Opinion
No. C0-02-931.
Filed February 12, 2003.
Appeal from the Hennepin County District Court, File No. CT00017661.
Marnie E. Polhamus, James W. Rude, Felhaber, Larson, Fenlon Vogt, P.A., (for respondent)
Eric D. Bull, (for appellant)
Considered and decided by Peterson, Presiding Judge, Randall, Judge, and Willis, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).
UNPUBLISHED OPINION
This appeal is from an order denying appellant Jon Delange's request for indemnification of attorney fees and costs pursuant to respondent Oarfin Records, Inc.'s corporate by-laws and the Minnesota Business Corporation Act. We affirm.
FACTS
Delange was the founder, president, a director, and shareholder of respondent Oarfin from 1993 until he resigned in August 2000. Oarfin's operations include a musical recording studio, a recording label, and a promotions and distribution business. Delange and Oarfin entered into an employment agreement that contained non-compete and non-disclosure clauses.
In October 2000, Oarfin filed a complaint seeking injunctive relief and damages from Delange for, inter alia, breach of contract, breach of fiduciary duty, breach of covenant of good faith and fair dealing, and misappropriation of trade secrets and confidential information. The complaint alleged that Delange (1) took client lists and demonstration tapes without permission; (2) allowed clients to use the recording studio free of charge; (3) solicited Oarfin's clients before and after he resigned; and (4) failed to perform his duties while employed by Oarfin.
In lieu of an answer, Delange filed a motion to strike the complaint on the ground that the lawsuit was frivolous. Delange also sought sanctions against Oarfin and its counsel. Because both parties submitted additional evidence outside the pleadings, the district court treated the motion as a motion for summary judgment pursuant to Minn. R. Civ. P. 12.02. Following a hearing, the district court dismissed most of Oarfin's claims. Delange later filed a counterclaim against Oarfin and his former business partner, Robert Pickering, Jr.
In April 2001, Delange requested indemnification under Oarfin's corporate by-laws and Minn. Stat. § 302A.521 (2002). Oarfin denied the request, alleging that Delange had not acted in good faith or in the best interests of the corporation. The parties settled Delange's counterclaims, and Oarfin chose to dismiss its remaining claims.
In November 2001, Delange submitted his indemnification request to the district court. Following a series of letters and conference calls between the court and counsel for the parties and the submission of additional materials, the district court denied Delange's request.
DECISION
Delange argues that the district court findings that he failed to act in good faith and that his conduct before resigning was not in the best interests of the corporation are clearly erroneous because they are based on hindsight and evidence that was not available when he was discharging his duties.
Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the trial court to judge the credibility of the witnesses.
Minn. R. Civ. P. 52.01. In applying this rule, "we view the record in the light most favorable to the judgment of the district court." Rogers v. Moore, 603 N.W.2d 650, 656 (Minn. 1999) (citation omitted). This court will not reverse the district court's judgment merely because we view the evidence differently. Id. Rather, to warrant reversal, the court's factual findings must be "manifestly contrary to the weight of the evidence or not reasonably supported by the evidence as a whole." Id. (quotation omitted). "If there is reasonable evidence to support the district court's findings, we will not disturb them." Rogers, 603 N.W.2d at 656 (citation omitted).
Delange sought indemnification under Oarfin's bylaws and Minn. Stat. § 302A.521 (2002). The bylaws provide that the "[c]orporation shall indemnify and reimburse its officers and directors whenever such indemnification or reimbursement is permitted" by statute. The statute requires a corporation to indemnify
a person made * * * a party to a proceeding by reason of the former or present official capacity of the person against judgments, * * * settlements, and reasonable expenses, including attorneys' fees and disbursements, incurred by the person in connection with the proceeding, if, with respect to the acts or omissions of the person complained of in the proceeding, the person:
* * * *
(2) acted in good faith;
* * * *
(5) * * * reasonably believed that the conduct was in the best interests of the corporation, or * * * reasonably believed that the conduct was not opposed to the best interests of the corporation.
Minn. Stat. § 302A.521, subd. 2(a). If a corporation denies a request for indemnification, an application can be made to a court. Id., subd. 6(a)(5). The person seeking indemnification bears the burden of establishing entitlement. Id.
It is undisputed that Delange meets the remaining three criteria for indemnification: he has not previously been indemnified, he did not receive any improper personal benefit, and no criminal charges were made against him. Minn. Stat. § 302A.521, subd. 2.
The district court found that Delange did not act in good faith with respect to demonstration (demo) tapes that were allegedly missing following appellant's resignation. The court also found that in failing to properly manage the recording studio, Delange did not act in the best interests of the business.
Demo tapes
On average, Oarfin received one to two demo tapes per day from hopeful artists looking for a recording contract. Only Delange and Pickering had authority to decide which tapes to follow up on. Oarfin's main studio engineer testified in his affidavit that Delange always had a "couple of boxes of demo tapes" in his office. There is no dispute that after Delange resigned, there were no demo tapes in his office.
In his early submissions to the court, Delange acknowledged that he "often solicited demo tapes" while employed at Oarfin and explained "that after [his] resignation that solicitation stopped." Several months later, when questioned at his deposition about the absence of tapes, Delange testified that he was "not sure [he] necessarily solicited demo tapes," though he received some. He also denied being in charge of demo tapes.
Rich Cheney, a consultant to Oarfin who was sometimes asked to review demo tapes, stated in his affidavit that he was "in the process of reviewing a new batch of tapes * * * when appellant left Oarfin." Cheney returned the tapes to Oarfin after Oarfin filed its complaint. Pickering testified in his affidavit that the tapes Cheney returned were more than a year old and from bands that no longer existed. Months later at his deposition, and in contrast to Cheney's statement that the tapes he was reviewing were new, Delange testified that the demo tapes given to Cheney in July were old tapes that had been around the studio awhile and were typically kept in another employee's office.
The court concluded that Delange's inconsistent and changing explanations for the absence of demo tapes could not sustain his burden of proving that he acted in good faith. The court acknowledged that none of the evidence conclusively established that Delange took any demo tapes. But the court reasoned that because (1) the evidence established that Delange had primary responsibility for soliciting, evaluating, and safeguarding demo tapes; (2) there were no tapes in Delange's office following his resignation; and (3) Delange provided no plausible or consistent explanation for the absence of tapes; he failed to meet his burden of proving that he acted in good faith.
Delange contends that his consistent denial that he took or retained any demo tapes after leaving Oarfin is sufficient to establish that he acted in good faith because there is no evidence contradicting his statement. He argues that because Oarfin never had a systematic process for reviewing demo tapes that provided an inventory of tapes retained or discarded, there is no basis for the court's determination that any tapes disappeared. But the evidence that Oarfin received one or two demo tapes per day, together with the evidence that the tapes that remained after Delange resigned were received more than a year before he resigned, support a conclusion that recently received tapes were missing.
Delange also argues that the court misinterpreted his deposition testimony and did not scrutinize Oarfin's witnesses' testimony with the same intensity. Essentially, Delange challenges the district court's credibility determinations and ignores the fact that he bears the burden of proving that he acted in good faith. Minn. Stat. § 302A.521, subd. 6(a)(5) (person seeking indemnification has burden of establishing that person is entitled to indemnification).
Presented with conflicting evidence, the court made its findings, conclusions, and credibility determinations based on the parties' relevant submissions and Oarfin's claims that survived summary judgment (but were later voluntarily dismissed by Oarfin). See Straus v. Straus, 254 Minn. 234, 235, 94 N.W.2d 679, 680 (1959) (stating conflicts in evidence are to be resolved by district court even where presented by affidavit). The record supports the district court's findings, and even though the record might support findings other than those made by the district court, that does not show that the court's findings are defective. Vangsness v. Vangsness, 607 N.W.2d 468, 474 (Minn. App. 2000); see, e.g., Elliott v. Mitchell, 311 Minn. 533, 535, 249 N.W.2d 172, 174 (1976) (affirming trial court's findings despite admitting "the evidence might support another conclusion").
Studio Management
Delange argues that the district court erred in finding that he failed to establish that his conduct in managing the recording studio was in the best interests of the business.
Delange's responsibilities included managing the recording studio. Oarfin alleged that he mismanaged the studio during the months before he resigned by failing to book studio time. There was evidence that the studio was typically booked one to two months in advance and generated approximately $20,000 in revenue each month. In July 2000, studio revenue began to drop off and by August, studio revenue was down approximately sixty percent. The estimated revenue loss was approximately $25,000.
In concluding that Delange failed to exercise the ordinary care reasonably expected of a corporate officer, the court found Delange's explanations for the reduction in studio revenue to be inconsistent and inadequate. The court compared Delange's pre-summary-judgment testimony with his post-summary-judgment deposition testimony. Before summary judgment was granted, Delange testified in his affidavit that there was "little, if any, drop off" in August bookings. At his deposition, he testified that "[t]here were only a handful of days on the calendar" in August.
Delange's explanations for the decline were that (1) Pickering canceled a booking that Delange had made for August; (2) Pickering failed to follow up on potential clients for August studio time; and (3) Delange did not transfer booking information into Oarfin's computer, and the information was lost after he resigned.
The court did not find Delange's explanations credible in light of (1) Pickering's undisputed testimony that he substituted a different act for the one Delange had booked; (2) Delange's failure to identify potential clients and Pickering's testimony that many of the studio sessions Delange booked for August did not actually exist; and (3) Delange's failure to ensure that the booking information was processed before he abruptly resigned. The record also contains affidavits of several Oarfin employees stating that during the period leading up to his resignation, Delange spent less time than usual at the company.
While acknowledging that Delange's actions were not part of any deliberate scheme, the court found they indicated "a lapse of the ordinary care reasonably to be expected from a corporate officer charged with this responsibility." Because the evidence reasonably supports the district court's findings of fact, they are not clearly erroneous. Fletcher v. St. Paul Pioneer Press, 589 N.W.2d 96, 102 (Minn. 1999) (citing Minn. R. Civ. P. 52.01).
Evidentiary Hearing
Delange argues that the district court abused its discretion by failing to grant him an evidentiary hearing. Citing criminal case law, Delange contends that he is entitled to confront and cross-examine his accusers. Alford v. United States, 282 U.S. 687, 691, 51 S.Ct. 218, 219 (1931). But an accused's constitutional right to confront witnesses against him applies only in criminal prosecutions. U.S. Const. amend. VI; Minn. Const. art. 1, 6; Kichler v. Civil Service Com'n, 381 N.W.2d 48, 50 (Minn. App. 1986).
Minn. Stat. § 302A.521, subd. 6(a)(5), does not require the district court to conduct a hearing to determine indemnification eligibility. During a conference call, the parties discussed with the court whether to hold an evidentiary hearing. Both parties indicated a desire to avoid the expense of a hearing. Delange changed his position in a letter to the court dated three days later. The court, in its discretion, determined that it would be unfair to Oarfin to grant an evidentiary hearing after the parties had decided against doing so. The court also found that conservation of both judicial resources and the parties' resources counseled against a hearing. Instead, the court made its eligibility determination based on the parties' considerable submissions, including detailed affidavits and deposition testimony of the parties and their witnesses.
Delange contends that the district court abused its discretion by basing credibility assessments on his affidavit and deposition testimony without holding a hearing. He also contends that the court failed to make the same credibility assessments of Oarfin's witnesses. To support his argument, Delange cites a footnote in the court's order noting the discussion the parties had with the court concerning the difficulty of making factual determinations on disputed issues without a hearing.
District courts routinely make credibility determinations based on documentary evidence. See Straus, 254 Minn. at 235, 94 N.W.2d at 680 (stating conflicts in evidence are to be resolved by district court even where presented by affidavit); Varner v. Varner, 400 N.W.2d 117, 121 (Minn. App. 1987) (stating that district court is not required to believe even uncontradicted testimony if there are reasonable grounds to doubt its credibility). The fact that the district court made credibility determinations based on the parties' affidavits is not error. Moreover, the court's findings imply that the court actually made credibility determinations with respect to Delange's and Oarfin's witnesses. See Vang v. A-1 Maint. Serv., 376 N.W.2d 479, 482 (Minn. 1985) (stating that an actual determination regarding credibility is necessarily implicit in a fact-finder's decision when there is conflicting witness testimony). Given the conflicting testimony, the court's determination implicitly resolved any credibility determinations in favor of Oarfin.
Appellant's counsel argues that his comments during the December 2001 conference call with the court were not "carefully considered" or "informed" and were not intended to bind appellant. But the decision to conduct an evidentiary hearing is discretionary with the district court.
A district court does not abuse its discretion in denying an evidentiary hearing where the record reveals the court based its findings and conclusions on detailed affidavits and where it makes specific findings of fact. Buller v. A.O. Smith Harvestore Prods., Inc., 518 N.W.2d 537, 538 (Minn. 1994). The record reveals that the district court based its decision on detailed affidavits and made specific findings concerning Delange's eligibility for indemnification. The district court did not abuse its discretion when it declined to hold an evidentiary hearing.
Affirmed.