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Timothy Longwell Plaintiff and Appellant v. Custom Benefit Programs Midwest, Inc., Defendant and Appellee [2001 SD 60] South Dakota Supreme Court Appeal from the Circuit Court of The Fourth Judicial Circuit Lawrence County, South Dakota Hon. Warren G. Johnson, Judge Brad P. Gordon Fuller, Tellinghuisen, Gordon & Percy Spearfish, South Dakota Attorneys for plaintiff and appellant Thomas E. Brady Spearfish, South Dakota Attorney for defendant and appellee Considered on Briefs February 13, 2001 Opinion Filed 5/16/2001 #21585 ERICKSON, Circuit Judge [¶1.] This is an action brought by Timothy Longwell, a director, stockholder and employee of Custom Benefit Programs Midwest, Inc. (CBPM) for liquidation of the corporation and its assets. Philip Koehler, the remaining director, stockholder and president of CBPM, answered and filed a derivative counterclaim alleging breach of contract, usurpation of corporate opportunities and conversion of assets. The trial court allowed the derivative counterclaim and found that Longwell had breached his contract, usurped corporate opportunities and converted assets. The trial court further assessed damages of $137,431.70, costs of $112,431.70, and punitive damages of $25,000.00 against Longwell. We affirm. FACTS [¶2.] CBPM was incorporated in 1996 by Philip and Eric Koehler to sell employee benefits and insurance. In January 1997, Longwell became a shareholder and employee of CBPM. In 1998, Eric Koehler left the corporation. His shares of stock in the corporation were redeemed, and Philip Koehler and Longwell became co-equal shareholders in CBPM. By January 1999, the relationship between Koehler and Longwell had deteriorated and in April 1999, Longwell petitioned the trial court for liquidation of CBPM. [¶3.] Other facts will be set forth where relevant to discussion of the issues. STANDARD OF REVIEW [¶4.] "We review the circuit court's findings of fact under the clearly erroneous standard. 'Clear error is shown only when, after a review of all the evidence, we are left with a definite and firm conviction that a mistake has been made. The trial court's findings of fact are presumed correct and we defer to those findings unless the evidence clearly preponderates against them.' Conclusions of law are reviewed under a

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de novo standard, giving no deference to the circuit court's conclusions of law." Arnold Murray Constr. v. Hicks, 2001 SD 7, ¶6, 621 NW2d 171, 174. ISSUE ONE [¶5.] Whether a derivative counterclaim was properly allowed under the provisions of SDCL 15-623.1. [¶6.] Longwell argues that Koehler failed under SDCL 15-6-23.1[1] to properly plead his derivative action. Koehler's verified answer and complaint alleges: 1. Longwell has demanded that CBPM not defend the corporation in this action; 2. 3. Longwell is attempting to prevent CBPM from pursuing claims against him; and CBPM had demanded disclosures and accountings from Longwell, which had been refused.

[¶7.] Koehler argues it would have been futile to demand corporate action. There were only two stockholders and they were deadlocked. "[F]utility is measured when a case is filed." Noble v. Shaver, 1998 SD 102, ¶17, n3, 583 NW2d 643, 647 (citing In re Storage Technology Corp. Securities Litigation, 804 FSupp 1368, 1376 (DColo 1992); 13 Fletcher's Cyclopedia of Corporations, § 5965 at 40 (1995); and Loftus v. Farmers' Shipping Ass'n, 8 SD 201, 204-05, 65 NW 1076, 1078 (1896)). [¶8.] In Noble, the only South Dakota case discussing SDCL 15-6-23.1, we stated that when determining whether it would have been futile to demand corporate action, the trial court must review the particularized factual allegations and determine whether the derivative shareholder's complaint "creates a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to demand." Id. [¶9.] As in Noble, it is clear that at the time the complaint was filed any further demand would have been futile. Accordingly, the trial court was correct in allowing Koehler to proceed on the derivative complaint. ISSUE TWO [¶10.] Whether the trial court erred when it found that while the directors were deadlocked, CBPM had not been threatened with irreparable damage. [¶11.] The parties agree they are deadlocked. They also agree SDCL 47-7-34[2] allows the trial court to liquidate a corporation when the directors are deadlocked and irreparable damage has occurred, or is threatened, or when the acts of the directors are illegal, oppressive or fraudulent. The trial court found that while the directors were deadlocked as to the management of the business, CBPM was not threatened with, nor was it suffering irreparable damage. [¶12.] Longwell cites Black v. Graham, 464 SE2d 814 (Ga 1996) for authority that a corporation is threatened with irreparable damage when there are only two equal stockholders acting as directors, who are wholly unable to agree on the management of the business. The Georgia court determined that this factual scenario created a hostile and static situation threatening irreparable harm to the corporation. Id. at 815. [¶13.] In South Dakota, "[a]n injury is irreparable . . . where . . . it cannot be readily, adequately, and completely compensated [ ] with money." Maryhouse, Inc. v. Hamilton, 473 NW2d 472, 475 (SD 1991) (quoting 42 AmJur2d Injunctions §49 (1969)). [¶14.] In Landstrom v. Shaver, 1997 SD 25, ¶41, 561 NW2d 1, 9, we noted that SDCL 47-7-34 does not "leave the trial courts with two draconian options of helplessly dismissing outright a proven cause of action or ordering the dissolution of a corporation[.]" Rather, we held that "a trial court has discretion, within its broad powers of equity, to create an appropriate remedy based on the evidence presented. . . . The statute

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does not actually mandate liquidation . . . but rather provides that the court has this ultimate power to liquidate." (internal citations omitted). [¶15.] In this case, the parties are unable to agree on the management of CBPM. However, this case differs from Black, in that Longwell has been shown to have wasted or concealed corporate assets, thus creating the deadlock. CBPM was still functioning without Longwell at the time of the trial. Longwell has offered to sell and Koehler has offered to purchase Longwell

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