SHOP RITE INC v. GARDINER (2021)

Dan Gielen established three companies (the Companies) during his marriage. He died on February 14, 2018. Prior to his death, he donated a minority interest in the Companies to each of his three children and a grandson. After his death, Peggy Gielen, his wife, became owner of one-half of a majority of the Companies’ stock. Pursuant to the terms of Mr. Gielen's will, Mrs. Gielen became usufructuary of the remaining one-half of a majority of the stock in the Companies, the legacy shares, and the Gielens’ children and grandson became the naked owners of the other half of the legacy shares. The will granted Mrs. Gielen the right, as usufructuary, to alienate the estate property without the consent of the naked owners.

One week after Mr. Gielen's death, Mrs. Gielen established voting trusts for each of the Companies and transferred the shares she owned and the legacy shares into the voting trusts. Mrs. Gielen named her grandson the trustee of the voting trusts and authorized him to vote the shares deposited into the voting trusts. Pursuant to the voting trust agreements, Mrs. Gielen had the authority to revoke or terminate the voting trusts.

Five months later, in July 2018, Ms. Gardiner notified the Companies of her withdrawal as a minority shareholder in the Companies, asserting oppression as the reason for her withdrawal, as provided in the Louisiana Business Corporation Act. This notice constituted an offer to sell all of her shares in the Companies. La,R.S. 12:1-1435. In September 2018, the Companies responded to Ms. Gardiner's notice. They denied that Gardiner was an oppressed shareholder but accepted her offer to sell her stock. The parties entered negotiations to establish the fair value of Ms. Gardiner's ownership interest in the Companies.

On March 19, 2019, Mrs. Gielen amended the voting trust agreements to authorize the trustee to “exercise all the rights of each Depositing Shareholder” and to “sell all or any portion of the Trust Shares ․ with the express written authorization of the Depositing Shareholder.” Then, pursuant to a stock redemption agreement dated April 17, 2019, Mrs. Gielen and the voting trusts sold to and the Companies redeemed outstanding shares held by the Companies that were “subject to a testamentary legacy of naked ownership ․ in favor of” Ms. Gardiner.

The negotiations between Ms. Gardiner and the Companies were unsuccessful, and in October 2019, the Companies filed a petition for declaratory judgment to have the trial court determine the fair value of the shares registered in Ms. Gardiner's name. See La.R.S. 12:1-1435. Ms. Gardiner answered the Companies’ petition and asserted in a reconventional demand against them that she is record owner of the shares her father donated to her before his death and the naked owner of the legacy shares specified in her father's will.

In November 2019, the Companies answered the reconventional demand admitting that Ms. Gardiner is owner of the shares donated to her but denying she had a naked interest in the legacy shares because they had been redeemed by the Companies and now are owned by the Companies. The Companies then filed a peremptory exception of no right of action urging that Ms. Gardiner no longer owned a naked interest in the legacy shares; therefore, she did not have a right to have the trial court determine the fair value of those shares. They asserted that Mrs. Gielen's February 2018 transfer of the legacy shares to the voting trusts transferred ownership of the shares including the naked owners’ interests but further assert that full ownership was transferred no later than April 17, 2019, when the Companies redeemed the legacy shares. The Companies further urged that Ms. Gardiner's only recourse for her claim for her legacy shares is against her mother's estate for an accounting as usufructuary upon her death. The trial court and the majority agree with the Companies.

Ms. Gardiner contends that she meets La.R.S. 12:1-140(2)(A)’s definition of beneficial shareholder although the Companies did not issue a separate stock certificate recognizing her as a beneficial shareholder. Section 1-140(2)(A) defines beneficial shareholder to include “a person on whose behalf shares are registered in the name of an intermediary or nominee.” Based on this definition, Ms. Gardiner argues that Mrs. Gielen's recognition as beneficial owner after she transferred the legacy shares to the voting trusts in February 2018 did not affect her naked ownership of the legacy shares. She contends that the Companies acknowledged this in their September 2018 letter in which they accepted her “offer to sell for fair value all interests she may have in shares in the Companies, including without limitation any interests Ms. Gardiner may have as a legatee or heir in shares comprising part of the estate of John Dan Gielen.” (Emphasis added.)

In conjunction with her arguments, Ms. Gardiner urges this court to apply the theory of equitable relief provided by judicial estoppel. She notes that in March 2019 Mrs. Gielen amended the voting trust agreements to authorize the trustee to sell “all or any portion of the Trust shares ․ with [her] express written authorization,” and one month later, Mrs. Gielen sold Ms. Gardiner's interest in the legacy shares. Continuing, Ms. Gardiner argues, as she did to the trial court, that because the amendment of the voting trust agreements and stock redemptions were not made until eight and nine months, respectively, after she gave written notice of her withdrawal as shareholder of the Companies, this court should apply the equitable doctrine of judicial estoppel and deny the Companies’ exception of no right of action. “[J]udicial estoppel [is] an equitable doctrine designed to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.” Webb v. Webb, 18-320 (La. 12/5/18), 263 So.3d 321, 328 (quoting Miller v. Conagra, Inc., 08-21, p. 9 (La. 9/8/08), 991 So.2d 445, 452. Ms. Gardiner further argues that the $1.35 million Mrs. Gielen accepted for the voting trusts redemption of the stock represents only the value of her usufructuary interest in the legacy shares, not the fair value of 100% interest in those shares, which Ms. Gardiner contends is more like $6.6 million.

The Companies counter that Ms. Gardiner's failure or refusal to file reports with the Louisiana State Police and/or State Gaming Board required to renew the Companies’ gaming licenses necessitated the redemption. They explain that state regulations prohibit an individual who refused to provide said information from holding directly or indirectly more than a 5% ownership interest, income, or profit interest in a company that holds such license. This explanation is contrary to the Companies’ argument that upon Mrs. Gielen's depositing the shares into the voting trusts Ms. Gardiner's naked ownership interest ceased. Indeed, the explanation acknowledges that Ms. Gardiner retained an ownership interest in the legacy shares; otherwise, there was no need for Mrs. Gielen to dispose of Ms. Gardiner's interest in those shares.

Pursuant to La.Civ.Code art. 568, a “usufructuary may not dispose of nonconsumable things unless the right to do so has been expressly granted to him.” Louisiana Civil Code Article 568.1 further provides that if a usufructuary alienates “a thing subject to the usufruct ․ the usufruct attaches to any money or other property received by the usufructuary” and that “[t]he property received shall be classified as consumable or nonconsumable in accordance with the provisions of this Title.” Thereafter, whether the property received is a consumable or nonconsumable, the usufruct “shall be governed by those provisions subject to the terms of the act establishing the original usufruct.” La.Civ.Code. art. 568.1. The Comments -- 2010 to Article 568.1 (emphasis added) explain:

(a) If the property received by the usufructuary is consumable, then under the provisions of this Title, the usufructuary will be bound to pay to the naked owner at the termination of the usufruct the value of the consumables that he received, and under the regular provisions governing usufruct the usufructuary will become the “owner” of the consumable property. See Civil Code Article 538. This will leave open the question of whether he may have sold the property for too low a price, and he is always subject to the obligation of acting as a prudent administrator. See Civil Code Article 576 and revision comment (b). If the usufructuary receives property that is nonconsumable, the usufruct will always attach to it and the usufructuary will be bound to deliver the thing received to the naked owner at the termination of the usufruct. See Civil Code Article 539.

(b) The provisions expressed in comment (a) are the provisions to which Article 568.1 refers when it states that the usufruct “shall be governed by those provisions.” This Article expressly refers to the act establishing the original usufruct, because if that act granted authority to dispose of nonconsumables, that grant would be a continuing grant of authority and would apply to the new nonconsumables that have been received.

Upon establishing the voting trusts in February 2018, Mrs. Gielen exchanged one nonconsumable, the legacy shares, for another, the voting trust shares. La.Civ.Code art. 568.1. Therefore, she still had a duty to act as a prudent administrator, La.Civ.Code art. 538, and remained “bound to use them as a prudent administrator.” La.Civ.Code art. 539. Moreover, Ms. Gardiner still had a naked ownership interest in the voting stock shares. Id.

In my view, Article 568.1 addresses what happens after a transaction. As such, it does not eliminate the duty of a usufructuary of a nonconsumable to act as a prudent administrator when entering a transaction. Furthermore, La.Civ.Code art. 623 allows a naked owner to terminate a usufruct “if the usufructuary commits waste, alienates things without authority, neglects to make ordinary repairs, or abuses his enjoyment in any other manner.”

Mrs. Gielen had the duty to act as a prudent administrator when she accepted payment for the legacy shares, and Ms. Gardiner has the right to question whether Mrs. Gielen did in fact act as a prudent administrator in accepting $1.35 million for the redeemed stock. The answer to this question is determinative of whether Ms. Gardiner still has an ownership interest in the stock. If Ms. Gardiner's argument regarding the disparity between the value of the shares and the price Mrs. Gielen accepted is correct, Mrs. Gielen transferred only her usufructuary interest in the shares, and Ms. Gardiner still has a naked ownership interest in the “new” shares. This determination can only be made by allowing Ms. Gardiner to introduce evidence on this issue.

In my opinion, the Companies’ and Mrs. Gielen's actions after the Companies accepted Ms. Gardiner's offer to sell her interests in the legacy shares, coupled with the Companies’ inconsistent claims regarding Ms. Gardiner's ownership interest in the Companies and their ability to maintain their gaming licensure, warrant consideration of the merit of Ms. Gardiner's request to apply judicial estoppel. Furthermore, based on Mrs. Gielen's duty as a usufructuary, I believe that Ms. Gardiner has a right of action to have the trial court determine whether the price the Companies paid for her interest in the legacy shares was a fair value. It is especially important to allow a naked owner such as Ms. Gardiner to be afforded this right because unlike publicly-traded stock, the fair value of stock in a closely-held corporation cannot be determined with public information. As a result, if a naked owner is not allowed to question the amount a usufructuary receives in a transaction involving a closely-held corporation, the usufructuary's duty to act as a prudent administrator and to account for imprudent alienations of property after the usufruct terminates serves little, if any, purpose.

For these reasons, I would reverse the trial court's judgment sustaining the Companies’ exception of no right of action and remand the matter to the trial court for a trial to determine whether the Companies paid Mrs. Gielen the fair value of the legacy shares.

Decedent John Dan Gielen formed closely held family corporations from which he operated family businesses for many years - Shop Rite, Tobacco Plus and Acadia Wholesale (The Companies). The record shows that Mr. Gielen's daughter, Shawne Gielen Gardner (Shawne), was closely involved with the work of The Companies all of her adult life and eventually became a director and officer of all three. Before his death, Mr. Gielen donated shares in The Companies to Shawne (referred to as the “Prior Shares”), as well as to his other children and grandson, Cody Gielen.

Mr. Gielen passed away on February 14, 2018 and left a last will and testament. Pursuant thereto, Shawne became the naked owner of a designated percentage of stock in The Companies (designated “Legacy Shares”), subject to a usufruct in favor of her mother, Peggy Gielen, Mr. Gielen's surviving spouse.

A week after Mr. Gielen's passing, his grandson, Cody, allegedly succeeded in “convincing Mrs. Peggy” to place all shares of which she was both owner and usufructuary into a “Voting Trust” under Cody's exclusive control. Since there has been no trial on the merits, the record as to how and why this occurred has not been developed.

On July 23, 2018, a few months later, Shawne sent a “letter of withdrawal” to The Companies on the grounds of “shareholders oppression,” offering to sell to The Companies for “fair value” all of her shares in The Companies pursuant to La.R.S. 12:1-1435(C).

On September 21, 2018, The Companies, pursuant to La.R.S. 12.1-1435(E), accepted Shawne's offer to sell all of her shares “including without limitation any interests Ms. Gardner may have as a legatee or heir in shares comprising part of the estate of John Dan Gielen[.]” (Emphasis added.)

The price to be paid for Shawne's shares was subject to expert evaluation and negotiations, with a court to decide if the parties could not reach agreement on the price per share.

On April 8, 2019, six months later, well after The Companies had accepted Shawne's offer to sell, Cody proposed that The Companies redeem on behalf of The Companies all shares, including Shawne's Legacy Shares. A resolution of The Companies was allegedly adopted allowing Cody to do so at a price allegedly agreed upon by all the remaining shareholders (except Shawne), and with the proceeds payable to Peggy Gielen as usufructuary for all shares over which she had usufruct.

Meanwhile The Companies and Shawne had not been able to reach a decision on the value of Shawne's Prior Shares and The Companies moved forward with their purchase/redemption of Shawne's Prior Shares. By their separate petition filed against Shawne, The Companies asked the trial court to determine the fair value of Shawne's “Prior Shares” she owned before her father's death, as well as the terms by which her Prior Shares would be redeemed by The Companies. Judgment was rendered in that case on November 10, 2020 (15th JDC Docket # 2019-10957-G) and is now on appeal before a different panel of this court. See Shop Rite, Inc., et al. v. Tobacco Plus, Inc. v. Shawne Gielen Gardiner, 21-371.

At this point it's important to note that the majority's opinion focuses almost exclusively on Ms. Peggy Gielen's rights as usufructuary under the Civil Code to dispose of Shawne's Legacy Shares subject to the usufruct, subject only to Shawne's right to an accounting from Ms. Peggy's estate after her death. I agree with Judge Pickett's analysis of the usufruct issue and join her dissenting opinion, but would further find that the specific provisions of the Louisiana Law governing corporations should be applied in this case.

Shawne alleged she was an “oppressed shareholder” and as such tendered her shares for redemption to The Companies pursuant to La.R.S. 12:1-1435. That offer was accepted by The Companies. The only thing left to do at that stage was to value Shawne's Prior Shares as well as Shawne's Legacy Shares, and pay that sum to Shawne. As indicated infra, the trial court determined the value of her Prior Shares in a separate trial and that decision is on appeal before a separate panel of this court. The value of Shawne's Legacy Shares must also be decided by the trial court should the parties fail to agree. See La.R.S. 12:1-1436.

Instead, on April 8, 2019, some six (6) months after The Companies accepted Shawne's offer to sell all her shares, including her Legacy Shares, Cody initiated a proposal to the remaining shareholders to have The Companies redeem all shares in a shareholder's “agreement” that allegedly valued the shares at a very low price, payable ten (10%) cash, with the balance to be paid in 180 months. All voting shareholders approved except Shawne.

This is an important case involving the rights of a minority shareholder and hence should be decided based on the specific requirements of Louisiana's Corporate law that provide for the rights of an allegedly “oppressed shareholder.” The Companies have denied that Shawne is an “oppressed shareholder,” but in this case, the trial court is not required to determine whether Shawne was an “oppressed shareholder” since The Companies specifically accepted her offer to sell all her shares to The Companies, both her Prior Shares and her Legacy Shares. The Companies accepted the offer subject only to price negotiations or eventual resolution by the trial court pursuant to La.R.S. 12:1-1436, which provides in pertinent part:

§ 1-1436. Judicial determination of fair value and payment terms for withdrawing shareholder's shares

A. (1) If a shareholder's right to withdraw from a corporation is recognized by means of a notice of acceptance under R.S. 12:1-1435(E), but the notice does not create a contract under R.S. 12:1-1435(F), the corporation and shareholder shall have sixty days from the effective date of the notice of acceptance to negotiate the fair value of the shareholder's shares and the terms under which the corporation is to purchase the shares. Within one year after the expiration of the sixty-day period, either party may file an action against the other to determine the fair value of the shares and the terms for the purchase of the shares. Venue for the action lies in the district court of the parish where the corporation's principal office or, if none in this state, where its registered office is located.

. . .

C. The court shall conduct the trial of the action under Subsection A of this Section or the motion under Subsection B of this Section by summary proceeding.

D. Except as provided in Subsection E of this Section, at the conclusion of the trial the court shall render final judgment as described in Paragraphs (1) and (2) of this Subsection:

(1) In favor of the shareholder and against the corporation for the fair value of the shareholder's shares.

(2) In favor of the corporation and against the shareholder that does both of the following:

(a) Terminates the shareholder's ownership of shares in the corporation.

(b) Orders the shareholder to deliver to the corporation within thirty days of the date of the judgment any certificate issued by the corporation for the shares or an affidavit by the shareholder that the certificate has been lost, stolen, destroyed, or previously delivered to the corporation.

(Emphasis added.)

Citing The Companies’ acceptance of her withdrawal, Shawne accurately argues that the theory of judicial estoppel operated to preclude The Companies from attempting to “frustrate” her right to proceed under La.R.S. 12:1-1436 via its exception of no right of action.

The Louisiana Supreme Court has explained that “ ‘judicial estoppel [is] an equitable doctrine designed to protect the integrity of the judicial process by prohibiting parties from deliberately changing positions according to the exigencies of the moment.’ ” Webb v. Webb, 18-0320, p. 9 (La. 12/5/18), 263 So.3d 321, 328 (quoting Miller v. Conagra, Inc., 08-0021, p. 9 (La. 9/8/08), 991 So.2d 445, 452).

Although its equitable nature precludes the reduction of equitable estoppel to a precise formula or test, the United States Supreme Court has noted that several factors typically inform a court's decision on its application as follows:

First, a party's later position must be clearly inconsistent with its earlier position. Second, courts regularly inquire whether the party has succeeded in persuading a court to accept that party's earlier position ․ A third consideration is whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped.

Zedner v. U.S., 547 U.S. 489, 504, 126 S.Ct. 1976, 1987, 164 L.Ed.2d 749 (2006) (quoting New Hampshire v. Maine, 532 U.S. 742, 750-51, 121 S.Ct. 1808, 1815, 149 L.Ed.2d 968). .

“The purpose of the doctrine is to protect the integrity of the judicial process, by preventing the parties from playing fast and loose with the courts to suit the exigencies of self-interest.” Thomas v. Economy Premier Assur. Co., 50,638, p. 5 (La.App. 2 Cir. 5/18/16), 196 So.3d 7, 11 (citing In re Coastal Plains, Inc., 179 F.3d 197 (5th Cir. 1999), cert. denied, 528 U.S. 1117, 120 S.Ct. 936, 145 L.Ed.2d 814 (2000); In re Superior Crewboats, Inc., 374 F.3d 330 (5th Cir. 2004); Jethroe v. Omnova Sols., Inc., 412 F.3d 598 (5th Cir. 2005)), writ denied, 16-1169, 16-1177 (La. 10/28/16), 208 So.3d 377, 378.

Noting its “equitable” nature, the Louisiana Supreme Court explained in Webb that the doctrine of estoppel is invoked at the court's discretion given the specific factual context before it, including any harm that may be posed to third parties. Webb, 263 So.3d 321.

Shawne maintains that a balancing of such factors in this case requires the application of the discretionary doctrine upon consideration of “the significant risk to third parties if [The Companies] are not estopped, as well as the familial and fiduciary relationships shared by the parties and the endangered third parties.” She contends that the trial court, in sustaining the exception of no right of action, allowed The Companies to attempt to manipulate the judicial system and “compounded” the harm not only to herself, but to “Mrs. Peggy, and the Gielen family” as well. As an example, Shawne explains that had the same per share value used at the trial on the merits of her Prior Shares in 15th JDC Docket # 2019-0957-G, she would have been able to demonstrate that “Mrs. Peggy should have received $6,600,032.85 for the full ownership, including the usufructuary and naked ownership interests, in the Legacy shares.” The Companies, however, “only paid Mrs. Peggy $1,350,314, well below the fair value of the Legacy Shares.” Such tactics should not be countenanced, Shawne argues.

I find merit in this position. Certainly, Shawne offers a compelling argument regarding the stark difference in the amount paid to Ms. Peggy and the “value” found by the trial court in its evaluation of Shawne's Prior Shares. However, the trial court decided the separate issue of the value of Shawne's Legacy Shares on an exception of no right of action, which offers no opportunity for the type of evidentiary hearing mandated by La.R.S. 12:1-1436. As indicated above, an appeal of the judgment resulting from the valuation of Shawne's Prior Shares is pending before a different panel of this court. See Shop Rite, Inc., et al. v. Tobacco Plus, Inc. v. Shawne Gielen Gardiner, 21-371.

Clearly, Shawne has alleged, and the record supports, that The Companies have already accepted her offer to sell all of her shares, including her Legacy Shares, subject only to valuation of her shares as well as the valuation of Peggy Gielen's usufruct. I would remand this case to the trial court to do so. Hence, I would reverse the trial judge and issue a remand for the trial court to determine the value of Shawne's Legacy Shares. The eventual value must take into account the value of Peggy Gielen's usufruct over Shawne's Legacy Shares.