#29395-r-SRJ
2021 S.D. 40
IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA
…
SMITH ANGUS RANCH, INC. (SAR), Plaintiff and Appellee,
v.
TRAVIS HURST, as an alleged
Director of SAR, and as
an Individual, Defendant, Third-Party
Plaintiff and Appellant,
v.
CRAIG SMITH and LANCE SMITH, Third-Party Defendants.
…
APPEAL FROM THE CIRCUIT COURT OF
THE FOURTH JUDICIAL CIRCUIT
HARDING COUNTY, SOUTH DAKOTA
…
THE HONORABLE GORDON D. SWANSON
Retired Judge
…
MICHAEL K. SABERS
TRAVIS B. JONES of
Clayborne, Loos & Sabers, LLP
Rapid City, South Dakota Attorneys for plaintiff and
appellee.
MATTHEW E. NAASZ
DAVID LUST of
Gunderson, Palmer, Nelson
& Ashmore, LLP
Rapid City, South Dakota Attorneys for defendant, third-party plaintiff and appellant.
…
ARGUED
APRIL 27, 2021
OPINION FILED 07/14/21
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JENSEN, Chief Justice
[¶1.] Smith Angus Ranch Inc. (SAR), a South Dakota corporation, brought
an action alleging Travis Hurst (Travis) wrongfully acquired SAR assets and made
improper purchases using SAR funds while serving as a director and officer of SAR.
The complaint alleged breach of fiduciary duty and self-dealing, among other
claims. The court granted SAR’s motion for partial summary judgment on the
claims for breach of fiduciary duty and self-dealing, after prohibiting Travis from
presenting extrinsic oral evidence to show he was authorized to carry out the
contested transactions. We granted Travis’ petition for an intermediate appeal of
the circuit court’s ruling. We now reverse and remand.
Facts and Procedural History
[¶2.] Calvin and Dee Smith operated a family ranch in Jones County. They
had three children: Lance, Craig, and Julie. Beginning in 1994, Julie and her
husband Travis (the Hursts) began working with Calvin and Dee on the Jones
County ranch. They did not receive a salary for their labor. In 2000, Calvin and
Dee sold their Jones County ranch and bought a ranch in Harding County. The
Hursts also relocated their family to Harding County to work on the ranch with
Calvin and Dee. Lance and Craig had left the family ranching business prior to
Calvin and Dee’s purchase of the Harding County ranch.
[¶3.] Calvin and Dee incorporated the Harding County ranching operation
as SAR and were SAR’s initial shareholders, officers, and directors. Travis was
added as a signatory on SAR’s checking account at the time of incorporation and
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made purchases on the account over the years. When Calvin died in 2008, Dee
became the sole shareholder, director, and officer of SAR.
[¶4.] In 2013, Dee began treatment for cancer, which reduced her time at
the ranch. She filed an Amended Annual Report with the South Dakota Secretary
of State adding Travis as a director and vice president of SAR. Travis testified that
Dee made these changes so he could sell SAR cattle at local sale barns, but the
amendment did not alter “the operation of the ranch . . . in any meaningful way.”
Travis claimed he continued to write checks drawn on SAR’s “checking account as
needed, and as directed by Dee, to make ranch related purchases” just as he had
before he became a director and officer.
[¶5.] While serving as a director and officer, Travis wrote checks on SAR’s
account to purchase a vehicle for his son, a vehicle for himself, fencing supplies for
land he owned, and other supplies associated with raising livestock that he owned
personally. Travis claimed that Dee orally authorized each of these transactions.
Travis also presented the depositions of Lance and Craig, in which they admitted
that Dee had purchased vehicles for their children.
[¶6.] In 2015, Dee began transferring both personal assets and SAR assets
to the Hursts. She sold 6,000 acres of ranch land, which she owned individually, to
the Hursts via a contract for deed. Dee also transferred SAR vehicles to Travis.
After purchasing the ranch land, Travis claimed that, “under Dee’s direction,” he
and Julie assumed ownership of half of the 2015 SAR calf crop and branded them
with their personal brand. Travis claimed Dee had agreed to pay him and Julie the
calves as rent for allowing SAR livestock to graze on the ranch land that Dee had
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recently sold to them. Travis claimed that Dee also gifted them the other half of the
2015 calf crop and instructed them to place their brand on the calves.
[¶7.] Dee executed a will on April 3, 2015, in which she forgave all
outstanding principal and interest payments that the Hursts owed for the ranch
land at the time of her death. The will stated: “I am aware that my sons may not be
happy with the provisions I have made . . . . [H]owever I ask them to honor my
wishes . . . .” The will bequeathed her shares in SAR to Lance and Craig. In May
2015, Dee wrote separate $100,000 checks to Lance and Craig that stated
“inheritance” or “inheritance share” on the memo line. Dee suffered a stroke several
months later and moved to a nursing home. She resided there for a week until she
passed away on October 24, 2015.
[¶8.] SAR was dissolved in September 2016. On September 4, 2018, Lance
and Craig caused SAR to file a complaint against Travis, which alleged breach of
fiduciary duty, self-dealing, usurpation of corporate opportunity, fraud, and
conversion. SAR’s corporate documents are not available, but the parties agreed
that these documents did not grant Travis the explicit authority to self-deal.
[¶9.] On July 21, 2020, SAR moved for partial summary judgment on the
counts for breach of fiduciary duty and self-dealing. SAR argued that Travis
engaged in self-dealing by taking ownership of SAR cattle and by using SAR funds
to purchase vehicles, fencing, and livestock supplies for himself and his family.
SAR argued “[t]hat no written authorization existed to justify self-dealing and
Defendant Director[ Travis’] attempt to utilize ‘oral’ authorization [from Dee] fails
as a matter of law.” In support, SAR cited Estate of Stoebner v. Huether, in which
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this Court applied “a bright-line rule that no oral extrinsic evidence may be
introduced to raise a factual issue as to whether an attorney-in-fact was authorized
to self-deal under a power of attorney.” 2019 S.D. 58, ¶ 23,
935 N.W.2d 262, 268.
SAR argued the bright-line rule applies to all fiduciaries, including a corporate
director or officer. As such, SAR claimed that Travis could not testify Dee
authorized the transactions at issue.
[¶10.] Travis argued that he did not breach his fiduciary duties to SAR
because Dee “was singularly in charge of corporate . . . decisions” and she instructed
him to carry out each transaction. He argued that the Stoebner rule is limited to
the fiduciary obligations of an attorney-in-fact arising from a power of attorney
(POA). Further, he claimed that his testimony was relevant and generated a
genuine issue of material fact concerning whether he breached his fiduciary duties
under South Dakota’s corporate statutes.
[¶11.] The circuit court granted SAR’s motion for partial summary judgment
on the claims for breach of fiduciary duty and self-dealing. The court recognized
that Travis’ testimony and other evidence may support his claim that Dee
authorized the activity at issue. However, the court extended and applied the
bright-line rule from Stoebner to corporate directors and officers, holding Travis’
testimony that Dee had authorized the transactions was inadmissible. After
excluding Travis’ testimony, the court held it was undisputed that Travis used SAR
assets to obtain items for his personal benefit.
[¶12.] Travis petitioned for intermediate appeal, which this Court granted.
He claims the circuit court erred by applying the rule in Stoebner to exclude
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extrinsic oral evidence that the transactions were authorized or approved and
thereby erred in granting SAR’s motion for partial summary judgment.
Analysis and Decision
[¶13.] “We review a circuit court’s entry of summary judgment under the de
novo standard of review.” Stoebner, 2019 S.D. 58, ¶ 16, 935 N.W.2d at 266. Under
de novo review, “[w]e give no deference to the circuit court’s decision[.] Our task on
appeal is to determine only whether a genuine issue of material fact exists and
whether the law was correctly applied.” Id. (alteration in original) (citations
omitted).
[¶14.] “The existence and scope of a fiduciary duty are questions of law.
Whether a breach of a fiduciary duty occurred, however, is a question of fact.”
Chem-Age Indus., Inc. v. Glover,
2002 S.D. 122, ¶ 37,
652 N.W.2d 756, 772. “South
Dakota law reflects the traditional view that fiduciary duties are not inherent in
normal arm’s-length business relationships, and arise only when one undertakes to
act primarily for another’s benefit.” Dinsmore v. Piper Jaffray, Inc.,
1999 S.D. 56, ¶
20,
593 N.W.2d 41, 47. Corporate officers are fiduciaries. See SDCL 55-7-2(2).
[¶15.] Travis was an officer and director of SAR when he engaged in alleged
acts of self-dealing, and Travis does not contest SAR’s claim that he was acting as a
corporate fiduciary when he engaged in these transactions. Further, Travis worked
with Dee on closely-held family ranches for over two decades prior to this litigation
and regularly made purchases on SAR’s behalf since its incorporation. Travis also
conceded that his activities on behalf of SAR increased after Calvin’s death in 2008
and Dee’s cancer diagnosis in 2013. Therefore, for the purpose of considering the
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summary judgment motion, we conclude that Travis was acting in a fiduciary
capacity when the activity at issue occurred.
[¶16.] As a general rule, a fiduciary may not engage in self-dealing. See In re
Estate of Stevenson, 2000 S.D. 24, ¶ 11,
605 N.W.2d 818, 821 (discussing trustees).
“[F]iduciar[ies] must act with utmost good faith and avoid any act of self-dealing
that places [their] personal interest in conflict with [their] obligations to the
beneficiaries.” Id. ¶ 9. However, in certain cases, “our statutes set forth specific
exceptions to this general rule.” Id. ¶ 11. See, e.g., SDCL 55-2-3 (governing
trustees); SDCL 47-1A-861.1 (governing corporate officers).
[¶17.] We have “held that a power of attorney must be strictly construed
. . . .” Bienash v. Moller,
2006 S.D. 78, ¶ 13,
721 N.W.2d 431, 435. Relying on the
general prohibition against self-dealing and our rule that POAs must be strictly
constructed, this Court has held that “if the power to self-deal is not specifically
articulated in the power of attorney, that power does not exist.” Id. ¶ 14. “As a
corollary to this [] rule,” in Bienash we “adopt[ed] a bright-line rule that no oral
extrinsic evidence will be admitted to raise a factual issue” concerning a principal’s
intent to allow self-dealing by an attorney-in-fact. Id. ¶¶ 23-24.
[¶18.] In adopting this rule, the Court considered the decisions of other states
holding POAs must be strictly construed, and which have barred extrinsic evidence
of a principal’s intent to allow self-dealing. Id. ¶¶ 18-23. The Court noted the policy
rationale for excluding extrinsic evidence of a principal’s intent in attorney-in-fact
relationships:
When one considers the manifold opportunities and temptations
for self-dealing that are opened up for persons holding general
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powers of attorney—of which outright transfers for less than
value to the attorney-in-fact [himself or] herself are the most
obvious—the justification for such a flat rule is apparent. And
its justification is made even more apparent when one considers
the ease with which such a rule can be accommodated by
principals and their draftsmen.
Id. ¶ 21 (quoting Kunewa v. Joshua, 924 P.2d 559, 565 (Haw. Ct. App. 1996)
(alteration in original)). This Court applied the bright-line rule barring oral
extrinsic evidence again in Studt v. Black Hills Fed. Credit Union,
2015 S.D. 33, ¶
14,
864 N.W.2d 513, 517. Most recently, we affirmed the rule in Stoebner stating,
“[w]e have adopted a bright-line rule that no oral extrinsic evidence may be
introduced to raise a factual issue as to whether an attorney-in-fact was authorized
to self-deal under a power of attorney.”
2019 S.D. 58, ¶ 23, 935 N.W.2d at 268
(emphasis added).
[¶19.] In extending this bright-line rule to corporate fiduciaries, the circuit
court relied on language from Stoebner stating, “a written document must clearly
articulate that the fiduciary is authorized to engage in self-dealing.” Id. Although
Stoebner involved a POA, the circuit court read Stoebner broadly to also prohibit a
corporate officer or director from presenting extrinsic oral evidence concerning a
principal’s intent in the absence of writing that expressly granted the power to self-
deal.
[¶20.] Initially, Travis argues that the court erred by applying the bright-line
rule from Bienash and Stoebner when SAR’s corporate documents are unavailable,
claiming that the rule is inapplicable because there are no written documents that
set out his fiduciary duties. Travis also argues the bright-line rule is limited to
agents acting under a written POA. Thus, he claims the circuit court erred by
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“anticipat[ing] this Court would, for the first time, extend the bright-line rule
applying to agents acting pursuant to powers of attorney to other fiduciaries.” In
support, Travis cites Hein v. Zoss, in which this Court held the circuit court abused
its discretion by barring the admission of extrinsic evidence relevant to whether an
attorney-in-fact “acted with utmost good faith and for the benefit of [the principal]”
before a POA was executed. 2016 S.D. 73, ¶ 13,
887 N.W.2d 62, 67. Finally, Travis
claims that, unlike the common law fiduciary duties of an attorney-in-fact, the
South Dakota Business Corporation Act codified the duties owed by a corporate
fiduciary. See SDCL 47-1A-830 to -831 (providing duties owed by directors); SDCL
47-1A-840 to -842.2 (providing duties owed by officers).
[¶21.] SAR disputes Travis’ claim that South Dakota’s corporate statutes
have any impact on the application of the bright-line rule to corporate fiduciaries.
SAR argues that the circuit court properly applied the rule from Bienash and
Stoebner to prohibit Travis’ testimony concerning Dee’s alleged oral authorization.
Further, SAR argues that if the bright-line rule is not extended to other fiduciary
relationships, it “would open a pandora’s box of excuses in self-dealing and/or
conversion cases that could never be closed.” Alternatively, SAR claims that “the
record as it was presented to the [c]ircuit [c]ourt,” including “[Travis’] own self-
serving unsupported [testimony,]” was insufficient to generate a genuine issue of
material fact.∗
∗ The circuit court excluded Travis’ testimony concerning Dee’s oral
authorization based on Bienash and Stoebner. We decline to consider SAR’s
argument that Travis’ testimony is inadmissible hearsay, as this objection
was not raised before, or considered by, the circuit court.
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[¶22.] Our cases, including our most recent decision in Stoebner, have only
applied the rule from Bienash to acts of self-dealing by an attorney-in-fact acting
under a written POA. We have not extended this rule to other fiduciaries, and SAR
does not present authority from any jurisdiction that has extended the rule to other
fiduciary relationships. Limiting the rule to acts of self-dealing by POAs is
consistent with the recognition of this Court, and other courts, that the rule arises
from the acute vulnerability of POAs to self-dealing. See Bienash, 2006 S.D. 78, ¶
21,
721 N.W.2d at 436. See also Estate of Casey v. Comm’r of Internal Revenue,
948
F.2d 895, 898 (4th Cir. 1991) (stating the bright-line rule concerning POAs had been
adopted “in order to avoid fraud and abuse”).
[¶23.] Further, the Legislature has codified the duties and liabilities of
corporate officers and directors through the South Dakota Business Corporation Act
in SDCL chapter 47-1A. The Legislature does not require that a corporate fiduciary
obtain written authorization to avoid liability for self-dealing. Thus, our decision to
decline extending the bright-line rule from Bienash and Stoebner to corporate
fiduciaries is consistent with South Dakota’s statutory framework.
[¶24.] Having determined that the circuit court erred by excluding extrinsic
oral evidence in this case, we conclude that questions of fact exist precluding
summary judgment. “Summary judgment may be granted only where there is no
genuine issue of material fact.” Erickson v. Lavielle,
368 N.W.2d 624, 626 (S.D.
1985). “The moving party has the burden of clearly demonstrating an absence of
any genuine issue of material fact and an entitlement to judgment as a matter of
law.” Johnson v. Matthew J. Batchelder Co.,
2010 S.D. 23, ¶ 8,
779 N.W.2d 690,
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693. “We view all evidence and favorable inferences from that evidence in a light
most favorable to the nonmoving party.” Id.
[¶25.] Travis presented testimony that Dee authorized each one of the
transactions at issue. Further, as the circuit court correctly observed, “there may be
evidence,” apart from Travis’ testimony, “tending to support Travis’[] contention
that Dee not only approved of, but directed Travis to convert assets of SAR to his
personal use.” Travis was never paid a salary for his work for SAR, but Dee
transferred ownership of SAR vehicles to Travis, transferred ownership of ranch
land to the Hursts, and then forgave the Hursts’ debt on the ranch land in her will.
In her will, Dee also acknowledged that her favorable testamentary intent toward
the Hursts may upset her sons.
[¶26.] The existence of disputed facts in the record requires that we reverse
the circuit court’s decision granting partial summary judgment and remand for
further proceedings.
[¶27.] KERN, SALTER, DEVANEY, and MYREN, Justices, concur.
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