The Michigan Supreme Court will take a look at a dispute between siblings over shares of a family-run ski resort launched by their late father.
Kathryn Kircher is a shareholder in Boyne USA, Inc., and her brother, Stephen Kircher, is the majority shareholder and CEO of the company.
She sought to redeem her shares, but claimed the company acted in bad faith by destroying the value of her shares in the Northern Lower Michigan resort when it bought with borrowed funds almost $300 million in real estate and assets that it had been leasing.
The Emmet Circuit Court found questions of fact regarding whether Kathryn could succeed on a theory of the implied covenant of good faith and fair dealing, and denied the defendants’ motion for summary disposition.
The Michigan Court of Appeals affirmed in a published decision , saying that, when a contract confers discretion on a party, a breach of contract action will lie for an alleged bad faith exercise of that discretion.
“[W]e agree with plaintiff that she has sufficiently stated a breach of contract claim on the basis of defendants’ alleged bad faith decision to not utilize a different formula to calculate her redemption price,” Judge Douglas B. Shapiro wrote in Kircher v. Boyne USA Inc. ( MiLW 07-107348 ).
The court directed the parties to file supplemental briefs addressing three key issues: whether the implied covenant of good faith and fair dealing applies only as an interpretive tool to understand the express terms of a contract; whether Kathryn stated a valid claim for breach of contract based on the defendants entering into the 2018 real estate transaction that significantly added to the debt Boyne USA, Inc.; and whether Kathryn stated a valid breach of contract claim based on the defendants’ refusal to negotiate an alternative formula to calculate the redemption price of her shares.
Those invited to file briefs amicus curiae include the Business Law Section of the State Bar of Michigan, the Michigan Association for Justice, the Michigan Chamber of Commerce and the Michigan Defense Trial Counsel, Inc. Other interested persons or groups may move the court for permission to file briefs.
Share price dispute
Kathryn worked for Boyne for many years and the bulk of her net worth came from her stock shares in the company.
The family operated the business without issue until 2010, when disagreements arose.
Kathryn was terminated in 2012, resulting in a lawsuit and a settlement agreement two years later. The 2014 settlement agreement contained a provision that gave Kathryn the right to redeem her shares of stock in the company, with a cap on the dollar amount she could redeem per year and a set valuation method.
Kathryn had several million dollars’ worth of shares based on the valuation formula. But disputes about the redemption of her shares led to additional litigation and another settlement in 2019.
That settlement agreement established a redemption price for the years 2015-2018 but left 2019 as “TBD.”
According to Kathryn, Boyne had long run an “operate leased assets” business model. In 2018, however, Boyne changed its model by purchasing, with borrowed funds, almost $300 million in real estate and assets that it was previously leasing.
The transaction had the effect of greatly increasing the company’s “total debt” under the redemption price formula and resulted in Kathryn’s stock having a negative share price.
In 2020, she filed a new lawsuit alleging that her brother and the company breached the 2014 settlement by entering into the 2018 real estate transaction, which effectively eliminated her right to redeem shares and made her shares worthless.
She claimed the defendants acted in bad faith by destroying the value of her shares.
The defendants moved for summary disposition, arguing that the 2014 settlement did not limit Boyne’s ability to acquire assets or incur debt.
The Emmet Circuit Court agreed with this contention, it denied the motion, finding questions of fact regarding whether Kathryn could succeed on a theory of the implied covenant of good faith and fair dealing.
The court also disagreed with the defendants’ alternative argument that an August 2019 settlement agreement between the parties contained a release or waiver provision that barred Kathyrn’s claims under MCR 2.116(C)(7).
The defendants appealed.
Cognizable breach of contract claim
As a general rule, Michigan does not recognize a cause of action for breach of the implied covenant of good faith and fair dealing, Shapiro pointed out.
However, a plaintiff can maintain a breach of contract claim on the basis of the implied duty of good faith and fair dealing based on “some underlying contractual term to which the duty can apply,” the judge explained.
This is consistent with a recognition of a cause of action based on the implied duty of good faith when a party exercises its discretionary powers under a contract.
Shapiro noted that the 2014 settlement permitted the parties to agree to a different formula to calculate Kathryn’s redemption price: “Plaintiff may redeem Plaintiff’s shares not to exceed $150,000 in value as determined in accordance with Paragraph 2(c) unless otherwise agreed by the Parties and until such time as Plaintiff has redeemed all of her shares.”
“Thus, the 2014 settlement expressly conferred discretion on defendants to agree to an alternative method to calculate plaintiff’s redemption price,” the judge wrote. “This is a type of discretionary authority on which a breach of contract action may be based.”
Further, he found Kathryn sufficiently alleged that the defendants acted in bad faith.
“The 2014 settlement shows the parties contemplated that plaintiff would be able to ‘redeem all of her shares,’” Shapiro said. “But, even though the existing formula to determine the redemption price had been rendered obsolete, defendant declined to adopt a different formula, thereby destroying the benefit to plaintiff of the 2014 settlement. Again, the duty of good faith and fair dealing protects a party’s right to receive the ‘fruits of the contract.’”
Kathryn’s reasonable expectation that she would be able to redeem her shares had been frustrated and yet the defendants refused to consider an alternative method to calculate the redemption price, as expressly permitted by the 2014 settlement, the judge added.
“Under the alleged circumstances, plaintiff has stated a cognizable breach of contract claim,” Shapiro said.
The judge said the trial court correctly concluded that a provision in the 2019 settlement was not an unambiguous release or waiver of the breach of contract claims in the instant case.
“The August 2019 settlement provided that plaintiff had no current claims, causes of action or disputes against defendants,” he wrote. “But there is no language explicitly using words such as ‘released,’ ‘discharged’ or ‘waived,’ nor is there language discussing the full effects of the provision. In other words, although there is an acknowledgement plaintiff had no current claims against defendants, there is no language showing that plaintiff released, discharged or waived all such future claims.”
The defendants also argued that, at the time of the 2019 settlement, Kathryn was aware of the 2018 transaction and its effect on the redemption price, which she denied.
“The parties’ dispute on this matter only highlights the questions of fact at play and the inappropriateness of summary disposition,” Shapiro concluded, affirming denial of the defendants’ motion.
Judges Michelle M. Rick and Christopher P. Yates joined Shapiro’s opinion.
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