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Graydog Internet, Inc. v. Giller

Supreme Court of Oregon

November 30, 2017

GRAYDOG INTERNET, INC., an Oregon corporation, Respondent on Review,
v.
David GILLER, Petitioner on Review. David GILLER, Petitioner on Review,
v.
Douglas WESTERVELT, Respondent on Review.

          Argued and submitted May 11, 2017

         On review from the Court of Appeals. CC 130506470, CA A156539 [*]

          Colin M. Murphy, Southern Oregon Public Defenders, Medford, argued the cause for the petitioner on review. Gary M. Bullock, Gary M Bullock & Associates PC, Portland, fled the briefs for the petitioner on review.

          Susan Marmaduke, Harrang Long Gary Rudnick PC, Portland, argued the cause and fled the brief for the respondent on review. Also on the brief were Nathan Robert Morales and C. Robert Steringer.

          Before Balmer, Chief Justice, and Kistler, Walters, and Nakamoto, Justices, and Armstrong, Judge of the Court of Appeals, Justice pro tempore. [**]

         [362 Or. 178] The decision of the Court of Appeals is reversed. The judgment of the circuit court is affirmed, and the case is remanded to the circuit court for further proceedings.

         Case Summary: A shareholder in a closely held corporation challenged the corporation's attempt to purchase all of the shareholder's shares pursuant to a provision of the Oregon Business Corporation Act, ORS 60.952(6). The trial court ruled that, for purposes of the statute, a third-party complaint was not a "proceeding" and that the claims made in the third-party complaint were not qualifying claims "under" ORS 60.952(1). The Court of Appeals reversed, allowing the corporation to proceed to purchase the shareholder's shares. Held: In the circumstances here, the shareholder's third-party complaint was not a "proceeding under [ORS 60.952(1)]" and therefore it did not trigger the corporation's right to elect to purchase the shareholder's shares.

         The decision of the Court of Appeals is reversed. The judgment of the circuit court is affirmed, and the case is remanded to the circuit court for further proceedings.

         [362 Or. 179] BALMER, C. J.

         Under ORS 60.952(6), when a shareholder in a closely held corporation files a certain type of proceeding, the corporation or another shareholder may respond with an election to purchase for fair value all of the shares of the shareholder who filed the proceeding and proceed to acquire those shares. This case presents the question of when, if ever, the filing of a third-party complaint constitutes the "filing of a proceeding under subsection (1)" of that statute, such that the shareholder who filed the proceeding may be bought out by the corporation or another shareholder. The corporation here, Graydog Internet, Inc., has only two shareholders: Westervelt, the company's president and majority shareholder, and Giller, an employee and minority shareholder. Graydog initiated the underlying case, at Westervelt's direction, when it filed a declaratory judgment action against Giller raising an issue regarding his employment. As part of his response, Giller filed a third-party complaint against Westervelt. Graydog then filed an election to purchase Giller's shares under ORS 60.952(6). Giller objected, arguing that filing a third-party complaint does not constitute the "filing of a proceeding" as that term is used in ORS 60.952(6) and that the claims in the third-party complaint were not "under [ORS 60.952(1)]." For those reasons, Giller asserted, Graydog could not elect to purchase his shares. We agree that ORS 60.952(6) does not apply to Giller's third-party complaint, and therefore reverse the decision of the Court of Appeals.

         I. FACTS

         Westervelt and Giller founded Graydog in 1997. Since incorporation, Westervelt has been the majority shareholder and Giller has been the minority shareholder. Both have been active in the management and operation of the firm. Their cooperation was fruitful and the company grew.

         Eventually, however, Westervelt and Giller disagreed about aspects of their venture together. At some point, Westervelt offered to buy out Giller, but Giller refused to sell. A provision in a shareholder agreement among Graydog, Westervelt, and Giller allowed Graydog to purchase [362 Or. 180] the shares of any shareholder who ceased to be employed by Graydog. To that end, Westervelt directed Graydog to file a declaratory judgment action against Giller seeking a declaration of his status as an at-will employee and Graydog's right to terminate Giller's employment.

         Giller responded with an answer and counterclaims against Graydog. He also filed a third-party complaint against Westervelt personally. The third-party complaint asserted claims for

"(1) a declaration that the 'shareholder agreement is void and unenforceable, ' (2) 'breach of contract' based on Westervelt allegedly violating the corporate bylaws by 'tak[ing] unilateral action in his personal capacity and for his personal interests, ' and (3) 'breach of [the] contractual duty of good faith and fair dealing' based on Westervelt allegedly 'having acted for the sole purpose of trying to force [Giller] to unwillingly sell his shares to him.'"

Graydog Internet, Inc. v. Giller, 279 Or.App. 722, 725, 381 P.3d 903 (2016) (first and second brackets in Graydog Internet, Inc.). In support of those claims, Giller alleged:

"Westervelt loaned himself $20, 000 from the company without the board's approval; Westervelt elected his wife to the board of directors over Giller's objection; Westervelt threatened to force Giller to sell his shares if Giller did not agree to do so voluntarily, and had an attorney prepare and file Graydog's complaint to terminate Giller's employment before the board of directors voted on the proposal. *** Giller alleges that Westervelt took all of those actions 'for his personal interests' and harmed Giller as a result."

Id. at 734.

         In response to the third-party complaint, Graydog- controlled by Westervelt-filed an election to purchase all of Giller's shares pursuant to ORS 60.952(6), setting up the issue now before us.

         Subsection (6) of ORS 60.952 applies when a shareholder in a closely held corporation "fil[es]" a "proceeding under subsection (1)." ORS 60.952(1) identifies the grounds for liability that a shareholder in a closely held corporation must "establish[]" before a court will grant certain relief [362 Or. 181] against the corporation or another shareholder: that the directors or shareholders are deadlocked; that the directors have acted in an illegal, oppressive, or fraudulent manner; or that waste has occurred.[1] Once a shareholder establishes liability, a court "may order one or more of the remedies listed in subsection (2)." ORS 60.952(1). When a shareholder files a proceeding under ORS 60.952(1), "the corporation or one or more shareholders may elect to purchase all of the shares owned by the shareholder who filed the proceeding for their fair value." ORS 60.952(6).[2] That process-a defendant corporation or a shareholder in the defendant corporation electing under ORS 60.952(6) to purchase the shares of the shareholder who filed the proceeding-is referred to as an "election." As discussed below, as a result of the election provision, when a shareholder files a proceeding under ORS 60.952(1), in addition to seeking damages or other relief under ORS 60.952(2), the shareholder in effect makes an offer to sell all of its shares, for fair value, to the corporation [362 Or. 182] or another shareholder, without resolving the merits of the complaint or other proceeding that the shareholder filed.

         We return to the facts of the case. After Graydog filed an election, Giller objected to it. Graydog and Giller then filed cross-motions for partial summary judgment contesting the legality of Graydog's election under ORS 60.952(6). The parties disputed two issues under ORS 60.952(6): whether filing a third-party complaint constituted the "filing" of a "proceeding" and whether the claims in Giller's third-party complaint were actually "under" ORS 60.952(1). On the first point, Giller asserted that the election procedure is available only to the party defending against a proceeding brought by another, and not to the party that initiated the proceeding in the first place. He argued that it was Graydog and Westervelt that had initiated the litigation and that his answer, counterclaim, and third-party complaint were simply defensive responses to Graydog's complaint. Graydog responded that "proceeding" in ORS 60.952(6) can mean an "action or step that is part of a larger action" and, therefore, that the third-party complaint filed by Giller was a "proceeding" that Giller had "filed."

         On the second issue, Giller argued that his third-party complaint was not actually "under" ORS 60.952(1), because he had not asserted a claim for relief from "illegal, fraudulent or oppressive" conduct, the standards for liability in ORS 60.952 (1)(b), nor had he sought one of various equitable remedies identified in ORS 60.952(2). Rather, Giller argued, he had simply responded to Graydog's complaint and asserted an appropriate contract-based claim against the majority shareholder who controlled Graydog, seeking money damages and a declaratory judgment. Graydog replied that the true nature of Giller's claim was revealed by the conduct alleged in the complaint, which appeared to show that Westervelt had acted in an oppressive and illegal manner, although Giller did not use those words. Because "illegal" and "oppressive" conduct creates liability under ORS 60.952(1), Graydog asserted, Giller's claims were actually "under" ORS 60.952(1).

         After argument, the trial court entered a limited judgment stating:

[362 Or. 183] "1. ORS 60.952(6) does not apply to this case because ORS 60.952(6) may be triggered only against one who commences an action, not against a party who files counterclaims or a third-party complaint.
"2. ORS 60.952(6) does not apply to this case for the further reason that the claims made by Mr. Giller are not of the type described in ORS 60.952."

         Graydog and Westervelt appealed that judgment to the Court of Appeals.

         At the Court of Appeals, Graydog and Westervelt challenged both conclusions of the trial court. They argued that the text and context of ORS 60.952(6) indicate that a party who files a third-party complaint has filed a "proceeding" for the purposes of the statute, citing a number of Oregon cases suggesting that a "proceeding" can mean a part of a lawsuit, such as a third-party complaint. They also argued that Giller's claims were the type of claims described in ORS 60.952(1) that could trigger the right of the corporation or another shareholder to make an election under the statute to purchase the filing shareholder's shares.

         Giller argued that filing a third-party complaint was not the "filing of a proceeding" under the statute. He contended that the legislative history indicates that the legislature intended ORS 60.952(6) to be "a remedy, not a weapon." By allowing a majority shareholder to commence litigation against a minority shareholder and then, after the defendant has responded by answer, counterclaim, or third-party complaint, use ORS 60.952(6) to buy out the latter, as Giller asserted that Graydog and Westervelt were attempting to do here, ORS 60.952(6) would become a weapon for majority shareholders seeking to oust minority or dissenting shareholders. Giller also reprised his argument that the claims in the third-party complaint were not the type of claims described in ORS 60.952(1) that could trigger an election.

         The Court of Appeals agreed with Graydog and Westervelt and reversed the trial court. The court first considered the meaning of the phrase "filing of a proceeding" as used in ORS 60.952(6). The court noted that "proceeding" for [362 Or. 184] purposes of ORS chapter 60 is denned as "a civil, criminal, administrative or investigatory action." ORS 60.001(24). It cited several cases where this court described "third-party complaints as a separate civil action" from the cases in which they were filed and concluded that filing a third-party complaint was the "filing of a proceeding." Graydog Internet, Inc., 279 Or.App. at 729.

         The court then considered whether the claims in Giller's third-party complaint were claims "under subsection (1)" of ORS 60.952. To determine the "true nature" of Giller's claims, it applied a standard for determining the application of the correct statute of limitations set out in Htaike v. Sein, 269 Or.App. 284, 344 P.3d 527, rev den,357 Or. 595 (2015). Graydog Internet, Inc., 279 Or.App. at 731. Under the Htaike standard, whether a claim properly sounds in tort or contract depends on the "legal source of the defendant's liability, the factual setting of the dispute, the injuries asserted by the plaintiff, and the plaintiffs claimed measure of damages." Id. at 732. The Court of Appeals applied that standard and concluded that "the real character of at least some of Giller's third-party claims is a claim for ...


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