Phillips Brothers v. Ray Winstead ( 2011 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2011-CA-01846-SCT
PHILLIPS BROTHERS, KILBY BRAKE
FISHERIES, LLC AND HARRY SIMMONS
v.
RAY WINSTEAD
DATE OF JUDGMENT: 09/22/2011
TRIAL JUDGE: HON. JANNIE M. LEWIS
COURT FROM WHICH APPEALED: YAZOO COUNTY CIRCUIT COURT
ATTORNEYS FOR APPELLANTS: LUTHER T. MUNFORD
ROBERT G. MAYER
WILEY J. BARBOUR, JR.
CHARLES W. WRIGHT, JR.
L. BROOKS HOOPER
ATTORNEYS FOR APPELLEE: DORSEY R. CARSON, JR.
JOHN M. LASSITER
CHRISTOPHER D. MEYER
NATURE OF THE CASE: CIVIL - TORTS-OTHER THAN PERSONAL
INJURY & PROPERTY DAMAGE
DISPOSITION: REVERSED; REMANDED IN PART;
RENDERED IN PART - 01/09/2014
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
EN BANC.
WALLER, CHIEF JUSTICE, FOR THE COURT:
¶1. Defendants Phillips Brothers, Kilby Brake Fisheries, LLC, and Harry Simmons seek
review of a $1,724,923 judgment in favor of Ray Winstead for shareholder and employment
claims. Finding multiple errors, we reverse and render in part; and remand in part.
Facts & Procedural History
¶2. In March 2000, Kilby Brake Fisheries, LLC, was formed as a catfish hatchery and
farm. An operating agreement was signed by the three members–Harry Simmons, Phillips
Brothers, LP, and Ray Winstead. The Kilby Brake operating agreement provided each
member a one-third percent ownership stake in Kilby Brake. At the start of the LLC, bank
loans were made and signed by all three members as guarantors. There were three loans: one
in the amount of $300,300 (for the purchase of inventory), one in the amount of $201,040
(the purchase of equipment), and one in the amount of $300,900 (revolving line of credit to
be used for operating expenses). Shortly after Kilby Brake was formed, Phillips and
Simmons purchased an adjacent catfish farm (“the Wise Place”) to be used to support the
Kilby Brake operation. Winstead declined to be a part of the purchase of the Wise Place.
¶3. The members agreed that Winstead would be the hatchery operator and, for his work,
he would receive $30,000 per year from Kilby Brake and use of a company truck, and Kilby
Brake would pay for his and his family’s housing on the farm, utilities, and health insurance.
Winstead, as hatchery operator, was subject to the direction of Simmons, serving as the
manager under the operating agreement. Simmons, under the Kilby Brake operating
agreement, was authorized to carry out the business functions of the hatchery, including
borrowing money and check-writing.
¶4. Kilby Brake’s records indicated it was profitable for only two of the almost eight
years while Winstead was the hatchery operator. Simmons fired Winstead in late 2007.
¶5. In September 2009, Winstead filed a complaint against Kilby Brake, Harry Simmons,
Chat Phillips, Simmons Farm Raised Catfish, Inc., Five Mile Fisheries, Inc., and H.D.
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Simmons Corp. in the Circuit Court of Yazoo County.1 His complaint was amended to add
Phillips Brothers, LP, as a defendant. Winstead alleged that Simmons and Phillips Brothers
had failed to pay him his agreed-upon salary, asserting claims of fraud, breach of fiduciary
duty, corporate freeze-out, conversion, slander, slander per se, and tortious interference with
business relations. He also requested an accounting and dissolution of the LLC.
¶6. Along with their answers, Simmons, Phillips and Kilby Brake (Defendants) filed
counterclaims against Winstead asserting theft, conversion, usurpation of corporate
opportunities, tortious interference with business relations, conversion, theft by deception,
breach of contractual and fiduciary duties, and unjust enrichment. They requested replevin
and judicial dissolution. The counterclaims alleged that Winstead took Kilby Brake property
for his personal use, provided property to others to use, and sold property, including fish
products, food products, equipment, chemicals and fuel without authorization, while
retaining all profits. The trial court granted Winstead’s motion to dismiss the claims of
tortious interference with Kilby Brake’s business relations and claims that were barred by
the three-year statute of limitations.
¶7. Trial commenced in April 2011 and, at the completion, a jury awarded Winstead
compensatory damages in the amount of $1,160,000 and punitive damages against Simmons
of an additional $100,000. The court also awarded Winstead attorneys’ fees and costs in the
amount of $464,923, bringing the total judgment against Harry Simmons and Phillips
Brothers to $1,724,923. Further, the court awarded post-judgment interest at a rate of eight
1
Harry Simmons and Phillips Brothers were members of a number of other entities
involved in the catfish industry. The partners’ other companies also were named as
defendants in Winstead’s complaint.
3
percent. Defendants appealed. The jury denied three of Defendants’ four
counterclaims–theft, unjust enrichment, and breach of fiduciary duty. Kilby Brake prevailed
on its replevin counterclaim, and the jury ordered that Winstead return the company truck
to Kilby Brake.
¶8. Defendants filed a motion for judgment notwithstanding the verdict (JNOV) or, in the
alternative, a motion for new trial, which were denied. Although both parties asked in their
pleadings for the LLC to be dissolved, they were unable to agree about the terms of
dissolution. In the final judgment, the parties’ claims for judicial dissolution were dismissed
without prejudice. No issue is made of this dismissal on appeal. Because of the many issues
in this case, we will discuss the facts relevant to each issue below.
DISCUSSION
¶9. The issues raised by the three defendants in this appeal fall into six categories: (1)
Whether the admission of testimony regarding an oral agreement for cash contributions
violated the parol evidence rule; (2) whether there was sufficient evidence to support
Winstead’s award for fraud; (3) whether there was sufficient evidence to support Winstead’s
award for corporate freeze-out; (4) whether there was sufficient evidence to support
Winstead’s award for breach of fiduciary duty; (5) whether Kilby Brake is entitled to a new
trial; (6) whether Winstead met the requisite elements of slander per se?
I. Whether the admission of testimony regarding an oral argument
for case contributions violated the parol evidence rule.
¶10. Winstead asserted that Simmons and Phillips Brothers had agreed to provide $600,000
in paid-in capital from cash contributions for the purchase of the startup equipment and fish
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inventory. Over Simmons and Phillips Brothers’ objections, the trial court allowed Winstead
to testify to this alleged oral agreement because the operating agreement was “silent as to the
contributions.” Winstead’s expert also was permitted to testify, over objections, that he
believed it was the intent of Simmons and Phillips to pay$600,000 in capital, out of cash.
¶11. “Questions concerning the construction of contracts are questions of law that are
committed to the court rather than questions of fact committed to the fact finder.” Facilities,
Inc. v. Rogers-Usry Chevrolet, Inc., 908 So. 2d 107 (Miss. 2005) (quoting Miss. State
Highway Comm'n v. Patterson Enters. Ltd., 627 So. 2d 261, 263 (Miss. 1993)). An
appellate court applies a de novo standard of review for questions of law. Starcher v. Byrne,
687 So. 2d 737, 739.
¶12. The relevant portion of the Kilby Brake operating agreement at issue is set out as
follows:
ARTICLE VI
CAPITAL CONTRIBUTIONS AND CAPITAL ACCOUNTS
Section 6.1 Initial Capital Contributions. As initial capital
contributions to the Company, the Members shall
contribute the Property more particularly described in
Schedule “A”.2
Section 6.2 Additional Contributions. Except as set forth in
Section 6.1 above, no Member shall be required to
make any capital contributions.
¶13. “The primary purpose of all contract construction principles and methods is to
determine and record the intent of the contracting parties.” Royer Homes of Miss., Inc. v.
2
See Schedule “A,” attached as an exhibit to this opinion.
5
Chandeleur Homes, Inc., 857 So. 2d 748, 752 (Miss. 2003) (citing Kight v. Sheppard Bldg.
Supply, Inc., 537 So. 2d 1355, 1358 (Miss. 1989)). In contract construction cases, the
court’s focus is on the language of the contract. Royer Homes, 857 So. 2d at 752 (citing
Turner v. Terry, 799 So. 2d 25, 32 (Miss. 2001); Osborne v. Bullins, 549 So. 2d 1337, 1339
(Miss. 1989)). A court should look to the “four corners” of a contract to determine how to
interpret it. McKee v. McKee, 568 So. 2d 262, 266 (Miss. 1990). It is well established that
“parol extrinsic evidence is not admissible to add to, subtract from, vary or contradict written
instruments, contractual in nature, and which are valid, complete, unambiguous and
unaffected by accident, mistake or fraud.” Byrd v. Rees, 171 So. 2d 864, 867 (Miss. 1965).
“Our concern is not nearly so much with what the parties may have intended, but with what
they said, since the words employed are by far the best resource for ascertaining the intent
and assigning meaning with fairness and accuracy.” In re Estate of Fitzner, 881 So. 2d 164
(Miss. 2003) (citing Simmons v. Bank of Miss., 593 So. 2d 40, 42-43 (Miss. 1992)). If the
language in the contract is clear and unambiguous, the intent of the contract must be
effectuated. Rotenberry v. Hooker, 864 So. 2d 266, 270 (Miss. 2003); see also Pfisterer v.
Noble, 320 So. 2d 383, 384 (Miss. 1975). “The mere fact that the parties disagree about the
meaning of a provision of a contract does not make the contract ambiguous as a matter of
law.” Burton v. Choctaw County, 730 So. 2d 1, 6 (Miss. 1997) (quoting Cherry v. Anthony,
Gibbs, Sage, 501 So. 2d 416, 419 (Miss. 1987)).
¶14. This Court has said that “silence alone does not necessarily create an ambiguity as a
matter of law.” Facilities, Inc. v. Rogers-Usry Chevrolet, Inc., 908 So. 2d 107, 115 (Miss.
2005). In Facilities, Inc., this Court found that, although the Court of Appeals held that a
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lease agreement between the parties was not ambiguous, the Court of Appeals improperly
considered extrinsic or parol evidence in the analysis portion of its opinion. Id. at 110. We
found that, although the lease agreement was silent as to whether the bonus rent would apply
to new vehicle sales at the subject property, it was not ambiguous and, therefore, Rogers-
Usry was not required to pay bonus rent for sales that did not occur on the leased property.
Id. at 115-16 (“It is the silence, not the language of the [operating agreement], that has
created this dispute. However, silence alone does not necessarily create an ambiguity as a
matter of law”) (emphasis in original). Further, we noted this concept is not novel and has
been adopted in a number of jurisdictions. Id.
¶15. The Kilby Brake operating agreement is clear. It states “no member shall be required
to make any capital contributions” except as provided in Schedule A.3 Nothing is listed in
Schedule A. Kilby Brake was financed by the three loans totaling more than $800,000,
which Winstead signed for and subsequently renewed as a one-third partner. For more than
eight years, Winstead never raised an issue about the capital investment. Winstead’s expert
testified that it was not unusual to leave capital contributions blank for completion at closing.
No amounts were ever filled in or added.
¶16. Constraining our review to the “four corners” of the document, it is clear the language
used in the Kilby Brake operating agreement is not ambiguous. Thus, it was error for the
trial court to go outside the operating agreement to interpret the intent of the parties. Because
the trial court never should have considered the offer to make cash contributions, the interest-
expense-savings portion of Winstead’s corporate freeze-out damage award also is without
3
See Schedule “A,” attached as an exhibit to this opinion.
7
merit. We thus reverse the judgment of the trial court on its parol-evidence finding as well
as the damages awarded and render judgment in favor of Simmons on this portion of
Winstead’s freeze-out damages. Having limited our review to the admissible evidence, we
now address the merits of Defendants’ claims.
II. Whether there was sufficient evidence to support Winstead’s
award for fraud.
¶17. Winstead’s theory of recovery for fraud was based on two claims. The first is that
Simmons and Phillips Brothers purchased the Wise Place in their names only, with funds
from Kilby Brake. The second is that money was withheld fraudulently from his salary.
Winstead was awarded a total of $140,000 for fraud: $90,000 for one-third of the value of
the Wise Place and $50,000 for money withheld from his paychecks. Simmons and Phillips
Brothers were both found liable and both moved for JNOV, arguing Winstead had failed to
prove all of the elements of fraud by clear and convincing evidence or, in the alternative, that
the overwhelming weight of the evidence required a new trial.
¶18. The standard of review for the denial of a motion for JNOV is de novo. InTown
Lessee Assocs., LLC v. Howard, 67 So. 3d 711, 718 (Miss. 2011). We consider the facts in
the light most favorable to the nonmoving party. Natchez Elec. & Supply Co., v. Johnson,
968 So. 2d 358, 361 (Miss. 2007). “‘If the facts so considered point so overwhelmingly in
favor of the appellant that reasonable men could not have arrived at a contrary verdict, [we
are] required to reverse and render.’” Leaf River Forest Prods., Inc. v. Ferguson, 662 So.
2d 648, 659 (Miss. 1995) (quoting Munford, Inc. v. Fleming, 597 So. 2d 1282, 1284 (Miss.
1992)). We will affirm the denial of JNOV if there is substantial evidence in support of the
8
verdict. Natchez Elec. & Supply Co., 968 So. 2d at 362. “Substantial evidence is
information of such quality and weight that reasonable and fair-minded jurors in the exercise
of impartial judgment might have reached different conclusions.” Id. (citations omitted).
¶19. In order to recover for fraud, a plaintiff must prove the following elements: “(1) a
representation; (2) its falsity; (3) its materiality; (4) the speaker’s knowledge of its falsity;
(5) his intent that it should be acted on by the hearer and in the manner reasonably
contemplated; (6) the hearer’s ignorance of its falsity; (7) his reliance on its truth; (8) his
right to rely thereon; and (9) his consequent and proximate injury.” Holland v. Peoples
Bank & Trust Co., 3 So. 3d 94, 100 (Miss. 2008) (citations omitted). These elements must
be proven by clear and convincing evidence. Bank of Shaw v. Posey, 573 So. 2d 1355, 1363
(Miss. 1990). Clear and convincing evidence is of such a high order that “this Court held
that the ‘overwhelming weight of the evidence’ falls short of being ‘clear and convincing.’”
In the Interest of C.B., 574 So. 2d 1369, 1375 (Miss. 1990) (quoting Aponaug Mfg. Co. v.
Collins, 42 So. 2d 431, 434 (Miss. 1949)).
A. The Wise Place
¶20. The Wise Place is a catfish farm located adjacent to Kilby Brake. Winstead testified
that Simmons informed him that “they had gotten the Wise Place” and that it was his
understanding “that, basically, Kilby Brake bought the Wise Place.” Simmons testified that
he and Phillips Brothers purchased the Wise Place and the equipment thereon individually
and allowed Kilby Brake to use it as part of the hatchery operation. He further testified that
Winstead was unwilling to join in the purchase because he did not feel that a bank would
9
lend him more money. The deed to the property was dated April 12, 2000, and was recorded
in the names of Harry Simmons and Phillips Brothers.
¶21. At trial, Simmons initially testified that the purchase price of the Wise Place was
$190,000, however, he later explained that the total purchase price for the land and
equipment was $230,000. Phillips also testified that the purchase price for the land at the
Wise Place was $190,000, but that the equipment that came with the deal was an additional
cost. Simmons and Phillips Brothers permitted Kilby Brake to use the Wise Place, rent free,
and even gave the proceeds from the sale of the Wise Place equipment to Kilby Brake.
Although Kilby Brake did not pay rent for use of the Wise Place, Kilby Brake spent
$78,305.70 to make improvements to the pond walls and access roads to benefit Kilby Brake.
¶22. At the start of the company, Kilby Brake secured three loans from BankPlus, which
were signed by all members, totaling $800,000. Simmons testified that they paid $400,000
for inventory and $200,000 for equipment, which left $200,000 in operating capital. A Kilby
Brake bank statement from March 2000 was submitted into evidence showing that $610,000
was deposited into the account. Winstead’s attorney thoroughly questioned Simmons about
the purchase of the Wise Place and the March 2000 bank statement, claiming this is where
the $190,000 came from to purchase the Wise Place. Simmons denied this, later testifying
that he recalled purchasing the Wise Place with Phillips Brothers using cash.
¶23. The record contains no evidence that Kilby Brake funds were used to purchase the
Wise Place. Winstead’s forensic accountant, Robert Alexander, testified that no Kilby Brake
funds were used to purchase the property, and neither Simmons nor Phillips ever took any
money from the Kilby Brake account, whether salary, dividends, or other distributions. The
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deed to the Wise Place was in the name of Simmons and Phillips Brothers and was on record
at the Humphreys County Courthouse. Interestingly, the jury form stated Simmons and
Phillips Brothers were guilty of a material misrepresentation and all nine elements of fraud
but then stated the jury found Simmons and Phillips Brothers not guilty of
“misappropriat[ing] and convert[ing] Kilby Brake Fisheries’ funds or property. . . .”
¶24. This Court finds that insufficient evidence, much less clear and convincing evidence,
was presented to prove the funds to purchase the Wise Place came from Kilby Brake.
Further, Winstead’s mere assertion that he thought Kilby Brake owned the Wise Place is not
enough to carry his burden that he was defrauded by Simmons and Phillips Brothers. We
find that the trial court erred by failing to grant Defendants’ motion for JNOV for the claim
of fraud surrounding the purchase of the Wise Place. Thus, we reverse and render judgment
on this issue in favor of Simmons and Phillips Brothers.
B. Withheld Pay
¶25. The jury ruled Winstead was defrauded by Phillips Brothers and Simmons with regard
to withholdings from his paycheck over the course of his employment at Kilby Brake.
Whether Winstead was owed money based on the amounts withheld from his paycheck was
heavily contested by both sides. Winstead claims improper deductions were taken from his
paychecks and he was never paid the amount he was promised. Simmons claims Winstead
actually owed Kilby Brake for personal charges and cash advances. Both sides produced
documents which were admitted into evidence showing records of payments and deductions.
Based on Winstead’s stated $30,000 annual salary, Alexander calculated that Winstead was
11
owed $50,000 in withheld pay over eight years. The jury found Phillips Brothers and
Simmons liable for $25,000 each.
¶26. In Natchez Electric Supply Inc., the plaintiff was seeking to recover on an open
account. Despite some uncontroverted charges by the defendant, the jury returned a defense
verdict with no recovery for the plaintiff. Because the record contained undisputed evidence
of one party’s obligation to pay another, this Court held “no reasonable and fair-minded juror
in the exercise of fair and impartial judgement” could find the obligating party owed
absolutely nothing. Natchez Elec. & Supply Co., Inc., 968 So. 2d at 363. The case at bar
bears striking similarities.
¶27. In the record we find Winstead admitting to making personal charges on his Kilby
Brake account for some items that were indisputably personal, such as multiple deer-rifle
scopes, dog food, and hunting accessories. When asked if the purchase of a “Gobbler’s
Lounge,” used for turkey hunting, was for Kilby Brake, Winstead responded, “[n]o sir. That
would be a personal item for me.” It was further undisputed that Winstead charged Kilby
Brake for gasoline used at his father’s hunting camp in Durant. Winstead’s damages for lost
pay were based on testimony that money was taken out of all his paychecks; however,
payroll records indicate that Winstead was actually paid in excess of his $30,000 annual
salary for four of his eight years with Kilby Brake. What is more, Winstead admitted he had
received cash advances on his paycheck and that money subsequently would be taken out to
repay the advances. Because fault was apportioned between Phillips Brothers and Simmons,
we address both separately.
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¶28. As to Phillips Brothers, we can find no proof of any involvement in the decision-
making process regarding the execution of Winstead’s checks. Contractually, Simmons was
the manager and supervised Winstead. The only testimony in the record regarding
Winstead’s salary was between Simmons and Winstead. Further, all actions on Winstead’s
pay checks, including any deductions, were made by Simmons and his bookkeepers, not by
Phillips Brothers. Winstead even testified that he and Phillips had very little contact, and
when they did, they “didn’t discuss the farm a whole lot.” Nothing in the record indicates
Phillips Brothers ever made a representation to Winstead regarding his pay at all. Thus, there
is no evidence at all that Phillips Brothers fraudulently withheld pay from Winstead’s salary.
We therefore reverse and render judgment in favor of Phillips Brothers.
¶29. With regard to Simmons, Winstead admitted at trial that he knew deductions were
taken from his paycheck for cash advances and for personal charges he made on his Kilby
Brake account. Although Winstead disagreed that some of the charges were personal in
nature, there was no dispute that he was aware Simmons was making deductions. We find
no clear and convincing evidence in the record that any pay shortage which may have
occurred was caused by a fraudulent representation made by Simmons upon which Winstead
relied. Thus, we reverse the judgment against Simmons for fraud with regard to withheld
pay.
¶30. However, Kilby Brake may be liable to Winstead for any improper deductions from
Winstead’s pay that may have occurred, or Winstead may be liable to Kilby Brake if it is
shown he still owes money to Kilby Brake for charges made on his account. We find
Winstead’s own testimony, coupled with other evidence in the record, provides
13
overwhelming evidence, based upon which no reasonable and fair-minded juror in the
exercise of fair and impartial judgment could award Winstead the full amount that he alleged
was taken from each of his paychecks.
¶31. In addition, for reasons discussed below, we reverse and remand this issue to the trial
court for a new trial to determine any amounts Kilby Brake may owe Winstead or vice versa.
III. Whether Winstead proved the requisite elements of corporate
freeze-out.
¶32. As early as 1913, this Court used the term ‘frozen out’ when it held that a chancery
court could appoint a receiver for a corporation to wind up the business at the insistence of
minority stockholders “when it shall appear that by gross mismanagement . . . the rights of
the stockholders . . . are being put in jeopardy.” Brent v. B.E. Brister Sawmill Co., 60 So. 1018,
1022 (Miss. 1913). Since that time, Mississippi courts began to recognize freeze-out4 as a
distinctly individual and direct cause of action, separate from a derivative action. See, e.g.,
Bluewater Logistics, LLC v. Williford, 55 So. 3d 148 (Miss. 2011); Missala Marine Serv.,
Inc. v. Odom, 861 So. 2d 290 (Miss. 2003); Fought v. Morris, 543 So. 2d 167 (Miss. 1989);
Cook v. Wallot, 2013 WL 1883533 (Miss. Ct. App. May 7, 2013); Knights’ Piping, Inc.,
v. Knight, 123 So. 3d 451 (Miss. Ct. App. 2012), cert. denied, 2011-CT-00409-SCT (Oct.
3, 2013). This Court recognized in Fought v. Morris that “the distinctive characteristics and
needs” of closely held corporations made them different from traditional corporations.
Fought v. Morris, 543 So. 2d 167, 169 (Miss. 1989).
4
Other jurisdictions use the term “squeeze out.”
14
¶33. A closely held corporation is a “business entity with few shareholders, the shares of
which are not publicly traded.” Fought v. Morris, 543 So. 2d 167, 169 (Miss. 1989). This
Court has held that limited-liability corporations with few members resemble closely held
corporations. See Bluewater Logistics, LLC v. Williford, 55 So. 3d 148, 161 (Miss. 2011).
Minority shareholders in closely held corporations are particularly vulnerable, because they
usually lack the control the majority has and there is seldom a fair market available for
selling their shares. Fought, 543 So. 2d at 170 (citing Orchard v. Covelli, 590 F. Supp.
1548, 1557 (W.D. Penn. 1984); aff’d 802 F.2d 448 (3rd Cir. 1986)). Thus, if a dispute arises
between the minority member and the majority, it is usually the case that a “minority
shareholder can neither profitably leave, nor safely stay with, the corporation.” Fought, 543
So. 2d at 171.
¶34. Because of their size, membership in closely held corporations resembles that of a
partnership rather than a traditional corporation with directors and stockholders. In its most
classic form, a freeze-out of the minority shareholders by the majority occurs when the
majority purposefully denies the minority member from sharing proportionally in corporate
earnings or gains. This could be accomplished by a number of techniques. For example, the
majority could refuse to declare dividends, pay themselves exorbitant salaries, or sell
corporate assets to themselves at inadequate prices. See F.H. O’Neal and R. Thompson,
O’Neal’s Oppression of Minority Shareholders § 3.02 (2d ed. 1985). The freeze-out cause
of action, therefore, addresses the central problem: the majority, through its right of control,
intentionally reduces or eliminates the minority shareholder’s right to corporate earnings or
gains coupled with virtual inability of the minority member to withdraw or sell.
15
¶35. Although the jury instructions used at trial in the case before us state there are
“elements” to the corporate freeze-out cause of action, no specific elements were set out.
This Court previously has said that “[c]orporate freeze-out is an intentional tort that is
committed with willful and wanton disregard for the right of the shareholder who is frozen
out.” Missala Marine Serv., Inc. v. Odom, 861 So. 2d 290, 295 (Miss. 2003) (emphasis
added); Bluewater, 55 So. 3d at 163 (upholding chancellor’s finding that willful and grossly
negligent breach of the operating agreement constituted freeze-out). Recognizing the
problems inherent in close corporations, the Fought Court held that majority shareholder
actions in these close corporations must “be ‘intrinsically fair’ to the minority interest.” 543
So. 2d at 171 (overruling Ross v. Biggs, 40 So. 2d 293 (1949)). The Court went on to define
expressly the relationship between those in control and minority members, stating
“[d]irectors and officers of a corporation stand in a fiduciary relationship to the corporation
and its stockholders. These duties include exercising the utmost good faith and loyalty in
discharge of the corporate office.” Id. (citations omitted). We noted recently that the
Fought rationale “applies with equal force” to limited-liability companies. Bluewater
Logistics, LLC v. Williford, 55 So. 3d 148, 161 (Miss. 2011).
¶36. Using traditional elements for an intentional-tort claim and reviewing the above-
discussed cases, we find that, in order to prove a claim of corporate freeze-out, the plaintiff
must establish: (1) the existence of a legally defined duty owed to or right of a minority
shareholder arising out of his or her ownership interest in a corporation; (2) the intentional
or willful breach of that duty by the majority or controlling shareholder(s); (3) that the breach
proximately caused plaintiff’s direct injury; and (4) the fact and extent of injury. See
16
generally Prosser & Keeton, On the Law of Torts § 30 (5th ed. 1984). When we evaluate the
duties and the alleged breach of these duties, we will look to the parties’ agreements and
applicable state law. In the case of Kilby Brake, LLC, that would be applicable caselaw, the
Kilby Brake operating agreement, and the March 2000 version of the Mississippi Limited
Liability Company Act. See Miss. Laws Ch. 402, §§ 1-87, repealed by Revised Mississippi
Limited Liability Company Act, 2010 Miss. Laws Ch. 532, § 1, eff. Jan. 1, 2011. See also
Miss. Code Ann. §§ 79-29-101 to 79-29-1317 (Rev. 2013).
¶37. In his argument for freeze-out, Winstead alleged Simmons and Phillips Brothers took
actions to exclude Winstead from his ownership interest in Kilby Brake without justification
and in willful disregard of Winstead’s rights. Winstead’s amended complaint states this
conduct did not “allow him to in any way participate as a true managing shareholder during
his eight years with Kilby Brake.” In support of this claim, Winstead argued Phillips and
Simmons did not make alleged cash contributions to start the LLC; they misappropriated
funds from Kilby Brake; Simmons made detrimental loans for the company without his
consent; and Simmons did not allow him to inspect the company books. After he was fired
as hatchery operator and moved off the farm, Winstead claimed Simmons and Phillips
Brothers mismanaged Kilby Brake to his detriment. The jury found only Simmons guilty of
freezing out Winstead.
¶38. As noted above, we found the alleged promise of cash contributions inadmissable and
that Winstead had failed to prove Simmons or Phillips Brothers committed fraud by
misappropriating funds from Kilby Brake; thus, these arguments as a basis for his freeze-out
claim are without merit. The only remaining claims by Winstead are that Simmons
17
improperly fired him, made detrimental loans to the LLC, refused to share financial records
with Winstead, and that Simmons and Phillips Brothers mismanaged Kilby Brake after he
was fired in 2008. Thus, we look to see if these claims give rise to a cause of action for
corporate freeze-out.
1. Participation as a Managing Shareholder
¶39. The Kilby Brake operating agreement named Harry Simmons as manager. It stated
that Simmons, as manager, had “full and complete authority, power and discretion to manage
and control the business, affairs, and properties of [Kilby Brake]. . . .” Further, the operating
agreement gave Simmons alone the power to acquire property from any person, to borrow
money from banks or other members of Kilby Brake on the terms Simmons deemed
appropriate, control the business affairs of the company and to make “all decisions regarding
those matters.” Winstead admitted at trial he signed the operating agreement and understood
all of the terms. Although Winstead asserted he “managed” the day-to-day operations, he
admitted he was not named as a manager of Kilby Brake anywhere in the operating
agreement and that his title was hatchery operator. Simmons never needed Winstead’s
permission to borrow money on behalf of Kilby Brake. Further, it is evident from the record
that, had Simmons not borrowed the money from his other entities, Kilby Brake would have
ceased business operations. When asked whether Simmons had the authority as manager to
borrow money to be sure that payroll was made, Winstead answered affirmatively.
¶40. We find nothing in the record that would lead to the conclusion that Winstead could
participate in Kilby Brake as a managing shareholder. Further, Simmons, as the only
manager of Kilby Brake, did not use his control of Kilby Brake to violate any terms of the
18
operating agreement, thereby breaching the duty he owed to Winstead. Thus, Winstead’s
argument that he was frozen out of the LLC because he was denied participation as “a true
managing shareholder” in the company is without merit.
2. Winstead’s Termination as Hatchery Operator
¶41. Although many commentators point to being fired by management as possible
evidence a minority member in a closely held corporation has been frozen out, the Fifth
Circuit has held that in employment-at-will states like Mississippi, nonmanaging members
of a closely held corporation do not have “fiduciary-rooted entitlements to their jobs.” Hollis
v. Hill, 232 F.3d 460, 470 (5th Cir. 2000). See also Knights’ Piping, Inc. v. Knight, 123
So. 3d at 459 (Miss. Ct. App. 2012) (“a majority shareholder does not breach his fiduciary
duty when he terminates a minority shareholder if he has ‘acted pursuant to a legitimate
business purpose.’”). There is nothing in the Kilby Brake operating agreement that could be
construed as guaranteeing Winstead employment with Kilby Brake. Further, there was
certainly enough evidence in the record to suggest Simmons was acting pursuant to a
legitimate business purpose in firing Winstead.
¶42. Simmons had designated authority as manager to terminate Winstead. Though not
required, Simmons had several arguable causes to fire Winstead. Winstead made several
personal charges on his Kilby Brake account, even after he was told not to. Winstead used
Kilby Brake employees, while they were being paid by Kilby Brake, to make improvements
to his deer camp and to work in his father’s ham store during the holidays. Kilby Brake
equipment also was used to make improvements to Winstead’s deer camp. The survival ratio
of fish was around forty to fifty percent under Winstead and increased to seventy-five percent
19
after he left the hatchery. Most importantly, the business was profitable for only two of the
eight years Winstead ran the day-to-day operations at the hatchery. Thus, we find Simmons
presented sufficient evidence to show he acted pursuant to a legitimate business purpose, and
Winstead’s firing did not, by itself, constitute a freeze-out of his interest.
3. Inspection of Kilby Brake Finances
¶43. The Kilby Brake operating agreement states that every member, at their own expense,
“shall have the right to inspect, copy, and audit [Kilby Brake’s] books and records at any
time during normal business hours without notice to any other member or the manager.” It
also states each member “shall be furnished [with] . . . a copy of the balance sheet of [Kilby
Brake]” for each accounting period. The records for Kilby Brake all were held at Kilby
Brake’s principal place of business, which was Simmons’s office in Yazoo City.
¶44. The record shows Simmons proposed that either he or Winstead leave the company
in mid-to-late 2007. Winstead alleged that he was interested in purchasing Kilby Brake, but
that Simmons failed to provide him with appropriate company financial information that he
needed to obtain a loan from a bank. Simmons testified he could not recall the last time that
he had sent a balance sheet to Winstead and he doubted that he had sent one since Winstead
moved off the farm in January 2008. He further admitted that Winstead remained a member
of the LLC, was entitled to the records, and that he continued to send them to Phillips
Brothers. However, Simmons delivered 3,500 pages of financial documents relating to Kilby
Brake to Winstead’s accountant in Canton in June 2008.
¶45. Winstead never presented any evidence to show he was denied access to Kilby
Brake’s offices and records or that he even attempted to “inspect, copy, and audit” the
20
records at his own expense, which, under the operating agreement, he had a right to do
without notice to Simmons. However, as manager and keeper of the records, Simmons also
had a duty under the operating agreement to furnish his other partners with balance sheets
for each accounting period, which he admittedly did not do for Winstead once he was fired.
¶46. Although Simmons arguably breached his duty to Winstead by not providing the
balance sheets to him, Winstead did not present any evidence on how these acts damaged
him. The purpose of trying to obtain the financial documents from Simmons was to try and
get financing to purchase Kilby Brake. Winstead had a right under the operating agreement
to inspect and copy Kilby Brake’s books without Simmons’s permission. And Simmons
eventually delivered the voluminous documents to Winstead’s accountant prior to filing suit;
thus, we find this claim to be without merit.
4. Mismanagement in 2008
¶47. Winstead’s claim for mismanagement was submitted to the jury in the same
instruction as his freeze-out claim. Winstead received damages on his mismanagement claim
in both his award for freeze-out and breach of fiduciary duty. The jury instruction stated
that, to prove a claim for mismanagement, “Winstead must show by a preponderance of the
evidence that during his corporate freeze-out, Harry Simmons and Phillips Brothers made
decisions, purchases, or acquisitions without his consent and that these actions devalued the
business, and in turn, Plaintiff’s ownership interest.” (Emphasis added.) Winstead’s
argument alleges Simmons’s mismanagement of Kilby Brake caused a lack of corporate
gains and devalued his interest. Thus, it clear from his amended complaint and the jury
instruction at trial that these allegations are better viewed as a derivative claim on behalf of
21
Kilby Brake and not a direct cause of action for corporate freeze-out. See Mathis v. ERA
Franchise Systems, Inc., 25 So. 3d 298, 303 (2009) (“[I]n determining whether the action
belongs to the corporation or the individual, the focus of the inquiry is whether the
corporation or the individual suffered injury.”).
¶48. In the case sub judice, Winstead presented a number of claims that were derivative
because he sought relief on behalf of Kilby Brake, and his injury was based on his ownership
in the company. This Court requested supplemental briefing on the issue of whether it was
error for the circuit court to allow the claims to proceed without making a determination of
whether the “Murray exceptions 5” applied, which would permit Winstead to bring the
derivative claims in a direct action. See Derouen v. Murray, 604 So. 2d 1086, 1091 (Miss.
1992).
¶49. Although the trial court did not apply the Murray exceptions, Defendants never
challenged whether Winstead should be permitted to bring the derivative claims in a direct
action; therefore, we find the derivative claims were tried by implied consent, and the pre-
trial procedural requisites that apply in derivative actions were waived. See id. We also find
that the trial court was not required to consider, sua sponte, whether Winstead was entitled
5
The Murray exceptions allow for derivative claims to be tried as direct actions if the
trial judge finds that doing so will not: “(i) unfairly expose the corporation or the defendants
to a multiplicity of actions, (ii) materially prejudice the interests of creditors of the
corporation, or (iii) interfere with a fair distribution of the recovery among all interested
persons.” Derouen v. Murray, 604 So. 2d 1086, 1091 n.2 (Miss. 1992).
22
to bring the derivative claims as a direct action; therefore, the trial court did not err in failing
to address the issue.
¶50. Alabama, like Mississippi, has held that managers in a closely held corporation owe
a duty to act fairly to minority interests. See Burt v. Burt Boiler Works, Inc., 360 So. 2d
327, 331 (Ala. 1978). We find persuasive the statement of the Alabama Supreme Court that
the freeze-out cause of action “is not a panacea for any and all conduct undertaken . . . that
could be deemed ‘unfair’ to the minority.” Stallworth v. AmSouth Bank of Alabama, 709
So. 2d 458, 468 (Ala. 1997). “[A] minority shareholder cannot parlay a wrong committed
primarily against the corporation, which gives rise to a derivative claim only, into a personal
recovery of damages under a squeeze out theory by simply stating the injury to the
corporation is also ‘unfair’ to him as well.” Id. at 467. Even though we find this language
to be persuasive, Winstead claimed the mismanagement of Kilby Brake factored into his
freeze-out. Thus, we review this claim in light of the elements we have cited above for
corporate freeze-out, which necessarily include proving the conduct complained of was
willful and wanton and that it proximately caused individual damages.
¶51. Winstead argued at trial and in his brief that, after he was fired, “Simmons undertook
activities which negatively affected Kilby’s financial sustainability and further devalued
Winstead’s interest.” Winstead presented evidence that, in the year following his term as
hatchery operator, Kilby Brake’s sales decreased by seventy-six percent, from $756,451.64
in 2007 to $181,146.44 in 2008. Winstead’s expert, Alexander, testified that, while Winstead
was operator, Kilby Brake’s sales consistently were close to $775,000 per year. Alexander
23
further testified that, although the economy was bad, the economy was not the cause of the
nearly eighty-percent decline in sales. In fact, Kilby Brake’s sales were back up in 2009.
¶52. None of the parties disputes that sales were low in 2008 and, of course, each side
blames the other. Simmons testified that sales were low because there were no fish in 2008
and attempted to show that Winstead was responsible for the missing fish by either taking
them or mismanaging the farm. Members of Kilby Brake’s staff testified that, when the
ponds were seined in 2008, there was a remarkably low number of fish. However, evidence
showed that the seining and feed expenses in 2008 were higher than they were in 2007.
Simmons testified this was because he had to restock the ponds to replace the fish that were
missing. Winstead argued that the increase in food and seining costs indicated there were
fish at Kilby Brake that were not reported. In sum, a sharp dispute exists in the record as to
what happened to the fish.
¶53. A number of witnesses testified that if Winstead had moved the millions of missing
fish, someone would have known. In fact, testimony was presented that it would be nearly
impossible to move the fish in the night and that moving the fish would require a crew of six
men, two tractors, a seine and reel, and a boat to move a million fish. However, there was
also testimony that large amounts of “swim-up fry” could be moved in a standard ice chest.
Alexander stated that he could not testify that the defendants caused the drop in sales;
however, he testified that the sales should have occurred if the parties had carried on normal
business in Winstead’s absence.
¶54. To carry his claim for corporate freeze-out, Winstead was required to demonstrate
that Simmons intentionally and willfully used his control of Kilby Brake in 2008 in a way
24
that harmed Winstead individually. We find Winstead failed to prove that Simmons
“willfully and wantonly” mismanaged Kilby Brake in a manner that harmed Winstead alone.
5. Conclusion on Corporate Freeze-out
¶55. Taken as a whole, Winstead failed to prove that he was frozen out of Kilby Brake by
Simmons. The record does not indicate that Simmons used his position in control of Kilby
Brake to breach a duty he owed to Winstead by denying him his proportional share of any
corporate benefits. The reality is the record does not reflect any corporate gains whatsoever.
Winstead’s expert testified that neither Simmons nor Phillips Brothers ever received any
payment from Kilby Brake in the form of salary, dividends, or any other distribution. None
of the actions undertaken by Simmons, which Winstead might have felt to be unfair to him,
circumvented the powers delegated to Simmons under the Kilby Brake operating agreement.
When viewing Winstead’s complaints for freeze-out in light of the agreements of the parties
and applicable law, we find Simmons did nothing to willfully breach the duty he owed to
Winstead. Therefore, for the reasons stated above, we reverse and render the judgment of
corporate freeze-out against Simmons.
IV. Whether Simmons and Phillips Brothers breached a fiduciary duty
they owed Winstead.
¶56. The jury found both Simmons and Phillips Brothers breached a fiduciary duty they
owed to Winstead and awarded him $395,000, being two thirds of Alexander’s valuation of
the missing fish sales in 2008 due to mismanagement. Simmons and Phillips Brothers argued
first that they did not breach a duty owed to Winstead or, in the alternative, Winstead’s
damages were speculative and amounted to a double recovery. Winstead counters that a
25
plaintiff who proves breach of a fiduciary duty is entitled to the damages incurred as a result
of the breach.
¶57. In his amended complaint, Winstead argued Simmons and Phillips Brothers
“negligently, carelessly, and intentionally failed to perform their duties as . . . managing
officers of Kilby Brake so that the assets of Kilby Brake . . . were mismanaged, wasted,
diverted to and converted by the defendants. . . .” A breach of fiduciary duty owed to Kilby
Brake should be separated from Winstead’s corporate freeze-out claim, which is an
individual claim for Simmons’s intentional breach of the duty owed directly to Winstead that
caused him personal damages, separate and apart from any damages to Kilby Brake. See
Fought, 543 So. 2d at 171 (“‘any attempt [by the majority] to squeeze out a minority
shareholder must be viewed as a breach of his fiduciary duty . . . .’”) (quoting Orchard v.
Covelli, 590 F. Supp. 1548, 1557 (W.D. Penn. 1984), aff’d 802 F.2d 448 (3d Cir. 1986))).
By contrast, a claim that Simmons breached his fiduciary duty through mismanagement or
dissipation of corporate assets belongs to the corporation because the wrong necessarily
damages the corporation and damages Winstead only derivatively.6 See Mathis, 25 So. 3d
at 304.
¶58. This Court held in Fought that directors and officers in a closely held corporation
stood in a fiduciary relationship with the corporation and its members. Fought, 543 So. 2d
6
We make this distinction to emphasize that the corporate freeze-out cause of action
is distinct from a general breach of fiduciary duty because of the injury involved. Indeed,
if a plaintiff proves he or she has been intentionally frozen out, that cause of action would
also be the support for an award of personal damages for a breach of fiduciary duty.
However, if the wrong directly damages the corporation and its assets from waste,
conversion, and mismanagement, the claim is the corporation’s.
26
at 171; see also Bluewater, 55 So. 3d at 161 (holding the Fought rationale “applies with
equal force” to limited liability companies). Before we look to any common-law standards
of care, we look to the agreement of the parties. The Kilby Brake operating agreement and
Fought lead us to conclude that Simmons, as manager, owed a fiduciary duty to the other
members of Kilby Brake. However, the operating agreement also indemnified Simmons
from any actions he took on behalf of Kilby Brake as long as he “conducted himself in good
faith” and reasonably believed “his conduct was in [Kilby Brake’s] best interest.” Thus, for
Winstead to succeed on his claim that Simmons’s mismanagement of Kilby Brake in 2008
breached the fiduciary duty Simmons owed Kilby Brake, he must first establish that
Simmons was at the very least in breach of the Kilby Brake operating agreement. Because
Simmons and Phillips Brothers both were found to have breached the duties they owed to
Winstead, we discuss them separately.
¶59. It is clear from the record that Winstead ran the day-to-day operations at the farm.
After he was fired, Simmons took over this responsibility and hired a new hatchery operator,
Dan Bradshaw. Importantly, Phillips Brothers was never involved in decision-making in the
day-to-day operations of Kilby Brake. There is no proof that any employee from Phillips
Brothers visited Kilby Brake at the time the fish went missing or that any fish were moved
to property in which Phillips Brothers had an interest. If anything, the damages resulting
from the mismanagement of Kilby Brake in 2008 were detrimental to the Phillips Brothers’
one-third interest in the company as well. Although as co-members of Kilby Brake, each
party owed a fiduciary duty to the other, Winstead presents no evidence that this duty was
27
breached by Phillips Brothers with regard to the mismanaged assets in 2008. Thus, we
reverse the jury’s judgment on this claim and render a decision in favor of Phillips Brothers.
¶60. Simmons, as manager of Kilby Brake, owed a duty to Winstead even after he was
fired. As noted above, both parties presented plenty of evidence and conjecture as to what
caused the missing fish sales in 2008. However, as will be discussed below, we find
prejudicial error in the trial court’s decisions to prevent Kilby Brake from discovering and
cross-examining Winstead on certain financial items that will necessitate a new trial on
whether Simmons breached a fiduciary duty he owed to Winstead. Because we also find
error in Winstead’s damages for breach of fiduciary duty, we discuss those first.
A. Damages for Breach of Fiduciary Duty
¶61. Winstead received one third of the value of his interest in Kilby Brake as calculated
by his expert in his damages for corporate freeze-out.7 This calculation included one third
7
Alexander calculated the value of Kilby Brake as follows:
28
of the value of the missing fish sales from 2008. Winstead received the other two-thirds of
the value of the missing fish sales in his damages for breach of fiduciary duty. Due to the
numerous errors in Winstead’s expert’s valuation of what Kilby Brake was worth and the
amount of the missing fish sales and because Kilby Brake also was improperly limited in its
discovery and cross-examination of Winstead as discussed in Issue V supra, we must reverse
and remand for a new trial with regard to any breach of fiduciary duty.
¶62. To begin, Alexander erroneously used the alleged promise of cash contributions at the
formation of the LLC and cumulative interest savings to help determine a faulty starting
value of Kilby Brake addressed in Issue I supra. In addition, Alexander calculated the price
of the mismanaged assets, being the missing fish sales in 2008, to be $591,191 and added this
number into his total valuation of Kilby Brake. Because we reverse and render the findings
of the trial court on the alleged cash contributions and cumulative interest expense savings,
the only damages left to assess are the damages for the missing fish sales.
¶63. Winstead was required to provide substantial proof of damages that he suffered so the
jury could have a reasonable basis to assess his loss. Missala Marine, 861 So. 2d at 294.
This Court has held that the plaintiff has the burden of proving any amount of damages with
reasonable certainty. Adams v. U.S. Homecrafters, Inc., 744 So. 2d 736, 740 (Miss. 1999).
However, this Court also has noted that “a measure of speculation and conjecture attends
even damage proof all would agree reasonably certain.” Wall v. Swilley, 562 So. 2d 1252,
1256 (Miss. 1990). This Court has stated that it will not overturn a jury’s verdict unless no
reasonable juror could find damages in the amount that the jury awarded. Missala Marine
29
Services, 861 So. 2d 290, 295 (Miss. 2003) (citing Wal-Mart Stores, Inc. v. Johnson, 807
So. 2d 383, 389 (Miss. 2001)).
¶64. Alexander testified that, in the year after Winstead left the hatchery, fish sales were
seventy-six percent lower than they had been throughout the company’s existence. He
opined that the low sales indicated that either Kilby Brake was mismanaged in 2008, or that
the sales were under reported by Simmons and Phillips Brothers. To reach the value of the
missing fish sales, Alexander found the difference between the average of the gross sales that
occurred in 2007 and 2009 versus the gross sales that occurred in 2008: a $591,000
difference. To get to $591,000, Alexander also added a speculative twenty-five percent
increase to the price of fingerlings, thus increasing the value of the assets. However, this
price increase took place in 2011, long after Winstead filed suit to dissolve Kilby Brake in
2009. Winstead was awarded one-third of Alexander’s valuation of the missing fish sales
in his corporate freeze-out damages and the other two thirds of this value in his breach-of-
fiduciary-duty damages, arguing Simmons and Phillips Brothers received a disgorgement of
profits from their breach.
¶65. There are several problems with Alexander’s valuation of the mismanaged assets
which require a new trial on these damages. To calculate lost profits as damages, the lost
profits a party must prove are the “net profits as opposed to gross profits.” Ballard Realty
Co., Inc., v. Ohazurike, 97 So. 3d 52, 62 (Miss. 2012) (quoting Lovett v. E.L. Garner, Inc.,
511 So. 2d 1346, 1353 (Miss. 1987)); Puckett Machinery Co. v. Edwards, 641 So. 2d 29,
37 (Miss. 1994) (“[T]his Court has held that in calculating the loss of profits, the loss to be
calculated is that of net profits, not gross profits.”). “To ascertain net profits, a party must
30
deduct such items as overhead, depreciation, taxes and inflation.” Lovett, 511 So. 2d at 1353.
Alexander testified that he added the $591,000 into the value of Kilby Brake “to account for
those fish that should have been there but have not been sold.” However, his valuation of
the total amount of lost profits from missing fish sales failed to account for items such as
overhead, labor, taxes, or debt. Indeed, the valuation simply calculated the gross amount of
missing fish sales.
¶66. Further, Winstead filed suit in September 2009 for, among other things, dissolution
of Kilby Brake. In valuing the business, both experts stated at trial that they used the date
Winstead filed suit as the valuation date. Inexplicably, Alexander adjusted the price of the
missing fish sales by increasing their value by twenty-five percent to “current prices” to
account for what he deemed an increase in value from 2009-2011. Any valuation on his right
to recover for the 2008 lost fish sales ended the date he filed suit in September of 2009 to
dissolve the LLC. See, e.g., Hollis v. Hill, 232 F.3d 460, 472 (5th Cir. 2000) (holding the
presumptive valuation date on a freeze-out claim to be the date of filing the suit). Both
experts stated at trial they used that date in their valuation of Kilby Brake. The use of this
date will allow the Court to take into account both parties’ actions, inactions and business
decisions which affected the value of the business from the time Winstead left Kilby Brake
until suit was filed. Alexander’s calculations were purely speculative in nature and artificially
inflated the value of Kilby Brake. Therefore, we are compelled to reverse and remand for
a new trial on issues regarding any breach of fiduciary duty with regard to the loss of fish
inventory.
V. Whether Kilby Brake is entitled to a new trial.
31
¶67. During discovery, Winstead produced his tax returns from 2006 to 2009 which
showed substantial income as coming from the Winstead Cattle Company. The only other
income listed on Winstead’s tax returns was from Kilby Brake and his wife’s job. Winstead
had also produced two Forms 1099 from a fish farmer named Scott Kiker, which did not
appear on his tax returns. Kilby Brake’s theory was the entries for “cattle” represented
income from sales of Kilby Brake fish Winstead was brokering and thus, it sought to compel
production of all of the Winstead Cattle Company’s financial records. Winstead admitted
in his deposition and again at trial that the Winstead Cattle Company did no actual business,
and it was simply his hunting camp. The trial court denied Kilby Brake’s motion to compel
discovery into Winstead’s finances.
¶68. While cross-examining Winstead, counsel for Kilby Brake began to question him
about the two Forms 1099 Winstead had produced in discovery showing income from Kiker.
Winstead testified that he would often act as a middle man if he knew of a farmer who was
in need of fish and another who had fish for sale; taking a commission for brokering the deal.
Kilby Brake’s counsel was not allowed to question Winstead about where this income from
brokering fish sales appeared on the tax returns, because the returns were prepared by
Winstead’s accountant. The trial court ruled Winstead did not have personal knowledge of
the returns and thus, the returns were inadmissable hearsay.
¶69. A trial court’s discovery orders will not be disturbed unless there is an abuse of
discretion. Dawkins v. Redd Pest Control Co., Inc., 607 So. 2d 1232, 1235 (Miss. 1992).
This Court said where “important information is denied a litigant reversal will obtain.” Id.
“‘[A]dmission or suppression of evidence is within the discretion of the trial judge and will
32
not be reversed absent an abuse of that discretion.’” Church of God Pentecostal, Inc. v.
Freewill Pentecostal Church of God, Inc., 716 So. 2d 200, 210 (Miss. 1998) (citation
omitted) (quoting Sumrall v. Mississippi Power Co., 693 So. 2d 359, 365 (Miss. 1997)).
Even if an abuse of discretion has occurred, “for a case to be reversed on the admission or
exclusion of evidence, it must result in prejudice and harm or adversely affect a substantial
right of a party.” Terrain Enter., Inc. v. Mockbee, 654 So. 2d 1122, 1131 (Miss. 1995)
(citations omitted).
¶70. Kilby Brake’s attorney made a proffer that he would have questioned Winstead on
where the income from Kiker appeared on his income tax return and whether it was indicated
under the Winstead Cattle Company entry, because Winstead already had testified Winstead
Cattle Company did no business and was merely a hunting camp. Winstead cited U.S.
Fidelity & Guaranty Co. v. Whitfield as authority for the proposition that it is inadmissible
hearsay for a witness who did not prepare a tax return to testify as to that tax return because
he lacks personal knowledge. See U.S. Fid. & Guar. Co. v. Whitfield, 355 So. 2d 307 (Miss.
1978). However, this case is easily distinguishable.
¶71. In U.S. Fidelity, the insured’s witness, a certified public accountant (CPA), testified
as to the amount of the loss the insured sustained after a fire, basing it on the inventory
reflected in the insured’s federal income tax return. Id. at 309. This Court held that, because
the witness CPA did not prepare the insured’s tax return nor discuss it with the actual
preparer, the witness CPA’s testimony “was rank hearsay.” Id. In the case at bar, Kilby
Brake was questioning Winstead about his own tax return. The signature line of the federal
income tax return, Form 1040, states that, under the penalty of perjury, the signer has
33
examined the return and believes it to be true and complete. Further, any information used
by Winstead’s accountant in calculating Winstead’s income tax return would have come
from Winstead. Thus, we find the trial court’s decision not to allow Kilby Brake to cross
examine Winstead on his tax return because he lacked personal knowledge was error.
¶72. Winstead argues that, if there were any errors in the trial court’s decisions, they were
harmless. However, the record indicates a third Form 1099 from Kiker to Winstead was
found in the company truck which Winstead returned after the jury verdict against him on
Kilby Brake’s replevin claim. Further, Kiker testified that he had received a load of fish
from Kilby Brake that Winstead claimed Simmons was going to “drain’em in the ditch.”
Kiker testified there was no paperwork on the transaction; that he sold this load of fish, gave
Winstead a commission and did not pay Kilby Brake for the sales.
¶73. From the evidence noted above, we find the trial court’s refusal to allow both
discovery into the finances of Winstead and questions concerning Winstead Cattle Company
on his tax return prevented Kilby Brake and the jury from finding out whether Winstead was
selling fish from Kilby Brake and disguising it on his income tax returns, thereby prejudicing
Kilby Brake’s ability to present its case. What happened to the fish inventory was central
to both parties’ theories of the case. Importantly, the decisions by the trial court denied Kilby
Brake the ability to present its case as to what happened to the fish. The record shows there
were years in which Winstead received substantial income from brokering fish sales, almost
$20,000 in one year. He admitted that Winstead Cattle Company did no business and was
simply his hunting camp, yet it made significant amounts of money. We therefore reverse
the trial court’s decision to deny discovery into the finances of Winstead and remand for a
34
new trial on Winstead and Kilby Brake’s breach-of-fiduciary-duty claims, as they pertain to
the missing fish sales. Specifically, Kilby Brake should be allowed discovery into the
finances of Winstead concerning outside income and specifically the stated income from
Winstead Cattle Company.
VI. Whether Winstead met the requisite elements of slander per se.
¶74. The jury found Simmons guilty of slander per se and awarded Winstead $5,000 on
this claim. Simmons argues that Winstead never presented any evidence that he made
slanderous statements about Winstead prior to judicial proceedings. Further, Simmons
argues no witnesses testified that he published the alleged slanderous statements about
Winstead. Finally, Simmons argues truth as a defense and that he was entitled to his opinion
of Winstead as a hatchery operator.
¶75. To prove slander, Winstead had the burden to prove the following elements: (1) a false
and defamatory statement concerning the plaintiff; (2) unprivileged publication to a third
party; (3) fault amounting to at least negligence on the part of the publisher; and (4) either
actionability of the statement irrespective of special harm or the existence of special harm
caused by the publication. Franklin v. Thompson, 722 So. 2d 688, 692 (Miss. 1998)
(citations omitted). Because publication is an essential element to slander, “if the words were
spoken only to the complaining party or to his agent, representing him in the matter discussed
. . . it is not such a publication as will support an action for slander.” Kirk Jewelers v.
Bynum, 75 So. 2d 463 (Miss. 1954).
¶76. In Mississippi, statements are actionable per se if they are:
35
(1) Words imputing the guilt or commission of some criminal offense
involving moral turpitude and infamous punishment. (2) Words imputing the
existence of some contagious disease. (3) Words imputing unfitness in an
officer who holds an office of profit or emolument, either in respect of morals
or inability to discharge the duties thereof. (4) Words imputing a want of
integrity or capacity, whether mental or pecuniary, in the conduct of a
profession, trade or business; and in this and some other jurisdictions (5) words
imputing to a female a want of chastity.
Speed v. Scott, 787 So. 2d 626, 632 (Miss. 2001) (quoting W.T. Farley, Inc., v. Bufkin, 132
So. 86, 87 (Miss. 1931)).
¶77. Further, “[t]he slander . . . must be clear and unmistakable from the words themselves
and not be the product of any innuendo, speculation or conjecture.” Baugh v. Baugh, 512
So. 2d 1283, 1285 (Miss. 1987). If the language is actionable per se, general damages are
presumed to result. McCrory Corp. v. Istre, 173 So. 2d 640, 646 (Miss. 1965) (citations
omitted). It is well settled that truth is a complete defense to a charge of slander. Franklin,
722 So. 2d at 692.
¶78. When analyzing a slander claim, Mississippi courts first determine if “the occasion
called for a qualified privilege” and if a qualified privilege does exist, “the Court must then
determine whether the privilege is overcome by malice, bad faith, or abuse.” Eckman v.
Cooper Tire & Rubber Co., 893 So. 2d 1049, 1052 (Miss. 2005) (citing Garziano v. E.I.
Dupont de Numours & Co., 818 F.2d 380, 386-87 (5th Cir. 1987) (applying Mississippi
law))). One of the qualified privileges recognized by this Court protects communications
between employers and their employees. See Holland v. Kennedy, 548 So. 2d 982, 987
(Miss. 1989). In speaking of this privilege, this Court held: “[t]he law guards jealously the
right to the enjoyment of a good reputation, but public policy, . . . the interests of society, and
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sound business demand that an employer . . . be permitted to discuss freely with an employee,
or his chosen representative, charges made against the employee affecting the latter's
employment.” Killebrew v. Jackson City Lines, 82 So. 2d 648, 650 (Miss. 1955). In
describing the contours of the employer/employee privilege, this Court held “‘[w]hen
qualified privilege is established, statements or written communications are not actionable
as slanderous or libelous absent bad faith or malice if the communications are limited to
those persons who have a legitimate and direct interest in the subject matter.’” Young v.
Jackson, 572 So. 2d 378, 383 (Miss. 1990) (quoting Bush v. Mullen, 478 So. 2d 313 (Miss.
1985) (internal citations omitted)).
¶79. In his amended complaint, Winstead asserted claims for slander and slander per se
against Simmons. In his count for slander, he accused Simmons of telling members of the
catfish farming community that Winstead stole fish from Kilby Brake. In his complaint for
slander per se, he asserted the statements which were inherently defamatory were the
statements adopted in his slander argument. The trial court granted Simmons’s motion for
a directed verdict on Winstead’s slander claim but denied his motion on the slander per se
claim.
¶80. No witnesses testified that Simmons told them Winstead was stealing fish from Kilby
Brake. The only evidence in the record of Simmons stating Winstead stole fish was when
he read his deposition testimony on the stand. Winstead’s attorney asked if Simmons had
ever used the word stealing when talking about Winstead. Simmons responded “not to my
recollection.” Winstead’s attorney then asked Simmons to read from his prior deposition
testimony. Simmons read the relevant portion, in which he stated, “I knew we needed to get
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out of this situation . . . when he was falsifying fish movement tickets . . . [i]t was stealing
from, from one of my other entities.”
¶81. Although Simmons said Winstead was stealing from Kilby Brake, Winstead did not
put on any proof that Simmons published these statements to third parties. Simmons’s
deposition testimony was about why he fired Winstead. Further, it was in response to a
question from Winstead’s attorney about why Winstead was fired. Winstead’s response was
published only to Winstead’s chosen representative and regarded charges made against
Winstead affecting his employment. Thus, we find no merit in this argument.
¶82. The other evidence Winstead argues proves his slander per se claim developed during
trial. Simmons was asked by Winstead’s counsel whether he believed that Winstead could
not run a successful operation because he was golfing, hunting, drinking, and gambling all
of the time. Simmons responded he believed so, and that he probably said that to people.
Therefore, the only evidence in front of the jury on this claim was Simmons’s own admission
that he “probably” expressed his belief to other people. The record does not reveal the
identities of these other parties.
¶83. Testimony from other witnesses indicated that Winstead drank to excess at times,
hunted often, golfed, and had gambled in a weekly card game regularly for years. All this
occurred while he was working for Kilby Brake. Further, it was undisputed that Kilby Brake
was successful for only two of the eight years Winstead was hatchery operator. However,
no witness testified that he or she could say Winstead’s golfing, hunting, drinking, or
gambling interfered with his abilities to operate Kilby Brake.
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¶84. Winstead bore the burden to prove by a preponderance of the evidence that Simmons
published the above statements to parties outside of those within the circle of privileged
individuals and that these statements were indeed false. We find that, alone, the statements
of Simmons that he probably had expressed his belief to others insufficient for Winstead to
carry the burden that Simmons’s statement were published to unprivileged third parties or
that they were even false. Therefore, we reverse the judgment for slander per se and render
a decision in favor of Simmons.
CONCLUSION
¶85. We reverse the judgment of the Yazoo County Circuit Court and remand this case for
a new trial on whether Winstead or Kilby Brake is entitled to any damages regarding
Winstead’s pay and personal charges. In addition, we reverse and remand for a new trial on
the breach-of-fiduciary-duty claim as to liability and damages for the missing fish and any
damages that may occur as a result. We also reverse and render all claims against Phillips
Brothers. Further, we reverse and render the claims for corporate freeze-out and slander per
se against Simmons. Because we reverse for a new trial, we also reverse all awards of
punitive damages, attorneys’ fees, and interest.
¶86. REVERSED; REMANDED IN PART; RENDERED IN PART.
DICKINSON AND RANDOLPH, P.JJ., LAMAR, KITCHENS, CHANDLER,
PIERCE, KING AND COLEMAN, JJ., CONCUR.
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EXHIBIT
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