Diannne Jones, individually and on behalf of McDonald Farms, Inc., a Nebraska corporation, appellant,
McDonald Farms, Inc., a Nebraska corporation, et al., appellees.
Actions: Equity: Accounting. A derivative action which seeks
an accounting and the return of money is an equitable action.
Actions: Equity: Corporations. An action seeking corporate
dissolution is an equitable action.
Equity: Appeal and Error. In an appeal of an equitable
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.
Corporations: Courts. Although the Business Corporation Act
gives the courts the power to relieve minority shareholders
from oppressive acts of the majority, the remedy of
dissolution and liquidation is so drastic that it must be
invoked with extreme caution.
Corporations. The ends of justice would not be served by too
broad an application of the authority to dissolve and
liquidate a corporation under the Business Corporation Act,
for that would merely eliminate one evil by the substitution
of a greater one-oppression of the majority by the minority.
A corporation is not required to pay dividends to its
Corporations: Stock. Stock transfer restrictions are
generally enforceable under Nebraska law unless they are
___. A stock restriction provision providing for book value
as determined by independent certified accountants for a
company in [24 Neb.App. 650] accordance with generally
accepted accounting principles is sufficiently certain to be
Appeal and Error. An appellate court is not obligated to
engage in an analysis that is not necessary to adjudicate the
case and controversy before it.
from the District Court for Hamilton County: Rachel a.
Daugherty, Judge. Affirmed.
R. Barry and Jonathan J. Papik, of Cline, Williams, Wright,
Johnson & Oldfather, L.L.P., for appellant.
M. Placzek, of Leininger, Smith, Johnson, Baack, Placzek
& Allen, for appellees.
Chief Judge, and Riedmann and Bishop, Judges.
minority shareholder of a closely held family farm
corporation brought an individual and a derivative action
against the corporation and the majority shareholders
claiming breach of fiduciary duty, misappropriation of
corporate assets, and corporate oppression. Essentially, the
minority shareholder took issue with the corporation's
failure to pay dividends, its refusal to purchase her shares
at a price she thought was fair, and its payment of commodity
wages to the majority shareholders. Following a bench trial,
the district court for Hamilton County entered judgment in
favor of the corporation and majority shareholders. Finding
that the minority shareholder failed to prove oppressive
conduct, misapplication or waste of corporate assets, or
illegal conduct by the majority shareholders, we affirm.
Farms, Inc., was incorporated in 1976 by Charles McDonald and
Betty McDonald. Charles and Betty were the parents of four
children: Donald McDonald, Randall McDonald, Dianne Jones,
and Rosemary Johns (Rosemary). [24 Neb.App. 651] Donald and
Randall began farming with Charles in the mid-1970's.
Charles resigned as president of the corporation in 1989, at
which time Randall became president and Donald became vice
president. At the time McDonald Farms was incorporated,
Charles and Betty held majority interests in the corporation
and Donald and Randall each held a minority interest. Upon
Betty's death in 2010, her shares were devised equally to
her four children. In June 2012, Charles gifted his stock
equally to Donald and Randall. As a result, Donald and
Randall each currently own 42.875 percent of the shares and
Jones and Rosemary each own 7.125 percent of the shares.
Charles passed away in March 2014.
Farms' assets include approximately 1, 100 acres of
irrigated farmland and dry cropland. Since 1991, McDonald
Farms has leased its land to two corporations: D & LA
Farms, Inc., a corporation owned by Donald and his wife, and
R & T Farms, Inc., a corporation owned by Randall and his
wife. The land is leased on a 50-50 crop share basis, and
Donald and Randall perform the farming duties such as
planting, harvesting, and selling the crops.
Farms was initially incorporated as a subchapter S
corporation under the Internal Revenue Code, but in 1993,
Charles decided to convert it to a subchapter C designation.
A subchapter C corporation pays its own taxes and is treated
as an entity separate from its stockholders. Phillip
Maltzahn, who has worked as McDonald Farms' certified
public accountant since 1990, testified that he recommends
that farmers put their farming operation under a C
corporation but leave the land out of the corporation.
to Maltzahn, as a C corporation employee, a farmer should
receive wages for his work in planting, harvesting, and
selling crops. There are two ways for an employee to receive
wages from the corporation: cash, which would be subject to
Social Security and Medicare taxes, or commodity wages.
Commodity wages are paid by transferring grain or another
such commodity from the corporation to the employee, [24
Neb.App. 652] and at the time of the transfer, a wage is
created. It is the corporation's choice whether to pay
wages in cash or commodities, but if it chooses commodities,
the corporation avoids paying Social Security and Medicare
taxes. Maltzahn's recommendation is that the farming
corporation pay its employees via commodity wages. He said
that it is not unusual for farmers to be paid in commodity
wages in central Nebraska and that in fact, "[a]ll of
[his] farm clients do that."
explained that when Charles converted McDonald Farms to a C
corporation, Charles' desire was to pay as little in
taxes as possible in order to build the size of the
corporation. Because the corporate tax rate on the first $50,
000 of net income is 15 percent, Maltzahn's goal, and
Charles' goal, was to keep the corporation's annual
taxable income at $50, 000. According to Maltzahn, all
shareholders benefit from a C corporation designation because
the book value for the corporation increases each year by
$50, 000, minus the 15-percent federal tax liability.
Maltzahn testified that he works for at least 100 other C
corporations and that they all share the same goal of keeping
net income around $50, 000 annually in order to take
advantage of the 15-percent tax rate. He said that planning
to reduce taxable income takes a lot of tax planning,
including timing business functions such as paying crop
inputs, replacing assets, and paying commodity wages.
to Maltzahn, Charles could have received compensation every
year he ran the corporation, but he did not because he wanted
to keep the cash in the corporation and grow it as large as
possible. Donald and Randall also could have taken annual
compensation for working for McDonald Farms since the
1970's, but they did not. However, McDonald Farms paid
Charles commodity wages worth $10, 019 in 2004 and $8, 355 in
2005. Then in 2010, 2012, and 2013, grain prices were high,
and McDonald Farms needed to reduce its income, so it again
decided to pay commodity wages. In 2010, prior to Betty's
death, Charles received 13, 100 bushels of corn at a value of
$50, 173. Although Donald and Randall [24 Neb.App. 653] were
minority shareholders at the time, they received no profits.
In June 2012, Donald and Randall became majority shareholders
and they, along with Charles, each received 10, 000 bushels
of corn worth $77, 100 for that year. In 2013, Charles
received 21, 667 bushels of corn valued at $157, 200, and
Donald and Randall each received 16, 667 bushels of corn
worth $120, 000.
considering the number of years Charles, Donald, and Randall
worked for the corporation, Maltzahn did not believe the
commodity wages they have been paid were dis-proportional. He
said the commodity wages paid to Charles, Donald, and Randall
in 2010, 2012, and 2013 were reasonable because the amount of
unpaid wages accrued since 1976 was much larger than the
actual amounts paid. Maltzahn said that McDonald Farms was
not legally obligated to pay wages to Charles, Donald, and
Randall, but it was optional for the corporation to do so. He
recommended the corporation do so, however, as part of its
tax planning strategy. Jones' expert, Christopher Scow,
had no opinion as to whether the commodity wages paid were
also explained that paying compensation via commodity wages
in the years after the compensation is earned does not fit
the definition of deferred compensation as that term is used
in the Internal Revenue Code. Under the code, deferred
compensation means compensation earned in 1 year is spread
out and paid over multiple years so it falls under a lower
tax bracket and the employee pays less taxes. To the
contrary, McDonald Farms took income earned over multiple
years and paid it in a lump sum in 1 year, a strategy which
works as a tax detriment to the employees because their tax
bracket is higher in the years the income is actually paid.
McDonald Farms' articles of incorporation, before
selling, giving, or transferring any shares of stock, a
shareholder must first offer the shares to the board of
directors for purchase by the corporation "at the book
value of said stock as determined by the books of the
corporation by regular and [24 Neb.App. 654] usual accounting
methods." In January and August 2012, Jones offered to
sell her shares to the corporation for $240, 650. She claimed
the price offered was the fair market value of the shares
based on a December 2010 valuation report prepared by a
certified public accountant for purposes of Betty's
estate. Donald and Randall declined Jones' offer, but
offered to purchase her shares for $47, 503.90, a sum which
represented the shares' book value as of December 2011
minus $6, 000 which they claimed was lost by the corporation
due to Jones' failure to return a form to the Farm
Service Agency. At one point, Donald and Randall offered
Jones more than book value for her shares, but no agreement
was ever reached.
commenced this action on April 1, 2013. She sought an
accounting, damages for breach of fiduciary duty and
conflicting interest transactions, and judicial dissolution
of the corporation based on oppressive conduct,
misapplication and waste of corporate assets, and illegal
corporate conduct. Trial was held in January and February
2015, and the district court subsequently issued an order
denying Jones' requests for relief. Relevant to this
appeal, the district court found that the corporation's
subchapter C designation and tax strategy, the payment of
commodity wages, and the corporation's purchase of
expensive equipment were not unreasonable or inappropriate.
In addition, the court determined that the failure to
purchase Jones' shares at her requested price did not
establish oppressive conduct. Jones now appeals to this
claims the court erred in failing to dissolve the corporation
under Neb. Rev. Stat. § 21-20, 162 (Reissue 2012)
because Donald and Randall (1) denied her any economic
benefit from her shares while attempting to force her to sell
her shares below their fair value, (2) misapplied and wasted
corporate assets by making improper payments to themselves
and Charles, and (3) acted illegally by taking improper
deductions for payments to themselves and Charles. She also
alleges [24 Neb.App. 655] the court erred by not requiring
Donald and Randall to return to the corporation improper
payments directed to themselves and Charles to reduce the
corporation's net income and in failing to recognize its
power to require Donald and Randall to pay her fair value for
her corporate shares.
derivative action which seeks an accounting and the return of
money is an equitable action. Woodward v. Andersen,
261 Neb. 980, 627 N.W.2d 742 (2001). An action seeking
corporate dissolution is also an equitable action.
appeal of an equitable 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. Id.
Jones' complaint asserted four causes of action, on
appeal, she only challenges certain decisions made by the
district court. She asserts that the court erred in failing
to provide a remedy pursuant to § 21-20, 162 for
corporate oppression, misapplication and waste of corporate
assets, and/or illegal conduct. She asks that we remand this
cause to the district court with directions ordering Donald
and Randall to purchase her shares for fair value. We decline
to do so, because we agree with the district court that Jones
was not entitled to a remedy under § 21-20, 162.
time this action was commenced, the Business Corporation Act
provided in relevant part: [T]he court may dissolve a
corporation: . . . .
(2)(a) In a proceeding by a shareholder if it is established
[24 Neb.App. 656] . . . . (ii) The directors or those in
control of the corporation have acted, are acting, or will
act in a manner that is illegal, oppressive, or fraudulent;
. . . .
(iv) The corporate assets are being misapplied or wasted.
§ 21-20, 162. Although the Business Corporation Act
gives the courts the power to relieve minority shareholders
from oppressive acts of the majority, the remedy of
dissolution and liquidation is so drastic that it must be
invoked with extreme caution. See Woodward v. Andersen,
supra. The Supreme Court has stated that the ends of
justice would not be served by too broad an application of
the statute, for that would merely eliminate one evil by the
substitution of a greater one-oppression of the majority by
the minority. Id.
this action and her arguments on appeal, Jones is essentially
challenging McDonald Farms' tax strategy. Rather than
attempting to reduce net taxable income to $50, 000 per year
in various ways such as paying commodity wages and timing the
purchase of new assets, Jones argues the corporation should
maximize its income and pay dividends to its shareholders.
She claims its failure to do so constitutes oppressive
conduct, misapplication or waste of corporate assets, and/or
illegal conduct. The evidence presented at trial established
that there is nothing inherently inappropriate about McDonald
Farms' tax strategy or decision not to pay dividends.
corporation is not required to pay dividends to its
shareholders. See Neb. Rev. Stat. § 21-2050(1) (Reissue
2012) (board of directors may authorize and
corporation may make distributions to its
shareholders subject to certain restrictions). The articles
of incorporation specifically make payment of dividends
discretionary. Jones argues, however, that the failure to pay
dividends constitutes oppressive behavior. She claims that
the corporation has over $13 million in [24 Neb.App. 657]
assets and no debt; therefore, it had the resources to pay a
evidence reveals, however, that McDonald Farms has never paid
dividends. Instead, management has chosen to operate the
business in a manner that best reduces its taxation. Its
accountant, Maltzahn, recommends farming corporations operate
under a subchapter C designation with the goal of keeping
taxable income around $50, 000 in order to reduce its tax
burden. Charles made the initial decision to select a
subchapter C designation, and his desire was always to pay as
little in taxes as possible in order to build the size of the
corporation. Donald and Randall have continued to run the
business as Charles had run it. Because Charles never paid
dividends to shareholders, Donald and Randall never elected
to do so either.
order to reduce its taxable income each year, McDonald Farms
strategically times the purchase of new equipment, the sale
of crops, and the payment of commodity wages. Randall
testified that although the corporation would strategically
time major purchases, it never purchased assets for the sole
purpose of reducing taxable income. In the several years
leading up to this action, McDonald Farms replaced irrigation
pivots, installed a new irrigation system, and replaced a
"[grain] dryer and a leg." The expenditures were
large, but as the district court determined, the evidence
demonstrates that the purchases were thought out and
necessary. The irrigation pivots replaced equipment that was
more than 30 years old. The irrigation system was purchased
after a drought year in which water restrictions were
discussed for the area, and McDonald Farms applied for and
received grants toward its purchase. The evidence established
that the new system would provide long-term benefits and cost
savings to the corporation.
commodity prices were high and net income would have exceeded
the $50, 000 limit, Charles paid himself commodity wages upon
the recommendation of Maltzahn. This first occurred in 2004
and 2005, before Jones was a shareholder. [24 Neb.App. 658]
Donald and Randall were both minority shareholders at the
time, and no profits were distributed to them. Again, in
2010, Charles paid himself commodity wages. At the time,
Donald and Randall were still minority shareholders and Jones
had not yet received her shares. Neither of the minority
shareholders received profits in 2010. In mid-December 2010,
Jones and Rosemary became minority shareholders, and in 2012,
Donald and Randall became majority shareholders. In 2012 and
2013, commodity wages were paid to Charles, Donald, and
Maltzahn explained, payment of commodity wages is common for
farming corporations, and although the amount paid in wages
was determined by the corporation's desire to reduce its
income to $50, 000, Maltzahn was not concerned that the wages
paid were unreasonable or excessive when considering the
number of years Charles, Donald, and Randall had worked
without pay. The payments equate to $302, 747 to Charles and
$197, 100 each to Donald and Randall for their 35-plus years
of work. Jones' own expert, Scow, could not opine whether
the wages paid were appropriate, and he also conceded that an
annual farm management fee of 7 percent to 10 percent of
gross income would be reasonable. Maltzahn testified that
using either the 71⁄2-percent rate or the 10- percent
rate, Donald and Randall still have not been fully
compensated. Although the dissent states that "[t]he
commodity wages paid to Randall, Donald, and Charles for
alleged unpaid (and undocumented) past services are an unfair
and unjustified business decision that was disguised as an
acceptable tax reduction policy, " no such opinion was
offered at trial by any expert to contradict Maltzahn's
only commodity payments made while Jones was a shareholder
were the payments made in 2012 and 2013. The question before
us is whether payment of those wages constitutes oppressive
acts by the majority shareholders. Given Maltzahn's
uncontroverted testimony that the payments were reasonable;
the number of years Charles, Donald, and Randall [24 Neb.App.
659] worked without compensation; and Scow's admission
that an annual management fee of 7 to 10 percent of gross
income would be reasonable, we find nothing illegal,
fraudulent, or oppressive in either the decision to pay
commodity wages or in the amount of the wages paid.
dissent argues that the payment of commodity wages denies the
minority shareholders their reasonable expectations of
sharing in the profits. It relies upon Baur v. Baur
Farms, Inc., 832 N.W.2d 663 (Iowa 2013), in which the
Iowa Supreme Court adopted the reasonable expectations of a
minority shareholder standard to assess minority shareholder
claims of oppression. It is questionable whether the
reasonable expectation standard applies to minority
shareholders who have acquired their interest by gift or
devise, because the test involves assessing the reasonable
expectations held by minority shareholders "'in
committing their capital to the particular
enterprise.'" See, e.g., Edenbaum v.
Schwarcz-Osztreicherne, 165 Md.App. 233, 256, 885 A.2d
365, 379 (2005); Ford v. Ford, 878 A.2d 894 (Pa.
Super. 2005); Mueller v. Cedar Shore Resort, Inc.,
643 N.W.2d 56 (S.D. 2002). See, also, Gimpel v.
Bolstein, 125 Misc.2d 45, 477 N.Y.S.2d 1014 (1984)
(explaining reasonable expectations test was not entirely
appropriate where corporation had been in existence for many
years and complaining shareholder had received share by gift
extent the reasonable expectations test may apply,
"'oppression should be deemed to arise only when the
majority conduct substantially defeats expectations that,
objectively viewed, were both reasonable under the
circumstances and were central to the [minority
shareholder's] decision to join the venture.'"
Matter of Wiedy's Furniture Clearance Center
Co., 108 A.D. 81, 84, 487 N.Y.S.2d 901, 903 (1985).
Accordingly, even Fox v. 7L Bar Ranch Co., 198 Mont.
201, 209-10, 645 P.2d 929, 933 (1982), relied upon by the
dissent, states that when defining oppression using the
reasonable expectation standard, it must be done
"'in light of the [24 Neb.App. 660] particular
circumstances of each case'" and that
"'courts will proceed on a case-by-case
basis.'" The court in Fox continued,
stating that "[b]ecause of the special circumstances
underlying closely held corporations, court[s] must determine
the expectations of the shareholders concerning their
respective roles in corporate affairs. These expectations
must be gleaned from the evidence presented. . . . That is
the province of the District Court . . . ." Id.
at 210, 645 P.2d at 933.
Montana Supreme Court addressed the reasonable expectations
of a minority shareholder who claimed it was oppressive for
the closely held corporation to deny dividends. Rejecting the
argument, the court stated:
[Plaintiff] complains that the Corporation pays no dividends,
but he is well aware from his long involvement with the
Corporation that it has historically not paid dividends.
While failing to issue dividends to shareholders could be an
oppressive tactic, the mere non- issuance of dividends is not
oppressive in all circumstances. Here, the District Court
concluded that neither [minority shareholder] had any capital
investment-having received their shares as gifts-which would
lead to an expectation of profits . . . .
Whitehorn v. Whitehorn Farms, Inc., 346 Mont. 394,
401, 195 P.3d 836, 842 (2008).
in the present case, Jones did not have any capital
investment-her shares were devised to her by her mother,
Betty. She received her shares in December 2010 and sought to
have the corporation buy her shares out in January 2012.
During this 13-month duration, no commodity wages were paid,
which makes suspect the dissent's claim that her
reasonable expectations were violated as a result of payment
of commodity wages. And based upon the history of the
corporation, the minority shareholders had no reasonable
expectation that profits would be paid out to them. Never, in
the history of this corporation that was established in 1976,
has a minority shareholder ever been paid profits.
Neb.App. 661] That is not to say that the majority
shareholders can retain all profits to themselves if doing so
constitutes oppression; indeed, after determining that the
evidence did not establish that the majority shareholders
deprived Jones of any return on her share, the district court
cautioned that "[i]t is quite possible that continuation
of payment of commodity wages without the payment of
dividends to shareholders would result in that finding, but
based upon the evidence as was presented, the evidence at
this time does not support a finding of oppression."
This conclusion implies that the district court found
Maltzahn's uncontroverted testimony credible that the
amounts paid thus far as commodity wages were not
disproportionate to back wages and, therefore, did not
constitute oppressive behavior.
dissent contends that payment of back wages in the form of
commodity payments is "incredulous" in part because
Donald and Randall were already "handsomely rewarded
when they ultimately received 86 percent of a corporation
with approximately 1, 100 acres of farmland and other assets
appraised at over $9 million in 2012." It claims the
exclusion of profits to the minority shareholders "fails
to consider the decision made by their parents to give each
of the sisters a 7.125-percent share of the corporation.
Presumably that decision was intended to confer some benefit
on the sisters."
correctly noted by the dissent, the value of the corporation
was appraised at over $9 million when Jones was devised her
7.125-percent share in the corporation. The dissent attempts
to shame Donald and Randall for the shares their parents
obviously believed they deserved, stating:
Receiving almost $4 million in farmland and other assets
might be considered a fairly substantial "payment"
for the brothers' efforts. The brothers have been
generously rewarded for their loyalty to the family's
farm operation, as signified by Charles' transferring ...