United States District Court, D. South Dakota, Southern Division
OPINION AND ORDER GRANTING IN PART AND DENYING IN
PART PLAINTIFF'S MOTION FOR PARTIAL SUMMARY
ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE.
Jeff Naaktgeboren ("Naaktgeboren") sued defendants
Vermeer Equipment of South Dakota, Inc. ("VESD"),
Kevin Klein ("Klein"), and Tomi Klein
("Tomi"),  (collectively "the defendants"),
in the Second Judicial Circuit of South Dakota, alleging that
in terminating Naaktgeboren's employment, the defendants
breached the Stock Restriction Agreement (Count I), breached
their fiduciary duty (Count II), and breached the Employment
Agreement (Count III). Doc. 1-1. Naaktgeboren also sought
declaratory judgment that the covenant not to compete in the
Employment Agreement is invalid and unenforceable (Count IV).
Doc. 1-1. Defendants removed the case to this Court under 28
U.S.C. §§ 1332, 1441, and 1446. Doc. 1.
Naaktgeboren has filed a motion for partial summary judgment
on Counts I, III, and IV. Doc. 19. For the reasons stated
below, this Court grants Naaktgeboren's motion with
respect to Counts I and IV, and denies the motion with
respect to Count III.
Facts Not Subject to Genuine Dispute
and Tomi are the sole shareholders and directors of Vermeer
Equipment of Nebraska, Inc. ("VEN"), a Nebraska
corporation, and the owners of VESD, also a Nebraska
corporation. Doc. 21 at ¶¶ 4, 8; Doc. 27 at
¶¶ 4, 8. VEN is the exclusive Vermeer dealer for
Nebraska, and VESD is the exclusive Vermeer dealer for South
Dakota and three counties in Wyoming. Doc. 21 at ¶¶
5, 8; Doc. 27 at ¶¶ 5, 8. A Vermeer dealer with an
exclusive territory has the exclusive right to sell and
service Vermeer equipment in the territory, and can seek a
portion of revenues from any sales to customers in that
territory by other Vermeer dealers. Doc. 21 at ¶¶
6-7; Doc. 27 at ¶¶ 6-7.
1999, VESD had two stores in South Dakota, one in Box Elder
and the other in Sioux Falls. Doc. 21 at ¶ 9; Doc. 27 at
¶ 9. The Sioux Falls store was in its infancy with only
two employees, little inventory, and a small building. Doc.
21 at ¶ 10; Doc. 27 at ¶ 10. At that time,
Naaktgeboren was a store manager for a Vermeer Equipment
store in Burnsville, Minnesota, where he had worked the
previous fifteen years. Doc. 21 at ¶¶ 1-3; Doc. 27
at ¶¶ 1-3. The Burnsville store had an established
customer base and fifteen employees. Doc 21 at ¶ 2; Doc.
27 at ¶ 2. Klein contacted Naaktgeboren about coming to
manage VESD. Doc. 21 at ¶ 11; Doc. 27 at ¶ 11.
Naaktgeboren accepted the offer after a compensation package
was agreed upon consisting of a base salary, a percentage of
annual profits, an Employment Agreement, and an opportunity
to purchase twenty percent of VESD. Doc. 21 at ¶ 14;
Doc. 27 at ¶ 14. Naaktgeboren was the only employee of
VESD to be offered an Employment Agreement, which was in part
a means to entice him to accept the position. Doc. 21 at
¶ 18; Doc. 27 at ¶ 18.
Employment Agreement provided that VESD could terminate
Naaktgeboren's employment only for cause,  and defined
"cause" as follows:
For purposes of this Agreement, Vermeer shall have
"cause" to terminate Naaktgeboren's employment
hereunder upon (i) the willful failure of Naaktgeboren to
substantially perform his duties and continuance of such
failure for more than ten (10) days after Vermeer notifies
Naaktgeboren in writing that he is failing to substantially
perform his duties; (ii) the engaging by Naaktgeboren in
serious misconduct which is injurious to Vermeer; (iii) the
conviction of Naaktgeboren in a court of proper jurisdiction
of a crime which constitutes a felony; or (iv) a breach of
any term, condition, agreement, representation or provision
of this Agreement.
Doc. 22-2 at 3. In addition, the Employment Agreement
mandated certain procedures in order to terminate
Naaktgeboren's employment for cause.
Notwithstanding the foregoing, Naaktgeboren shall not be
deemed to have been terminated for "cause" unless
and until there shall be delivered to him a copy of a
resolution, duly adopted by the Board of Directors of
Vermeer, finding that Vermeer has "cause" to
terminate Naaktgeboren as contemplated by this section.
Any termination by Vermeer of Naaktgeboren shall be
communicated by a "written notice of termination"
(as hereinafter defined) to the other party to this
Agreement. For purposes of this Agreement, a "notice of
termination" shall mean a notice which shall indicate
the specific termination provisions in this Agreement relied
upon and shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of
Doc. 22-2 at 3-4. The Employment Agreement also included a
covenant not to compete which imposed a three-year
restriction on Naaktgeboren following termination of his
employment "for any reason whatsoever" that:
Naaktgeboren shall not directly or indirectly engage in or
operate, own, manage, control, join or participate in the
ownership, management, operation or control, or consult with
respect to or otherwise be connected or associated with any
heavy equipment dealer, distributor or manufacturer within
the states of South Dakota, Nebraska, [and] Wyoming....
Doc. 22-2 at 5.
exercised his right to purchase twenty percent of VESD, and
at some point between March and August of 1999, VESD and
Naaktgeboren entered into a Stock Restriction Agreement. Doc.
21 at ¶¶ 20-21; Doc. 27 at ¶¶ 20-21. The
Stock Restriction Agreement established that upon termination
of employment, the terminated stockholder (Naaktgeboren)
would sell all shares of common stock back to the Corporation
(VESD). Doc. 22-3 at 4. VESD was required to purchase the
shares at a price equal to "book value, " which was
defined as follows:
"Book Value" shall mean the total Stockholder's
equity as shown on the financial statement certified by the
independent public accountants employed by the Corporation
determined in accordance with generally accepted accounting
principles applied on a consistent basis for financial
statement purposes for an "S" corporation divided
by the number of shares of common stock issued and
outstanding at the time of the calculation.
Doc. 22-3 at 1, 4. Generally accepted accounting principles
(GAAP) have never been used to prepare VESD's financial
statements, and Naaktgeboren purchased the shares of VESD and
received annual distributions based on a valuation derived
from a tax basis of accounting. Doc. 27 at ¶¶ 42,
44-45; Doc. 30 at ¶ 42, 44-45.
Naaktgeboren's tenure, VESD's revenues increased.
Doc. 21 at ¶ 33; Doc. 27 at ¶ 33. Nevertheless, on
July 15, 2016, Klein and his sons Dusty Klein and Joe Klein
traveled to VESD's Sioux Falls area store, which by that
time had moved to Tea, South Dakota, and asked Naaktgeboren
to resign his position or be terminated. Doc. 21 at ¶
34; Doc. 27 at ¶ 34; Doc. 22-4 at 26; Doc. 22-8 at 3.
Naaktgeboren provided Klein a written statement tendering his
resignation, dated July 15, 2016. Doc. 27 at ¶ 50; Doc.
30 at ¶ 50; Doc. 28-1. VESD had drafted a corporate
resolution deeming it to have cause to terminate
Naaktgeboren, but that resolution had not been formally
adopted by VESD's Board of Directors and was not provided
to Naaktgeboren on July 15, 2016, or when his employment
officially ended on July 31, 2016. Doc. 21 at ¶ 35; ...