Nebraska

Warning: The following opinion is provided for purposes of discussion only. We have not Shepardized™ this opinion, and do not know the subsequent disposition of this case nor whether the effect of the opinion has been overruled or superceded by other law.

Directory Services, LLC v. Joseph E. Rowland,
No. A-04-039 (Neb. Ct. App. 09/13/2005)

Directory Services, L.L.C.,
a Missouri limited liability company, appellee and cross-appellant,
v. Joseph E. Rowland, appellant and cross-appellee.

Directory Servs. v. Rowland
(Not Designated for Permanent Publication)

Filed September 13, 2005. No. A-04-039.

Appeal from the District Court for Seward County: Alan G. Gless, Judge. Affirmed.

Jeffery R. Kirkpatrick, of McHenry, Haszard, Hansen, Roth & Hupp, P.C., for appellant.

Terry C. Dougherty and Krista L. Kester, of Woods & Aitken, L.L.P., for appellee.

Inbody, Chief Judge, and Carlson and Moore, Judges.

Carlson, Judge.

INTRODUCTION

Joseph E. Rowland appeals from an order of the district court for Seward County, finding in favor of Directory Services, L.L.C. (DSLLC). Specifically, the court found that Rowland failed to meet one of the requirements for membership in the corporation. On that basis, the court ordered that DSLLC return Rowland's $100 contribution and ordered Rowland to pay the costs of the action. For the reasons set forth below, we affirm.

BACKGROUND

The record shows the following: DSLLC is a limited liability company organized and registered in 1999 under the laws of the State of Missouri. Its principal place of business is Lincoln, Nebraska. DSLLC is engaged in the business of printing directories for various entities. Originally, DSLLC was intended to be composed of five members: Neill Ingerslew, Michael Minor, Richard Mull, Edgar Walsworth, and Rowland.

On October 7, 2002, DSLLC filed an amended petition, alleging three causes of action. In its first cause of action, DSLLC alleged that all five members of DSLLC, including Rowland, agreed that as part of the consideration for their membership interest, each member would execute a personal guaranty, guarantying DSLLC's repayment of certain bank debt. DSLLC also alleged that the agreement to provide guaranties was material, since DSLLC had no manner of securing business financing except through the personal guaranties of its members. DSLLC stated that three of its five members executed such guaranties, but that Rowland did not do so, even though DSLLC had made attempts to obtain a guaranty from Rowland since February 2000.

DSLLC also stated that Rowland's refusal to execute a guaranty constitutes failure of consideration for Rowland's membership interest and that such failure entitles DSLLC to rescind the agreement as it relates to Rowland's membership interest. In the alternative, DSLLC alleged that DSLLC and Rowland were mistaken regarding the requirement that each member execute a guaranty and that this mistake was of a material fact that is substantial and fundamental to the agreement. DSLLC contended that this mutual mistake of fact would also entitle DSLLC to rescind the DSLLC agreement as it relates to Rowland's membership.

In its second cause of action, DSLLC sought declaratory judgment. In that action, DSLLC stated that between November 1999 and September 2000, Rowland acted as president of DSLLC and owed DSLLC a fiduciary duty. DSLLC alleged that between June 1 and August 15, 2000, Rowland spoke to individuals at InfoUSA, DSLLC's primary customer, and indicated that InfoUSA should stop doing business with DSLLC. DSLLC stated that as a result, the remaining members of DSLLC removed Rowland as president in September 2000.

DSLLC requested that if the court denied its first cause of action for rescission, the court enter a declaratory judgment in DSLLC's favor and against Rowland establishing that Rowland's actions constituted a withdrawal from DSLLC effective September 30, 2000. DSLLC stated that under that cause of action, Rowland should receive the fair value of his interest in DSLLC at the time of his withdrawal.

Although DSLLC also stated a third cause of action, we do not discuss it here because DSLLC subsequently dismissed that cause of action.

On August 4, 2003, Rowland filed an amended answer and counterclaim, alleging that as a member with a 20-percent ownership of DSLLC, he had not been provided with timely financial information regarding DSLLC or with timely notice of DSLLC meetings. Rowland also alleged that DSLLC was acting in a manner oppressive to DSLLC's minority members and that DSLLC's assets were being misapplied or wasted. Rowland requested an order dissolving DSLLC, directing the winding up and liquidation of the company's business and affairs "with a full accounting of the financial affairs of [DSLLC]; for the costs of this lawsuit; and reasonable attorney fees, and such other relief as the Court may find just and equitable."

On August 13, 2003, DSLLC filed a motion to dismiss Rowland's counterclaim, stating that the court lacked subject matter jurisdiction. On September 19, the court issued an order finding that it lacked subject matter jurisdiction to dissolve a Missouri corporation. Trial was held on DSLLC's petition on September 29 and 30, and October 1 and 2, 2003.

The evidence at trial shows that in order to become members of DSLLC, each member put in $100 of capital. On June 23, 2000, membership certificates were signed by Rowland, as president, and Minor, as secretary. The certificates were issued to all members, including Rowland. The record contains conflicting evidence as to whether the members agreed that they would personally guaranty DSLLC's business loans. DSLLC presented evidence that all five members had decided together that they did not want to invest large amounts of capital in the business, but knew that DSLLC would have to borrow money in order to start the company. DSLLC also presented evidence showing that each member, including Rowland, was aware that they would have to sign as guarantors on any loans DSLLC received.

Mull testified that all five members agreed that each member would have a 20-percent interest in DSLLC, that they would split the profits equally, and that each member would serve personally as a guarantor on DSLLC's debt. Mull also testified that the guaranty requirement was discussed a number of times by the other members and Rowland and that such agreement was a "material feature of this whole agreement" and the reason why Mull got involved in the formation of DSLLC. Mull testified that if Rowland said that he was not required to sign a guaranty, he would be mistaken.

Minor testified that he was present at a number of meetings at which Ingerslew placed pressure on Rowland to provide a guaranty. Minor also testified that at one meeting in June 2000, Ingerslew presented Rowland with bank documents for Rowland to sign as guarantor. Minor testified that Rowland told him that he was going to serve as guarantor on loans made by DSLLC.

Ingerslew testified that personally guarantying the debt of the corporation was a condition of membership and that DSLLC would not have been formed without that agreement. Ingerslew also testified that Rowland was in agreement that he would sign as guarantor as a condition of membership in DSLLC. DSLLC also produced evidence from a bank officer stating that the bank would not loan DSLLC money without a guaranty from each member, along with detailed financial information.

The record undisputedly shows that Minor, Ingerslew, and Mull all signed personal guaranties making them each personally liable for DSLLC's debt. There is evidence that DSLLC borrowed over $1 million. The record also shows that although Rowland signed a guaranty on an initial $100,000 operating loan for DSLLC, that loan was later paid off and that Rowland did not sign any further guaranties. The evidence also shows that Walsworth did not sign personal guaranties on behalf of DSLLC either and that DSLLC brought suit against Walsworth in Missouri.

Rowland testified that he never signed another guaranty because no one ever asked him to. Rowland testified that at no time did he refuse to sign as guarantor on one of DSLLC's loans. Rowland also testified that he did not think that DSLLC would require much money to get off the ground because it was a "cash flowing business" which should have been "relatively profitable." Rowland testified that it was not until April 2000 that he realized that the other members expected him to personally guaranty one of DSLLC's loans. Rowland further testified that in his mind, the only consideration he had to provide to DSLLC in order to become a member was his knowledge about sales in the printing business. Rowland stated that that consideration was equal to or maybe more than the others were contributing.

The record shows that the business venture proceeded generally as planned and that DSLLC soon gained InfoUSA as their largest client when InfoUSA agreed to have DSLLC do its directory publishing. The record shows that Rowland acted as the primary contact person between InfoUSA and DSLLC until September 2000.

In May or June 2000, two of InfoUSA's employees, Michael Johnston and Laurie Vanicek, arranged a meeting with Rowland to discuss ways in which InfoUSA could lower its costs for directory printing. At that meeting, Rowland suggested that one way for InfoUSA to cut printing costs would be to begin in-house directory printing. Johnston told Rowland that if Rowland could develop a feasible business plan for in-house printing, he would present it to his superiors.

Subsequently, a second meeting was held. At that meeting, Rowland presented a proposal to Johnston. In that proposal, Rowland recommended that InfoUSA create an in-house directory printing operation. The proposal stated that although DSLLC had been providing printing services for InfoUSA, "numerous production problems have been incurred," putting InfoUSA "at risk of not having a proven, secure, and stable source for directory production." The proposal stated that if InfoUSA was to do in-house printing, they would not have to worry about procuring printing equipment or startup issues. Specifically, the proposal stated that the "exact same equipment that had previously produced printed directories for InfoUSA is available through [DSLLC]." Additionally, "the former Manufacturing Manager and Sales Executive are available to pull this plan together and implement with fewer start-up issues tha[n] would normally occur." The record shows that the sales executive referred to in the proposal was Rowland.

Both Johnston and Vanicek understood that if InfoUSA would have acted on the ideas in Rowland's proposal, there would have been no future need for InfoUSA to work with DSLLC. Both Johnston and Vanicek testified that they considered Rowland's proposal to be a serious proposal.

Rowland testified that he presented the proposal without reading it. Rowland also stated that if InfoUSA would have adopted his proposal, InfoUSA would no longer have had a need for DSLLC. Rowland stated that he presented the proposal because he thought that InfoUSA would never adopt it, but that as a good salesman, it would be better for him to supply InfoUSA with this option than to allow InfoUSA to explore the option of in-house printing with an unknown party. The evidence shows that InfoUSA did not adopt Rowland's proposal.

In September 2000, the other four members of DSLLC held a meeting. Although Rowland was notified of that meeting, he did not attend. At that meeting, the other members voted to remove Rowland as president. After that vote, Rowland had limited involvement with the operations of DSLLC.

In an order filed December 11, 2003, the district court found in favor of DSLLC and rescinded the membership agreement as it relates to Rowland. In doing so, the court stated:

I find a failure of consideration occurred in the formation of [DSLLC]. [Rowland] did not complete the steps necessary to qualifying [sic] for membership. This finding ne[ga]tes the second cause of action. As a result, [DSLLC] is entitled to rescission of the membership agreement as it related to [Rowland's] interest in [DSLLC] and [Rowland] is entitled to a refund of his $100.00 capital contribution paid in, but nothing else.
The court then dismissed DSLLC's second cause of action with prejudice and taxed all costs against Rowland. Rowland appeals, and DSLLC cross-appeals.
ASSIGNMENTS OF ERROR

On appeal, Rowland argues that the trial court erred in (1) finding that there was a failure of consideration such that Rowland did not become a member of DSLLC, (2) rescinding the DSLLC membership agreement as it related to Rowland, (3) ordering judgment in favor of Rowland in the amount of $100 and then ordering all court costs to be taxed against Rowland, and (4) dismissing with prejudice his counterclaim for dissolution of DSLLC with a full accounting. In DSLLC's cross-appeal, it contends that the trial court erred in dismissing its second cause of action. DSLLC argues that the record shows that Rowland breached his fiduciary duty and that judgment should have been entered in favor of DSLLC and against Rowland on that claim.

ANALYSIS

Rescission of Rowland's Membership Interest.

On appeal, Rowland argues that the trial court erred in finding that there was a failure of consideration such that Rowland did not become a member of DSLLC and in rescinding the DSLLC membership agreement as it related to Rowland.

The Nebraska Supreme Court has stated that "[g]rounds for cancellation or rescission of a contract include, inter alia, fraud, duress, unilateral or mutual mistake, and inadequacy of consideration, which may arise from nonperformance of the agreement." Eliker v. Chief Indus., 243 Neb. 275, 278, 498 N.W.2d 564, 566 (1993), citing 13 Am. Jur. 2d Cancellation of Instruments § 23 (1964).

In the instant case, DSLLC produced evidence at trial to show that all five members of DSLLC agreed that each member would be required to provide a guaranty for DSLLC's debt in order to become a member of DSLLC. DSLLC also presented evidence showing that Rowland failed to act as a guarantor. Although Rowland presented conflicting evidence, the trial court was the judge of the credibility of the witnesses. The trial court clearly found Minor, Mull, and Ingerslew more credible than Rowland.

An action for rescission sounds in equity. Cao v. Nguyen, 258 Neb. 1027, 607 N.W.2d 528 (2000); Schuelke v. Wilson, 255 Neb. 726, 587 N.W.2d 369 (1998). In an appeal from an equity action, an appellate court tries factual questions de novo on the record and reaches a conclusion independent of the findings of the trial court, provided that where credible evidence is in conflict on a material issue of fact, the appellate court considers and may give weight to the fact that the trial judge heard and observed the witnesses and accepted one version of the facts rather than another. Madson v. TBT Ltd. Liability Co., 12 Neb. App. 773, 686 N.W.2d 85 (2004).

We conclude, as did the trial court, that the members agreed that each one of them would act as a guarantor on DSLLC's debt and that Rowland failed to do so. We must then determine whether DSLLC was entitled to rescind Rowland's membership in DSLLC. Although failure of consideration is not generally considered a sufficient ground for equitable cancellation of a contract, a ground for equitable cancellation may arise from a breach of contract which is so substantial and fundamental as to defeat the object of the parties in entering into the contract. Eliker v. Chief Indus., supra.

DSLLC argues that Rowland's failure to guaranty DSLLC's debt is both substantial and fundamental since "Rowland's failure to provide a personal guarantee frustrated the entire purpose of the agreement -- an agreement that allowed a company to form and operate without the infusion of capital while apportioning equally the reward of profits and risk of liabilities." Brief for appellee at 18. On this record, we agree that Rowland's failure to act as guarantor was so substantial and fundamental as to defeat the object of the parties in entering into the contract. See Eliker v. Chief Indus., supra. Otherwise, Rowland would be allowed to remain a member of DSLLC and he would be entitled to 20 percent of DSLLC's profits without sharing any risk for DSLLC's liabilities.

The trial court found that Rowland's interest in DSLLC could be rescinded because "a failure of consideration occurred in the formation of [DSLLC]." We disagree that this case involves a failure of consideration in the formation of DSLLC. Rather, we conclude de novo that Rowland breached the membership agreement and that that breach was so substantial and fundamental as to defeat the object of the parties in entering into the agreement.

Even so, we agree with the trial court that DSLLC is entitled to rescind Rowland's membership in DSLLC. Where the record demonstrates that the decision of a trial court is correct, although such correctness is based on a different ground from that assigned by the trial court, an appellate court will affirm. Quinn v. Quinn, 13 Neb. App. 155, 689 N.W.2d 605 (2004). Given that Rowland committed a substantial and fundamental breach by failing to serve as guarantor, it seems equitable that Rowland should not be able to share in DSLLC's profits. The evidence shows that DSLLC borrowed over $1 million and that only three of the members placed themselves at risk by signing as personal guarantors. For this reason, we conclude that the trial court did not err in rescinding Rowland's membership in DSLLC and requiring DSLLC to return Rowland's $100 contribution. Given our finding, we find it unnecessary to address DSLLC's cross-appeal.

Rowland's Counterclaim for Dissolution of DSLLC.

Rowland also argues that the trial court erred in dismissing his counterclaim for dissolution of DSLLC. The trial court dismissed Rowland's counterclaim, stating that it lacked subject matter jurisdiction to dissolve a Missouri corporation.

The rule in Nebraska is that Nebraska courts do not have jurisdiction to dissolve a foreign corporation. In State, ex rel. Spillman, v. Brictson Mfg. Co., 114 Neb. 341, 207 N.W. 664 (1926), the Nebraska Supreme Court found that Nebraska courts did not have subject matter jurisdiction to dissolve a foreign corporation, even one that had its corporate office within Nebraska. Given this law, we cannot say that the trial court erred in dismissing Rowland's counterclaim.

Costs Awarded to DSLLC.

Rowland also argues that the district court erred in ordering him to pay the costs of the action. DSLLC argues that given the rule that prevailing parties are entitled to costs, the court did not abuse its discretion. In equity actions, taxation of costs vests in the discretion of the trial court. Hein v. M & N Feed Yards, Inc., 205 Neb. 691, 289 N.W.2d 756 (1980). Neb. Rev. Stat. § 25-1711 (Reissue 1995) allows a court to "award and tax costs, and apportion the same between the parties on the same or adverse sides, as in its discretion it may think right and equitable." The action of the trial court in taxing costs is not reviewable unless an abuse of discretion is shown. Hein v. M & N Feed Yards, Inc., supra.

Considering the finding that Rowland failed to sign a guaranty on behalf of DSLLC, entitling DSLLC to rescission of Rowland's membership, we cannot say that the trial court abused its discretion in ordering Rowland to pay the costs of the action pursuant to § 25-1711. For this reason, Rowland's assignment of error is without merit.

CONCLUSION

After reviewing the record de novo, we conclude that the trial court did not err in rescinding the DSLLC membership agreement as it relates to Rowland or in ordering DSLLC to return Rowland's $100 contribution. Similarly, the trial court did not abuse its disretion in ordering all court costs to be taxed against Rowland, nor did the trial court err in dismissing Rowland's counterclaim for dissolution of DSLLC with a full accounting. For these reasons, the trial court's order is affirmed in its entirety.

Affirmed.

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