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Naaktgeboren v. Vermeer Equipment of South Dakota, Inc.

United States District Court, D. South Dakota, Southern Division

June 5, 2018




         Plaintiff Jeff Naaktgeboren ("Naaktgeboren") sued defendants Vermeer Equipment of South Dakota, Inc. ("VESD"), Kevin Klein ("Klein"), and Tomi Klein ("Tomi"), [1] (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.

         I. Facts Not Subject to Genuine Dispute

         Klein 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.

         In 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.

         The Employment Agreement provided that VESD could terminate Naaktgeboren's employment only for cause, [2] 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 employment.

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.

         Naaktgeboren 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.

         During 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; ...

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