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Schultz v. Scandrett

Supreme Court of South Dakota

June 24, 2015

STEVE SCHULTZ, MARK SCHULTZ, DAVID SCHULTZ, and THE SCHULTZ FAMILY TRUST, as Stockholders of Cosmos of the Black Hills, Inc., a South Dakota Corporation, and as individuals, and DONALD SCHULTZ and ELOISE SCHULTZ as Trustees of the SCHULTZ FAMILY TRUST, and DAVID SCHULTZ, as a Director of Cosmos of the Black Hills, Inc. on behalf of Cosmos of the Black Hills, Inc. a South Dakota Corporation, Plaintiffs and Appellants,
LYLE SCANDRETT and HEIDI BYBEE, Defendants and Appellees

Argued: April 21, 2015.

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REBECCA L. MANN, DAVID E. LUST of Gunderson, Palmer, Nelson & Ashmore, LLP, Rapid City, South Dakota, Attorneys for plaintiffs and appellants.

JEFFREY G. HURD of Bangs, McCullen, Butler, Foye & Simmons, LLP, Rapid City, South Dakota, Attorneys for defendants and appellees.

WILBUR, Justice. GILBERTSON, Chief Justice, and ZINTER, SEVERSON, and KERN, Justices, concur.


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WILBUR, Justice

[¶1] This is a dispute between two families of shareholders owning stock in Cosmos of the Black Hills, Inc. (" Cosmos" ).

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The Schultzes, the minority shareholders, brought an action against the Scandretts, the majority shareholders, alleging breach of fiduciary care, breach of fiduciary loyalty, minority shareholder oppression, and request for accounting. The jury rendered a verdict in favor of the Scandretts on the breach of fiduciary duty claims and the circuit court issued findings of fact and conclusions of law in favor of the Scandretts on the remaining claims. The Schultzes appeal. We affirm.


[¶2] Cosmos, an optical illusion tourist business, is a corporation organized and existing under the laws of the State of South Dakota. Plaintiffs are minority shareholders of Cosmos. The individual Plaintiffs are members of the same family (collectively, " Schultzes" ). Don Schultz is married to Eloise Schultz, and they have four sons: Steve, Mark, David, and Matt. Matt is not a party to this action. Defendants, Lyle Scandrett and Heidi Bybee, are members of the same family (collectively, " Scandretts" ). Lyle is Heidi's father. Lyle and his wife, Marlene Scandrett, along with Heidi and her husband, Kevin Bybee, are the majority shareholders. Marlene and Kevin are not parties to this action.

[¶3] In the early 1950s, Don constructed and opened Cosmos. The premise of Cosmos is simple: a customer purchases a ticket; walks on an approximately 30--minute, guided tour; and returns to the gift shop where souvenirs can be purchased. Initially, Cosmos was operated by either Don and Eloise or Don's parents, Fred and Marie Schultz. Don stopped working at Cosmos after the summer of 1958. In 1959, the business was incorporated with Don holding 1,500 shares and his parents holding 1,500 shares.

[¶4] Lyle began working at Cosmos as a tour guide in 1957. Lyle taught school in Wessington, South Dakota, but worked at Cosmos during the summers from 1957 through 1959. In 1960, Schultzes hired Lyle to manage Cosmos and issued him one share of stock to ensure his status as a shareholder. After Cosmos hired Lyle as manager, Cosmos issued an additional 50 shares to Don. In 1968, Lyle and Marlene purchased all of the shares owned by Fred and Marie. As a result, Don and Eloise owned 1,550 shares and Lyle and Marlene owned 1,501 shares out of the total 3,051 outstanding shares.

[¶5] Until 1969, Cosmos paid Lyle $5,000 to manage Cosmos from Memorial Day to Labor Day each year. In 1969, Don entered into an incentive compensation agreement with Lyle (" Compensation Agreement" ), whereby Lyle agreed to work at Cosmos throughout the entire year, instead of only part of the year, in exchange for a new compensation plan. The Compensation Agreement had two goals: first, " to keep the Cosmos open as early and as late as possible to 'protect the property and the business from freeloaders' and 'malicious mischief[; ]'" second, " to provide additional income to [Lyle]." In the Compensation Agreement, Lyle's salary was reduced from $5,000 to $2,500 per year. The decrease in salary, however, was offset by Cosmos's agreement that Lyle would receive most of the income during the " off-season," i.e., between Labor Day and Memorial Day. The Compensation Agreement provided that if Lyle was willing to operate Cosmos during the off-season, then he could keep all of the ticket income less $5 per day for operating expenses and less any employee wages incurred in the off-season operations. Lyle also received one-half of the net souvenir sales income after Labor Day and before Memorial Day. The Compensation Agreement is still in effect today, with two

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adjustments: Lyle's salary has been increased to $10,000 per year, and Lyle now pays all off-season expenses, rather than just $5 per day.

[¶6] In 1972, Lyle expressed concern to Don that if he continued to work as a minority shareholder, Don and Eloise's sons could grow up, take control of Cosmos, and terminate Lyle. In response, Don agreed to grant Lyle a controlling interest in Cosmos for the purpose of ensuring that Lyle would remain in control of the company, thereby protecting his employment arrangement. Don and Eloise decided it was important to retain Lyle because " [w]ith the passage of time it became clear that the continued success of the business was due to the efforts of Lyle, as none of the Schultz family was contributing anything more than moral support." In August 1972, Cosmos issued 100 additional shares to Lyle. As a result, Schultzes owned 1,550 shares, and Scandretts owned 1,601 shares. That difference still exists today.

[¶7] Scandretts have been the majority shareholders since 1972. Schultzes held two of the three board of directors' seats from Cosmos's incorporation in 1959 until 2008. In 2008, Heidi was elected to the board of directors. Thereafter, the board consisted of Lyle, Heidi, and David. Over the years, Don and Eloise gifted some of their shares to their children: Steve, Mark, David, and Matt. In 2004, Lyle condensed the corporate minutes into a document entitled the " Historical Record." The Historical Record outlined the Compensation Agreement. That same year, Don, Eloise, and David signed a " Shareholders Attachment" that indicated they were shareholders of Cosmos, that they had read the Historical Record, and that they were satisfied with the Historical Record as written, thereby ratifying the Compensation Agreement. In 2009, Don and Eloise assigned their stock to the Schultz Family Trust. Don acted as the agent for Schultzes in handling matters relating to Cosmos. Until the fall of 2008, Don had always been the member of the Schultz family who communicated with Lyle regarding Cosmos. Don told Lyle that Cosmos was doing well under Lyle's leadership and that Schultzes were indebted to Lyle for the success of Cosmos. Prior to the current dispute, Schultzes did not express to Lyle any dissatisfaction with his management of Cosmos. Since 1989, the dividends paid to Schultzes have increased by an average of 17.84% per year, totaling over $3 million.

[¶8] In 2005, the shareholders discussed whether to add restrooms and expand the gift shop. Discussions for this project spanned several years. In 2008, the shareholders discussed the plans for the gift shop and the addition of a new deck. The shareholders agreed that Heidi should plan the construction of the gift shop and deck. When the bids for the project came back higher than expected, David Schultz expressed concern to Heidi about the cost of the project. Heidi restructured the expansion and reduced the cost by a third. Schultzes continued to oppose the expansion. In a letter to Lyle and Heidi from Steve Schultz, Steve stated, " I am appalled by the way this situation has been managed and by the way you have treated my parents. This is unacceptable; you need to change your approach or prepare yourselves for a long, painful sequence of shareholder disputes." At a board of directors meeting on November 3, 2008, David Schultz said in a written statement, " [S]teve is wealthy, he is tenacious, and he enjoys confrontation. [Don] has held him back for 30 years; Steve will fight you to his last breath and leave instruction in his will to keep the fight going beyond his lifetime." Ultimately, the directors voted to approve a plan to expand

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the gift shop and restrooms, with Lyle and Heidi voting in favor and ...

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