Red Run Mountain, Inc. v. Earth Energy Consultants ( 2017 )

J. A18019/16
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
RED RUN MOUNTAIN, INC., IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
EARTH ENERGY CONSULTANTS, LLC.,
BRADLEY R. GILL, SYLVIA B. MASE,
AND MICHAEL HUGHES, No. 2259 MDA 2015
AS EXECUTORS OF THE ESTATE OF
RICHARD D. MASE, DECEASED
Appeal from the Order Entered December 1, 2015,
in the Court of Common Pleas of Lycoming County
Civil Division at No. 12-01259
BEFORE: FORD ELLIOTT, P.J.E., BENDER, P.J.E., AND STEVENS,* P.J.E.
MEMORANDUM BY FORD ELLIOTT, P.J.E.: FILED MAY 05, 2017
Red Run Mountain, Inc. ("Red Run") appeals the orders of the Court of
Common Pleas of Lycoming County that granted the motion for summary
judgment of Earth Energy Consultants, LLC ("EEC"), and Bradley R. Gill
("Gill") and the motion for summary judgment of Sylvia B. Mase and
Michael Hughes as executors' of the Estate of Richard D. Mase ("Estate").
We affirm.
* Former Justice specially assigned to the Superior Court.
1The executors were substituted as a party for Richard D. Mase ("Mase") on
September 4, 2012 after Mase's death on July 3, 2012.
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The record reflects that Red Run was incorporated in the State of
Delaware on November 29, 1990. The initial shareholders, each with a
1/3 interest were Mase, John L. McDowell III, and Roy W. Cummings, Jr.
These three individuals also comprised the Board of Directors ("Board").
Mase served as president of Red Run from its inception until January 19,
2011. Although the Board held an annual meeting, it gave Mase great
latitude in running the day-to-day operations of Red Run. Red Run's
purpose was defined in its articles of incorporation as any lawful purpose.
Under the by-laws of Red Run, the president (Mase) had the authority to
have general and active management of Red Run. Mase had the authority to
sign documents on behalf of Red Run and to authorize checks. The Board
elected Patricia Warren ("Warren") to serve as secretary of Red Run. She
remained in that capacity for 20 years. She was unaware of any discussions
regarding placing limitations on Mase's authority during her tenure.
Red Run owned 2,873.60 acres in McIntyre Township, Lycoming
County. It was primarily used for the recreation of the shareholders. In
2003, Mase began discussions with Gill concerning the possibility of entering
into oil and gas leases on Red Run's property. On February 21, 2003, Gill
wrote a letter to Mase and proposed that he would prepare a geological
report and base maps to attract companies interested in drilling for oil
and/or gas on the Red Run property as well as on other properties owned by
Mase in whole or in part. Gill sought an overriding royalty interest ("ORRI")
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of 3.125% in the form of a geological fee. This fee would be recovered from
the driller apart from the landowner royalty that Red Run would receive. On
April 24, 2003, Red Run and Gill entered into such an agreement in which
Gill would receive the 3.125% ORRI from any oil and/or natural gas
extracted on Red Run's property. The parties agreed that this provision
would be assigned by contract and referenced in the oil and gas leases.
Mase signed the agreement which was witnessed by Warren. The other
shareholders of Red Run did not receive notice of this agreement until
September 2010.2
On June 14, 2005, Red Run entered into an oil and gas lease with
East Resources, Inc. ("East"), a company which Gill had contacted on
Red Run's behalf. Mase executed the agreement which provided for a
royalty payment to Red Run for 12.5% of the gross proceeds for oil and gas
obtained on the property. Mase neglected to include an assignment in the
lease to Gill/EEC. On June 15, 2005, Gill wrote Mase and reminded him
about the ORRI and suggested that the assignment should be recorded. On
July 13, 2005, Gill contacted East about the ORRI assignment. East declined
to amend the lease to include the assignment.
On August 1, 2005, Mase executed an assignment to Gill of the ORRI
from Red Run's royalty interest. On March 6, 2009, Red Run and Gill agreed
2
As of the time of the filing of the complaint, no royalty payments had been
made to Red Run because no oil or gas had been removed from the
property.
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to reduce the ORRI to 2% following discussions between Gill and Red Run's
legal counsel. Also, on March 9, 2009, Mase executed an amended
assignment and conveyance that reduced the ORRI to 2% for Gill. A
subsequent assignment was made with the same reduction for EEC.
In September 2010, Mase, who was ill with cancer, met with the Board
to discuss a buy-out of his shares. Mase told the Board for the first time
about the ORRI assignments with Gill/EEC. In January 2011, the Board
authorized Mase to negotiate with Gill to cap the ORRI at $1,000,000. The
negotiations failed which led to this litigation.
In its first amended complaint filed on November 16, 2012, Red Run
sought a declaratory judgment that the agreements executed between Mase
and Gill be declared null and void ab initio. Specifically, Red Run asserted
that Mase acted beyond the scope of his corporate authority as president
and as a member of the Board when he entered into agreements with Gill.
Further, Red Run asserted that Mase did not have implied or apparent
authority to bind Red Run under these agreements with EEC or Gill. Red
Run also sought a declaration that, if the trial court determined that EEC
and/or Gill were entitled to be paid a royalty, Mase would be personally
liable rather than Red Run.
On February 6, 2015, EEC and Gill moved for summary judgment on
the basis of the actual, implied/inherent, and/or apparent authority of Mase
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and/or Red Run's attorneys, the law firm of McNerney, Page, Vanderlin &
Hall, or in the alternative, on the basis of ratification/agency by estoppel.
By order dated June 18, 2015, the trial court granted the motion for
summary judgment and dismissed EEC and Gill as defendants in the matter.
The trial court determined that Mase had the authority to enter into the
agreements with EEC and Gill. The trial court concluded that under Rednor
& Kline, Inc. v. Dep't of Highways, 196 A.2d 355, 358 (Pa. 1964), Mase
possessed the authority as president of a small corporation to enter into the
agreements in question, especially since the other two
shareholders/directors did not provide much supervision or oversight. The
trial court concluded that the Board of Red Run intended to vest Mase with
the inherent/apparent/implied authority to enter into the contracts with Gill
when it placed him in the position of president and did not supervise his
activities. The trial court further concluded that Red Run did not point to
any evidence in support of its contention that the lease was outside the
ordinary business dealings of Red Run. The trial court opined that it was
Mase's error regarding the ORRI which reduced the amount of income
available from the lease with East and not that the reduction in income was
the result of Mase exceeding his authority. Although Red Run claimed that
Gill had notice of Mase's lack of authority to enter into the agreements, the
trial court concluded that Red Run did not point to evidence that Gill was
aware that Mase lacked such authority. The trial court rejected Red Run's
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contention that Mase intentionally failed to include the assignment in the
lease with East because he wanted to conceal it from the other
shareholders/directors because there was no evidence to support that
contention. Regarding the 2009 assignments, the trial court concluded:
As to the [2009] assignment, there is even
more evidence of inherent/implied/apparent
authority to enter the August 1, 2005 assignment to
Gill, which reduced the ORRI to 2%. ["]Apparent
authority exists where a principal, by words or
conduct, leads people with whom the alleged agent
deals to believe that the principal has granted the
agent authority he or she purports to exercise."
Turner Hydraulics, Inc. v. Susquehanna Constr.
Corp., [606 A.2d 532, 534] 414 Pa. Super. 130,
135-136 (Pa. Super. 1992) (citations omitted)[.]
"The third party is entitled to believe the agent has
the authority he purports to exercise only where a
person of ordinary prudence, diligence and discretion
would so believe." Id. "Thus, a third party can rely
on the apparent authority of an agent when this is a
reasonable interpretation of the manifestations of the
principal." Id.In the present case, in addition to being
executed by the president of Red Run, the ORRI
reduction to 2% was negotiated by Red Run's
attorney, McNerney Page. The attorneys notified Gill
that they represented Red Run. Red Run put Mase
in the position as President and for twenty years
without oversight and they consulted McNerney Page
for legal counsel on an as needed bas[i]s for years
with Mase as the primary contact. As such, a person
of ordinary prudence could rely on the
representations from Red Run's counsel, as
confirmed by the president of Red Run; the counsel
had authority to negotiate the reduction in ORRI.
Trial court opinion, 6/19/15 at 17-18 (footnotes omitted).
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On September 1, 2015, the Estate moved for summary judgment. The
Estate asserted that the undisputed facts conclusively demonstrated that,
pursuant to Delaware law3 and the general grant of authority given to the
president of Red Run in its by-laws, Mase possessed the inherent power to
enter into the contracts at issue. Alternatively, the Estate asserted that the
contracts were within the authority impliedly granted to him by the Board's
course of conduct over the years, and no evidence existed on which to find
that Mase breached his duties of loyalty or good faith.
By order dated November 30, 2015, and filed December 1, 2015, the
trial court granted the Estate's motion for summary judgment. The trial
court determined, based upon the competent evidence of record, that Mase
was authorized to enter into the agreements with Gill, EEC, and East.
Further, the trial court also concluded that there was no evidence to support
a claim that Mase breached his duties of loyalty or good faith. The trial court
reasoned:
Mase possessed an inherent actual authority
by virtue of his position as President of Red Run and
under Red Run's By-laws to conduct the "general and
active management" of Red Run. See, Article V,
Section 4 of By -Laws; Joseph Greenspon's Sons
[Iron and Steel Co. v. Pecos Valley Gas Co., 156
A. 350 (Del. 1931)]. Further, Mase possessed the
3 In an order dated October 29, 2013, the trial court ruled that Pennsylvania
law applied to the claim Red Run brought against EEC and Gill because the
contract was formed in Pennsylvania. Because Red Run was incorporated in
Delaware, the trial court ruled that Delaware law applied concerning
Red Run's claim against the Estate regarding whether Mase had authority to
enter into the contracts in question.
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"general power and duties of supervision and
management usually vested in the office of President
of the corporation." Id. As such, Mase possessed
the inherent authority to take any action usual and
necessary to carry out the ordinary business of
Red Run. Id. See, also, Schoonejongen v.
Curtiss-Wright Corp., 143 F.3d 120 (3d Cir. N.J.
1998). Mase was therefore authorized to execute
the contracts at issue in this case because each of
the 5 contracts fell within actions necessary to carry
out the ordinary business of Red Run. Moreover, the
course of conduct of the corporation conferred
implied authority to execute each of the contracts at
issue.
Red Run further contends that, even if
the consulting agreements were within the ordinary
course of business, Mase lacked authority to enter
the 2005 assignment to Gill (and the 2009
amendments) because they were unusual and
extraordinary for transferring an asset of the
corporation (3.125% ORRI, reduced to 2%) without
board approval and for allegedly conferring a
personal benefit upon Mase not shared by other
shareholders. This Court disagrees. The course of
dealing of Red Run included Mase transferring
corporate assets to third parties without board
approval. For example, Mase transferred 87.5% of
the oil and gas royalties to [East] by executing the
2005 ERI Lease without board approval.
Further, Red Run's conjecture that Mase
engaged in self -dealing or litigation avoidance is not
supported by competent evidence and is too
speculative. To support this theory, Red Run relies
upon evidence that Red Run withdrew from evidence
and did not intend to reference or introduce into
evidence in its case-in-chief.[4] It is undisputed that
Red Run was contractually liable for the 3.125%
ORRI. By executing the assignment, Mase satisfied
4 The evidence was a handwritten document of the recollection of a
conversation that Jeff Pifer, a director and shareholder, had with Mase.
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the contractual obligation owed by Red Run. No
competent evidence establishes that Mase executed
the Assignment for another purpose, such as to
avoid litigation; it has not been established that
Mase was exposed to a reasonable risk of potential
liability, or that Mase believed he was exposed to
potential liability. Furthermore, executing the
Assignment did not avoid litigation, as Red Run
instituted the instant litigation. Finally, Mase shared
the tangible and non -speculative financial obligation
of the 2005 Assignment as 1/3 shareholder of
Red Run (1/3 of 2% ORRI should drilling ever occur).
Trial court opinion, 12/31/15 at 4-5 (footnotes omitted).
Red Run appealed to this court on December 29, 2015. On March 23,
2016, EEC and Gill moved to quash the appeal because they claimed that
this court lacked jurisdiction because Red Run's appeal was untimely. On
May 6, 2016, this court denied the motion to quash without prejudice to
bring the motion before the panel of this court, when the parties argued the
merits.
EEC and Gill did raise the motion to quash at argument. Before
addressing the merits, this court must address the motion to quash. EEC
and Gill assert that this court lacks jurisdiction to hear Red Run's appeal
because Red Run failed to file a timely notice of appeal from the trial court's
order filed on June 19, 2015, which dismissed EEC and Gill from the case.
Red Run did not appeal until December 23, 2015, which was after the order
in the second summary judgment motion.
Pa.R.A.P. 903(a) provides that a notice of appeal shall be filed within
30 days after the entry of the order from which the appeal is taken.
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Pa.R.A.P. 341(a) provides that an appeal may be taken as of right from any
final order of a government unit or trial court. At the time that Red Run
appealed, Pa.R.A.P. 341(b) defined a final order as follows: "A final order is
any order that: (1) disposes of all claims and of all parties; or (2) is
expressly defined as a final order by statute; or (3) is entered as a final
order pursuant to subdivision (c) of this rule."5
Before Pa.R.A.P. 341(b)(2) was rescinded, Rule 341 contained the
following note regarding final orders in declaratory judgment matters:
Final orders in Declaratory Judgment Matters -- in an
action taken pursuant to the Declaratory Judgments
Act, 42 Pa.C.S. §§7531-7541, orders based on a
pre-trial motion or petition are considered "final"
within the meaning of this Rule, under subdivision
(b)(2), if they affirmatively or negatively declare the
rights and duties of the parties. Nationwide Mut.
Ins. Co. v. Wickett, 563 595, 604, 763 A.2d
Pa.
813, 818 (2000). Thus, an order in a declaratory
judgment action sustaining a demurrer and
dismissing some, but not all, defendants is
considered a final order under subdivision (b)(2)
because it is expressly defined as such by statute.
Pa.R.A.P. 341 (Note).
The case law has evolved over time with respect to this rule. Not long
ago, in Modern Equip. Sales & Rental Co. v. Main St. Am. Assurance
Co., 106 A.3d 784 (Pa.Super. 2014), this court addressed the question of
final orders in declaratory judgment actions and determined that when an
5 Pa.R.A.P. 341(b)(2) was rescinded on December 14, 2015, effective
April 1, 2016.
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order fails to dispose of all of the claims for declaratory relief and did not
completely resolve the dispute the order was not final. Id. at 788-789.
Here, Red Run sought declaratory relief against EEC and Gill under one
theory of liability and against Mase, or ultimately the Estate, on another
theory of liability. When the trial court granted the summary judgment
motion of EEC and Gill and dismissed them from the case, this order did not
dispose of Red Run's claims for declaratory relief against Mase under an
alternative theory of liability. When the trial court granted EEC and Gill's
motion for summary judgment, Red Run still had its claim against the Estate
that Mase had acted without the authority of Red Run when he entered into
agreements that potentially bound Red Run. It was not until the Estate
moved for and was granted summary judgment that the issue of Mase's
authority was resolved as to all parties. Therefore, the order granting EEC
and Gill's summary judgment motion was not a final order. The motion to
quash the appeal is denied.6
On appeal, Red Run raises the following issues for this court's review:
1. Whether the lower court committed an error of
law and/or abused its discretion in determining
that there was no issue of fact regarding the
implied, inherent or apparent authority of
[Mase] to execute the 2005 Assignment, the
March 2009 Amendment to Assignment and
the May 2009 Amendment[?].
6 The Estate has applied for relief to correct references to the reproduced
record in its brief which are incorrect and substitute the correct pages of the
reproduced record. We grant this application for relief.
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2. Whether the lower court committed an error of
law and/or abused its discretion in determining
that there was no issue of fact regarding the
alleged breach of the duty of loyalty by [Mase],
for failing to disclose to the Board of Directors
the contractual liability he created for Red Run,
and for unilaterally executing the 2005
Assignment, the March 2009 Amendment to
Assignment and the May 2009 Amendment[?]
Appellant's brief at 5.
This court reviews a grant of summary judgment under the following
well -settled standards:
Pennsylvania law provides that summary
judgment may be granted only in those
cases in which the record clearly shows
that no genuine issues of material fact
exist and that the moving party is
entitled to judgment as a matter of law.
The moving party has the burden of
proving that no genuine issues of
material fact exist. In determining
whether to grant summary judgment,
the trial court must view the record in
the light most favorable to the
non-moving party and must resolve all
doubts as to the existence of a genuine
issue of material fact against the moving
party. Thus, summary judgment is
proper only when the uncontraverted
[sic] allegations in the pleadings,
depositions, answers to interrogatories,
admissions of record, and submitted
affidavits demonstrate that no genuine
issue of material fact exists, and that the
moving party is entitled to judgment as a
matter of law. In sum, only when the
facts are so clear that reasonable minds
cannot differ, may a trial court properly
enter summary judgment.
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[O]n appeal from a grant of summary
judgment, we must examine the record
in a light most favorable to the
non-moving party. With regard to
questions of law, an appellate court's
scope of review is plenary. The Superior
Court will reverse a grant of summary
judgment only if the trial court has
committed an error of law or abused its
discretion. Judicial discretion requires
action in conformity with law based on
the facts and circumstances before the
trial court after hearing and
consideration.
Gutteridge [v. A.P. Green Services, Inc., 804
A.2d 650, 651 (Pa.Super. 2002)].
Wright v. Allied Signal, Inc., 963 A.2d 511, 514 (Pa.Super. 2008)
(citation omitted).
Initially, Red Run contends that there is an issue of fact over whether
or not Mase acted with implied/inherent/apparent authority when he signed
the 2005 assignment, the March 2009 amendment to the assignment, and
the May 2009 amendment. Red Run argues that the trial court committed
an error of law and abused its discretion when it concluded that Red Run
offered no competent evidence to create an issue of fact regarding whether
Mase had implied/inherent/apparent authority to execute the agreements in
question and that EEC and Gill could rely on that authority. According to
Red Run, the trial court erred because the nature and extent of an agent's
authority is always a question of fact for the jury. See Turner Hydraulic,
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Inc. v. Susquehanna Constr. Corp., 606 A.2d 532, 534-535 (Pa.Super.
1992).
Red Run asserts that the Board did not execute a corporate resolution
to permit or direct Mase to enter into the agreements with Gill and EEC. In
the absence of express authority for Mase to sign the agreements with EEC
and Gill, Red Run argues that Mase lacked traditional implied authority to
sign the agreements because such authority can be found only when it is
incidental to the authority actually conferred. Red Run also argues that
Mase did not act with the apparent authority of Red Run because Red Run
did not knowingly permit Mase to sign the agreements.
Red Run concedes that Mase was the general agent of Red Run with
the inherent authority to undertake acts which normally accompany or are
incidental to transactions which he was authorized to conduct which were
intended to generate revenue. Red Run further concedes that Mase signed
many such contracts between annual meetings of the Board without a formal
vote by the Board. However, according to Red Run, Mase did not have the
inherent authority to enter into agreements which would cause Red Run to
lose money.
Red Run argues that the trial court erred when it failed to differentiate
between the agreements signed by Mase before and after his admitted
mistake of not including the ORRI payment to EEC and Gill as a condition of
the agreement with East, such that the trial court's characterization of the
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various agreements as being aimed at maximizing profits for Red Run was
incorrect. Although Red Run focuses on the duty to maximize profits, there
is not a clear duty for a president or director to do so. See Inversions and
Phantom Fiduciary Duties, Practical Law Corporate and Securities,
Delaware, July 31, 2014. Red Run specifically states that the 2005
assignment was intended to reduce profit for Red Run to avoid contractual
liability and the 2009 amendments' also were intended to reduce profit
though less than the 2005 assignment to reduce or avoid contractual
liability.
As a result, Red Run argues that the trial court's failure to recognize
this distinction resulted in a flawed analysis of the extent of Mase's
authority. Red Run argues that the trial court erred when it viewed the
agreements with EEC/Gill collectively rather than focusing on the 2005
assignment, confused the 2005 assignment with the 2009 amendment, and
that attorneys from Red Run's counsel informed Gill that they represented
Red Run when that was not the case at the time of the 2005 assignment.
According to Red Run, these errors by the trial court caused it to abuse its
discretion to conclude that Mase acted with implied/inherent/apparent
authority of Red Run when he signed the 2005 assignment.
7The 2009 Amendments reduced the ORRI to 2%. One amendment was
with Gill. One was with EEC.
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It is undisputed that the Board of Red Run did not grant Mase express
authority to sign the 2005 assignment. Red Run argues that Mase lacked
apparent, implied, or inherent authority to execute the 2005 assignment.
Apparent authority has been defined as the power to bind a principal when
the principal has not actually granted authority to an agent but leads
persons with whom his agents deal to believe that he has granted such
authority. The test for apparent authority is whether a person of ordinary
prudence, diligence, and discretion would have the right to believe that the
agent possessed the authority he purported to exercise. Apex Financial
Corp. v. Decker, 369 A.2d 488 (Pa.Super. 1976). Implied authority is the
authority to do all that is proper, usual, and necessary to the exercise of
authority already granted. Id. The trial court cited Rednor & Kline, Inc.
v. Dept. of Highways, 196 A.2d 355 (Pa. 1964), in its discussion of
authority given to the president of a closely held corporation and thoroughly
identified the facts. The Pennsylvania Supreme Court reasoned that the
signature of the president was prima facie evidence of authority particularly
in the case of a closely held corporation. This court discerns no error of law
or abuse of discretion on the part of the trial court for its reliance on
Rednor. Clearly, Mase ran the corporation and its activities with only
limited input from the Board and shareholders. The trial court did not abuse
its discretion when it determined that Mase had the authority to enter into
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these various agreements as he had almost unlimited authority to act on
behalf of Red Run.
Red Run asserts that the issue of whether or not Mase acted with
inherent authority is an issue which goes to the extent of his authority which
it claims is always an issue of fact. However, Joyner v. Harleysville
Insurance Co., 574 A.2d 664, 668 (Pa.Super. 1990), holds "[a]lthough the
question of whether a principal agent relationship exists is ordinarily one of
fact for the jury, where the facts giving rise to the relationship are not in
dispute, the question is one which is properly decided by the Court." Here,
the trial court found no issues of material fact concerning the relationship
between Red Run and Mase. After reviewing the record, this court agrees.
Once again, this court discerns no error or abuse of discretion.
Red Run also asserts that it, as the principal, and EEC and Gill, as the
third party, were not equally innocent. Except for Mase, the other
stockholders and Board members had no knowledge about Red Run's
contractual commitments to EEC and Gill until 2010, where Gill not only
knew about the contractual commitments but also knew that the deal that
Mase agreed to with East was not the deal that was intended under the
terms of the 2003 agreement. Red Run argues that Gill should have then
exercised a higher degree of due diligence to determine that the Board gave
Mase the authority to reduce Red Run's royalty interest. This court does not
agree. From the record, it appears that Gill reasonably believed that Mase
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had the authority to sign all of the agreements between them. Nothing in
the record indicates that Gill had any idea that Mase did not have authority
to sign the agreements or that Mase's execution of the lease with East had
the effect of changing Mase's authority.
Red Run next contends that the signing of the 2005 assignment, the
2009 amendment to assignment, and the 2009 amendment by Mase were
not usual or ordinary tasks for the president of Red Run because said tasks
were not intended to maximize profits. Red Run asserts that the trial court
failed to recognize that the 2005 assignment was not signed by Mase for the
purpose of maximizing profits but for avoiding contractual liability.
It is not clear exactly what to make of this argument. Red Run
includes it in its argument as to whether Mase had authority to enter into
the agreements, but Red Run cites to Delaware law which is pertinent as to
whether Mase breached any duty to the corporation or its shareholders.
Taken as a whole, these agreements were designed to maximize profits after
taking into account the mistake made by Mase. Further, not every action
taken by a corporation is designed to maximize profits. For instance, a
charitable donation made by a corporation may lead to increased "goodwill"
for the corporation but does not have a tangible effect of increasing profits.
Further, Red Run does not cite any authority for the so-called duty to
maximize profits.
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Red Run next contends that there is an issue of fact regarding whether
or not Mase breached his duty of loyalty to Red Run by concealing his
omission and signing agreements which would cause a reduction in
Red Run's profits.
Article 7 of Red Run's certificate of incorporation provides:
No directorshall be personally liable to the
corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such a
director as a
director. Notwithstanding the foregoing
sentence, a director shall be liable to the extent
provided by applicable law, (i) for breach of the
director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good
faith which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to
Section 174 of the Delaware General Corporation
Law or (iv) for any transaction from which the
director derived an improper personal benefit.
Red Run Mountain, Inc., Certificate of Incorporation at 2.
This provision of the certificate of incorporation follows
Section 102(b)(7) of the Delaware General Corporation Law, 8 Del.C.
§ 102(b)(7). The purpose of Section 102(b)(7) is to allow shareholders to
adopt a provision in the certificate of incorporation to exculpate directors
from any personal liability for the payment of monetary damages for
breaches of a director's duty of care but not for duty of loyalty violations and
bad faith misconduct. Emerald Partners v. Berlin, 787 A.2d 85, 90 (Del.
2001).
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Red Run asserts that Mase breached his duty of loyalty when he failed
to disclose the mistake he made when he failed to include the ORRI for EEC
and Gill in the lease agreement he made with East. Red Run argues that
this contention must be analyzed in the context of the business judgment
rule under Delaware law which provides a presumption that an individual
director is acting in the best interest of the corporation in the absence of any
evidence to the contrary. Cede & Co. v. Technicolor, Inc., 634 A.2d 345(Del. 1993). Red Run argued before the trial court that Mase acted out of
self-interest when he signed the 2005 assignment. According to Red Run,
Mase had a duty as a director and officer of Red Run to disclose his omission
to the other members of the Board. Instead, he signed the
2005 assignment without the knowledge or consent of the Board which
resulted in a reduction in the actual royalty interest Red Run was scheduled
to receive.
Red Run argues that Mase breached his duty of loyalty when he signed
the 2005 assignment. At the very least, Red Run argues that there is an
issue of fact that precludes summary judgment. Red Run believes that the
email to Gill where he admitted that he failed to include the ORRI in the
lease with East as well as the lease itself rebuts the business judgment rule
and that there is an issue of fact that he breached his duty of loyalty when
he signed the 2005 assignment because the Estate disagrees.
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However, while there is evidence that Mase made this oversight when
he signed the lease, there is no evidence of conscious disregard of his duty
of loyalty or bad faith misconduct when he failed to include the ORRI
payment in the lease with East. From all evidence in the record, it appears
that Mase made an honest mistake. There is no indication that he breached
his duty of loyalty to the corporation. In In re Walt Disney Co. Derivative
Litig., 906 A.2d 27, 64-67 (Del. 2006), the Delaware court stated that one
category of fiduciary misconduct involved the Chancellor's definition of
bad faith/intentional dereliction of duty, a conscious disregard for one's
responsibilities. The Delaware court quoted with approval the Chancellor's
definition of bad faith which included an actual intent to do harm, a lack of
due care as evidenced by gross negligence as well as a conscious disregard
for duty:
A failure to act in good faith may be shown, for
instance, where the fiduciary intentionally acts with a
purpose other than that of advancing the best
interests of the corporation, where the fiduciary acts
with the intent to violate applicable positive law, or
where the fiduciary intentionally fails to act in the
face of a known duty to act, demonstrating a
conscious disregard for his duties.
Id., 906 A.2d at 67.
Here, there is nothing in the record to support a suggestion that Mase
had an intent to act in a way that would not benefit the corporation or that
he intended to violate any law. Further, Mase did not benefit himself from
the transactions, apart from his role as a shareholder, contrary to what
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J. A18019/16
Red Run suggests. Further, although Red Run makes frequent references to
a duty to maximize profits, it is "highly dubious" that such a claim exists.
See Inversions and Phantom Fiduciary Duties, Practical Law Corporate
and Securities, Delaware, July 31, 2014. The trial court determined that,
while Mase made a mistake, he did not breach his fiduciary duty. Once
again, Red Run has failed to establish that the trial court committed an error
of law or an abuse of discretion. This court cannot discern that there is an
issue of material fact here.
Accordingly, the orders of the trial court are affirmed. The Estate's
application for relief to correct record references is granted.
Judgment Entered.
/ L
Joseph D. Seletyn,
Prothonotary
Date: 5/5/2017
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