
OPINION
By the Court,
Gunderson, C. J.:
This is an appeal from a judgment whereby the district court determined appellants had failed to prove, to the court's satisfaction, that respondents had been guilty of actionable conduct. We cannot fault the district court's findings and, therefore, affirm the judgment.
The Facts
Conrad and Amy Koning (the Konings) determined that an area of Mount Holly, Utah, had potential for development as a ski resort. In 1969, they formed Leisure Sports Incorporation (LSI) and negotiated with the State of Utah for a lease of the state owned land.
Jack and Dorothy Leavitt (the Leavitts) were neighbors of the Konings. These two couples became friends and, as a result, socialized together. In fact, the Leavitts visited the Mt. Holly area with their friends on several occasions. After discussion, the Leavitts decided to join the Konings in developing a hotel on the Mt. Holly land. Jack Leavitt was experienced in real estate and felt that this would be a profitable business venture. A preliminary agreement and memorandum of intent was drafted by Jack Leavitt. The stated purpose of the agreement was that the parties associate in order to develop, manage, and hold the planned hotel for investment purposes. The two couples formed Aspen Inn Corporation (AIC) in order to pursue this joint endeavor. Each couple contributed approximately $29,000 to the corporation and in return, received fifty percent (50%) of the corporation's stock. Each of these four people held a position as an officer and director of AIC.
The Konings' contribution to AIC was the value of the leased land ($26,100) and $3,000 in cash. Under this arrangement, AIC paid no rent. However, an annual fee was paid by AIC (via LSI) to the State of Utah. This fee was paid for three years by Dorothy Leavitt as secretary-treasurer of AIC.
We note that prior to the formation of AIC, the Leavitts were aware of LSI and that the Konings were the officers, directors and shareholders of that corporation. Also, in 1972, the Konings formed another corporate entity. Mt. Holly Ski Corporation (MHSC) provided certain services such as snow and garbage removal to the tenants in the Mt. Holly area. Again, the Leavitts were aware of MHSC and that the Konings acted as the officers, directors and shareholders of this corporation.
AIC obtained a loan from United Mortgage Trust (UMT) in order to build its hotel. The loan of $105,000 was secured by a first trust deed on the hotel. Pursuant to the loan documents, UMT did not receive an interest in the lot, and the Leavitts and Konings were made guarantors of the loan to AIC. The hotel was built and opened for business in 1973. By 1974, AIC was seeking a buyer for the hotel. The relationship between the Leavitts and the Konings was deteriorating. The hotel had failed to produce a profit for any given quarter of its operation and both couples had contributed capital beyond that of their initial contribution.
In late 1975, AIC had three offers for the purchase of the hotel. Two offers were favored by the Konings because the buyers were willing to make a substantial down payment. The Konings felt this would result in a greater commitment to the success of the hotel. The Leavitts vetoed these offers and favored an offer by their personal friend, Paul Sprague, to whom AIC sold the hotel for $230,000 with a down payment of only $1,000. Sprague assumed the UMT first trust deed (valued at approximately $88,000) and obtained a second trust deed from AIC. The second trust deed was secured by the hotel. Additionally, LSI and AIC assigned the land lease to Sprague. LSI retained the right to pay the annual fee if Sprague failed to do so. The agreement directed that if Sprague failed to pay the fee, LSI (after due notice) could cancel the sublease and obtain possession of the property. Under such an agreement, neither AIC nor UMT would retain a security interest in the hotel if LSI cancelled the sublease. As an experienced real estate broker, Jack Leavitt understood such a result. Additionally, we note that Jack Leavitt negotiated the sale to Sprague and the necessary documents were drafted by attorney Michael Leavitt (son of Jack and Dorothy Leavitt).
After the sale of the hotel, the Leavitts and the Konings discussed dissolution of AIC. By December 15, 1975, the corporation had adopted a resolution to dissolve.
Sprague began operating the hotel in late 1975 and, after only two months, determined that the hotel was a losing venture. Sprague abandoned the hotel and defaulted on all the related obligations. UMT initiated foreclosure proceedings against Sprague. Jack Leavitt and Conrad Koning were experienced real estate brokers and were aware that foreclosure on a first trust deed could render a second trust deed valueless. Pursuant to written agreement, LSI provided notice to AIC that the annual lease fee of $300 was delinquent.
On March 30, 1976, there was a meeting of AIC's board of directors. The Konings wanted to initiate foreclosure proceedings against Sprague in order to attempt to protect the interests of AIC. The Leavitts opposed such action and wanted to contribute funds (along with the Konings) to clear the UMT delinquency. The Konings declined to contribute funds as they were not in a position to incur such a financial obligation at the time. The Konings reiterated that Sprague had failed to make the annual lease payment and that LSI was prepared to terminate the lease if the fee was not received. Although the corporate account of AIC had dwindled to less than $500, there was enough money available at this time to pay the annual fee.
In July, 1976, LSI filed a notice to quit in order to terminate the sublease. This was four (4) months after AIC's board of directors meeting where the Konings expressed the intent of LSI to pursue this particular course of events if payment was not received. LSI re-entered the property.
By October, 1977, UMT was prepared to conduct a trustee's sale of the hotel. Prior to the trustee's sale (and purportedly upon the advice of counsel), the Konings recorded a document with the Beaver County (Utah) recorder claiming their interest in the land and hotel. Conrad Koning also appeared at the sale and announced that any buyer would not acquire an interest in the property. UMT was the sole bidder at the sale and purchased the hotel for $25,000. The Konings, however, refused to surrender possession of the hotel. UMT filed suit in Utah in order to gain access to the hotel. The Utah court determined that equity prohibited LSI's possession of the hotel and reinstated the LSI-AIC sublease. In 1980, all parties involved in the Utah litigation settled the lawsuit. UMT received possession of the hotel and, in exchange, relinquished all rights to a deficiency judgment from AIC. UMT later sold the hotel. LSI continues to hold the master lease on the lot. The settlement, however, failed to resolve any claims existing between the Leavitts and the Konings. In April, 1978, the instant lawsuit was filed by the Leavitts. The following allegations were asserted:
1. The Konings were negligent in their functioning as directors of AIC because they acted in their own interest by seizing AIC's asset.
2. The Konings failed to fulfill their obligations as per the preliminary agreement.
3. AIC was a third-party beneficiary to the master lease.
4. The Konings conspired to obtain AIC's real property.
5. The Konings converted and disposed of personal property which was contained in the hotel.
6. LSI took possession of the hotel and retained all rents and profits. As a result, LSI was unjustly enriched.
7. The Konings violated fiduciary duties owed to AIC.
After a bench trial, the district court entered judgment against the Leavitts. The district court determined that there could be no breach of fiduciary duties because all the acts required of the parties pursuant to the preliminary agreement had been performed. Additionally, the court concluded there was insufficient proof as to any breach of fiduciary loyalties. Moreover, the district court determined that the Konings acted in good faith and attempted to preserve corporate assets. Furthermore, the court found the Leavitts had accepted the possibility that the Konings would have an adverse interest to that of AIC by virtue of various contractual arrangements. In addition, the court determined that the Leavitts had failed to sustain their burden of proof as to the existence of a civil conspiracy and failed to prove any unjust enrichment. There had been, the court noted, no showing that the Konings profited while operating the hotel. Lastly, the district court noted, the Leavitts were never able to prove to the court's satisfaction that any damages existed.
After examination of the record, we believe the appellants have failed to demonstrate that the district court erred.
Fiduciary Duties
It is generally recognized that joint venturers owe to one another the duty of loyalty for the duration of their venture. A corporate officer or director stands as a fiduciary to the corporation. This fiduciary relationship requires a duty of good faith, honesty and full disclosure. Western Indus., Inc. v. General Ins. Co., 91 Nev. 222, 228, 533 P.2d 473, 476 (1975). Any alleged breach of such a duty is a question for the trier of fact after examination of all the evidence. Id. We also note that a corporate officer or director may contract directly with the corporation. Such contracts are valid, if at the time of their making, they are fair to the corporation. See NRS 78.140; Pederson v. Owen, 92 Nev. 648, 650, 556 P.2d 542, 543 (1976).
Here, Conrad Koning and Jack Leavitt were both experienced in real estate transactions and the effects of same. The Leavitts were guided by the advice of competent counsel during all of the agreements entered into between the parties. The Konings were always open in their dealings with the Leavitts. When LSI negotiated the ability to foreclose on the hotel if Sprague failed to pay the lease fee, there was no objection by the Leavitts. It was not until the Konings pursued these contractual rights that the Leavitts chose to complain.
We note that the purposes for which AIC was formed had been fulfilled. AIC had intended to develop and manage a hotel. The corporate purpose ended when the hotel was sold to Sprague. In fact, the Konings and the Leavitts had adopted a resolution to dissolve the corporation. When Sprague defaulted on his obligations related to the hotel, the Konings (as LSI) exercised their rights pursuant to prior negotiated agreements. In light of all the facts existing at the time, we cannot say that the Konings breached any fiduciary duties owing to what remained of the corporate status. The record does not impel findings contrary to those of the district court.
Corporate Opportunity Doctrine
It is also generally recognized that a corporate fiduciary cannot exploit an opportunity that belongs to the corporation. The difficulty arises, however, when attempting to ascertain if a particular opportunity "belongs" to the corporation.
We first note that the usual factual situation which evokes consideration of the "corporate opportunity doctrine" is not present here. Typically, the fiduciary is accused of diverting a business opportunity which the corporation has an expectancy interest or property right. Scrutiny generally reveals that the opportunity, in all fairness, should belong to the corporation. E.g., Klinicki v. Lundgren, 695 P.2d 906, 910 (Or. 1985). This is not the scenario involved here. An agreement was reached between the parties whereby LSI could cancel the Sprague sublease. The Leavitts agreed to such an arrangement and when confronted with the reality of it, they failed to pay the $300 fee in order to protect the corporate interests about which they now express such concern. We again must point out that the Leavitts were experienced in such transactions and were always represented by able counsel. In these circumstances, it is not difficult to perceive why the trial court was unpersuaded by arguments of the Leavitts.
We agree with commentators who argue that stricter rules related to the corporate opportunity doctrine are necessary when dealing with a public corporation. A more flexible approach, however, is dictated when dealing with a small corporation which is generally contractual in nature. Brudney and Clark, A New Look at Corporate Opportunities, 94 Harv. L. Rev. 997 (1981). The small number of players in a private venture result in better communication between the members. Additionally, agreements are entered into which are tailored to particular situations and objectives. We cannot say that the Leavitts proved a deprivation of any corporate opportunity owing to AIC. The record supports the trial court's determination that they failed to do so.
Wrongful Interference With Prospective Economic Advantage
The Leavitts also argue that the Konings wrongfully interfered with a prospective economic advantage of AIC arising from the trustee's sale. The Leavitts claim that the Konings' conduct in announcing that any buyer of the hotel would not obtain a leasehold interest in the property resulted in the low sale price of the hotel.
We note that this particular tort possesses the following elements: (1) a prospective contractual relationship between the plaintiíf and a third party; (2) the defendant's knowledge of this prospective relationship; (3) the intent to harm the plaintiíf by preventing the relationship; (4) the absence of privilege or justification by the defendant; and, (5) actual harm to the plaintiff as a result of the defendant's conduct. Buckaloo v. Johnson, 537 P.2d 865, 872 (Cal. 1975). From a review of the record, it appears the trial court could properly decide that the Leavitts failed to meet their burden of proof.
First of all, "prospective contractual advantage" in this situation would mean that the trustee's sale would have produced more than the approximate $88,000 owed to UMT. This would allow AIC to begin to collect on the obligation owed to it. Other than opinions rendered by the parties that they believed that the hotel's fair market value exceeded $230,000, there was no proof that the property's sale price would have exceeded the $88,000 owed to UMT. In 1979, the completely furnished hotel was advertised for sale at $165,000.00. The trial court specifically inquired as to whether an appraisal had been obtained and was informed that this had not been accomplished. We note that the hotel was built for less than $160,000 (the initial investment of the parties and the construction loan). Additionally, the hotel never produced a quarterly profit from the time of its inception. Thus, the value of the hotel could actually have been less than what was owed to UMT.
Next, and perhaps more important, we note that the Konings' conduct at the trustee's sale was privileged. Privilege can exist when the defendant acts to protect his own interest. See Zoby v. American Fidelity Company, 242 F.2d 76, 79-80 (4th Cir. 1957); Bendix Corp. v. Adams, 610 P.2d 24, 31 (Alaska 1980) (these cases dealt with wrongful interference of contract which is a species of the broader tort of interference with prospective economic advantage. Buckaloo at 869). Here, the Konings acted to protect the interests they had acquired via a valid contract. Such action was motivated by a desire to protect these interests and is privileged.
The Leavitts direct this court to IAMA Corp. v. Wham, 99 Nev. 730, 669 P.2d 1076 (1983), whereby respondent was found to have engaged in actions which had a detrimental effect on the sale of some commercial property. The Leavitts contend that the district court should have permitted recovery pursuant to our holding in that case. We note that in the Wham case, the respondent was able to purchase the property at a greatly reduced price. This is not the factual situation presently before this court. The Konings were not engaging in conduct whereby they could purchase the hotel for a reduced value. They were merely informing any interested parties of a property interest they had acquired by contract. Additionally, in IAMA Corp., the trial court was satisfied as to a fair market value of the involved property. Here, the trial court was not provided sufficient evidence to accomplish this task. For these reasons, IAMA Corp., is distinguishable.
Conclusion
The attempt by four friends to engage in a profitable business venture failed. Once the hotel was sold, the corporate purpose was finished. All that remained was dissolution of the corporate status. However, problems continued to haunt the parties. In response, the Konings attempted to exercise their contractual rights. The district court was required to scrutinize the Konings' conduct. As a result, the court determined that there had been no violation of fiduciary duties or any wrongful interference with prospective economic advantage. There is substantial evidence to support these determinations, and constraints of the appellate process preclude us from disturbing the judgment. Udevco v. Wagner, 100 Nev. 185, 189, 678 P.2d 679, 681 (1984). We need not consider the Leavitts' other contentions challenging various findings by the district court. We have determined these findings are also supported by substantial evidence. Accordingly, we affirm the decision rendered below.
Young and Springer, JJ., concur.
The third and fifth allegations were dismissed at the time of trial pursuant to stipulation of the parties.