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Hipps v. Biglari Holdings, Inc.

Court of Appeals of Indiana

December 4, 2019

Joseph Hipps and Eugene Protz, Appellants-Plaintiffs,
v.
Biglari Holdings, Inc., Sardar Biglari, Philip L. Cooley, Ruth J. Person, Kenneth R. Cooper, James P. Mastrian, BH Merger Company, and NBHSA, Inc., Appellees-Defendants.

          Appeal from the Hamilton Superior Court The Honorable Steven R. Nation, Judge Trial Court Cause No. 29D01-1801-CT-760

          ATTORNEYS FOR APPELLANTS Brad A. Catlin Price Waicukuauski Joven & Catlin, LLC Indianapolis, Indiana Eric L. Zagar Justin O. Reliford J. Daniel Albert Christopher Windover Kessler Topaz Meltzer & Check, LLP Radnor, Pennsylvania Jeremy Friedman David Tejtel Friedman Oster & Tejtel, PLLC New York, New York Robert T. Dassow William Fredrick Eckhart Hovde Dassow & Deet, LLC Indianapolis, Indiana Stephen J. Oddo Robbins, LLC San Diego, California

          ATTORNEYS FOR APPELLEES Scott S. Morrisson Mark J.R. Merkel Krieg DeVault, LLP Carmel, Indiana Libby Yin Goodknight Krieg DeVault, LLP Indianapolis, Indiana Michael E. Bern Latham & Watkins, LLP Washington, District of Columbia Christopher Clark Latham & Watkins, LLP New York, New York

          TAVITAS, JUDGE

         Case Summary

         [¶1] Joseph Hipps and Eugene Protz, individually and on behalf of a class of common shareholders ("Shareholders") of Biglari Holdings, Inc. ("Biglari Holdings") appeal the trial court's grant of a motion to dismiss filed by the Defendants, Biglari Holdings, BH Merger Company, NBHSA, Inc., Sardar Biglari ("S. Biglari"), and the other members of the Biglari Holdings board of directors-Phillip Cooley, Kenneth Cooper, James Mastrian, and Ruth Person (collectively, the "Board"). We affirm.[1]

         Issue

         [¶2] Shareholders raise one issue, which we restate as whether the trial court properly dismissed their complaint against Defendants.

         Facts

         [¶3] Biglari Holdings is a publicly-traded company incorporated in Indiana that, among other things, franchises and operates two restaurant chains-Western Sizzlin and Steak 'n Shake. S. Biglari is the CEO and chairman of the Board of Biglari Holdings. Cooley, Cooper, Mastrian, and Person are the remaining members of the Board.

         [¶4] The Lion Fund and the Lion Fund II (collectively, "the Lion Funds") are private limited partnerships that each own substantial shares of Biglari Holdings. In turn, Biglari Holdings is the majority limited partner of the Lion Funds. Biglari Capital Corp. ("Biglari Capital") is the general partner of the Lion Funds, and S. Biglari is the chairman, CEO, and sole owner of Biglari Capital.[2]

         [¶5] In 2011 and 2012, Biglari Holdings unsuccessfully sought to create a dual-class capital structure at Biglari Holdings, which required shareholder approval. The dual-class structure would have redesignated common stock as Class A and Class B common stock.

         [¶6] S. Biglari then sought to acquire voting control over Biglari Holdings. Through a series of complex transactions, Biglari Holdings contributed hundreds of millions of dollars in securities and cash to the Lion Funds in exchange for additional limited partnership interests in each of the Lion Funds. The Lion Funds then acquired additional common stock of Biglari Holdings. As a result of these transactions, S. Biglari, through his control of Biglari Capital and the Lion Funds, gained control of 54.7% of the Biglari Holdings common shares.

         [¶7] Having gained voting control over Biglari Holdings, S. Biglari then sought to implement the dual class capital structure previously rejected by the shareholders. On December 21, 2017, Biglari Holdings entered into an agreement ("Reclassification Agreement") whereby Biglari Holdings would merge with BH Merger Company to create NBHSA, Inc. Upon completion of the merger, NBHSA would be renamed Biglari Holdings, Inc. ("New Biglari Holdings"). Under the Reclassification Agreement, shareholders of Biglari Holdings would become shareholders of New Biglari Holdings. Biglari Holdings would be a wholly-owned subsidiary of New Biglari Holdings and renamed OBH, Inc.

         [¶8] For every ten shares of common stock in Biglari Holdings, shareholders would receive ten shares of Class B stock and one share of Class A stock of New Biglari Holdings. Owners of Class B stock would have no voting rights. The purpose of this change was "[t]o sustain the dual goal of maintaining the founder's control and of preserving the option of issuing equity in acquisitions, financings or for other purposes." Appellants' App. Vol. II p. 42. Minority shareholders voiced significant disapproval of the merger plan.

         [¶9] On January 29, 2018, Hipps filed a class action complaint in Hamilton County that sought to enjoin the Reclassification, and Defendants removed the litigation to federal court. Hipps also filed a second state court action, which was removed to federal court. While Hipps' actions were pending in federal court, Protz filed a class action complaint in Hamilton County on March 26, 2018. Protz sought injunctive relief to prevent the merger. In April 2018, the parties reached an agreement whereby: (1) Defendants consented to remand to Hamilton County from federal court; and (2) Shareholders abandoned their request for injunctive relief, agreed to consolidate the actions, and agreed to challenge the Reclassification after it was consummated. The Reclassification plan was finalized on April 30, 2018.

         [¶10] On May 17, 2018, Shareholders filed a consolidated class action complaint against Defendants. The Shareholders' main complaints relate to: (1) the shares acquired by the Lion Funds and the treatment of these shares as voting stock, which Shareholders contend violates the Indiana Business Corporations Law ("IBCL" or "BCL"); and (2) the consummation of the Reclassification Agreement. According to Shareholders, the voting and alleged improper treatment of the Lion Funds shares allowed S. Biglari to gain voting control of Biglari Holdings and consummate the Reclassification Agreement.

         [¶11] The complaint included the following counts:

(1) Count I, a claim against S. Biglari, as Biglari Holdings' controlling shareholder, for breach of fiduciary duty "by exploiting his position of control to cause [Biglari Holdings] to enter into the Reclassification on terms unfairly beneficial to himself and detrimental to the Class";
(2) Count II, a claim against the Board for breach of fiduciary duty "by, among other things, facilitating and approving the Reclassification, which only serves to benefit S. Biglari at the expense of Plaintiffs and the Class";
(3)Count III, a claim against Biglari Holdings and the Board for breach of the company's articles of incorporation by violating the IBCL by deeming shares acquired by the Lion Funds to be voting shares;
(4) Count IV, a claim against S. Biglari for unjust enrichment by maintaining his voting control "in perpetuity" through consummation of the Reclassification Agreement;
(5) Count V, a claim for declaratory relief against Biglari Holdings and the Board that the voting of the shares acquired by Lion Funds "and treatment of said shares as voting stock violated the IBCL" and the articles of incorporation; and
(6) Count VI, a claim for declaratory relief against Biglari Holdings, New Biglari Holdings, and BH Merger Company that the Reclassification Agreement was "invalid, void, voidable and/or unenforceable" because the Reclassification Agreement "is the product of breaches of fiduciary duty by S. Biglari and the other members of the Board."

         Appellants' App. Vol. II pp. 56-59.

         [¶12] Pursuant to Indiana Trial Rule 12(B)(6), Defendants filed a motion to dismiss the complaint with an attached exhibit. Shareholders filed a response brief with exhibits, and Defendants filed a reply brief in support of their motion to dismiss. After a hearing, the trial court summarily granted Defendants' motion to dismiss. Shareholders now appeal.

         Analysis

         [¶13] Shareholders appeal the trial court's grant of Defendants' motion to dismiss. Indiana Trial Rule 12(B)(6) allows a party to request dismissal for "[f]ailure to state a claim upon which relief can be granted . . . ." A motion to dismiss under Trial Rule 12(B)(6) "tests the legal sufficiency of the [plaintiffs'] claim, not the facts supporting it." Bellwether Properties, LLC v. Duke Energy Indiana, Inc., 87 N.E.3d 462, 466 (Ind. 2017) (citation omitted). Dismissals are improper under Trial Rule 12(B)(6) "'unless it appears to a certainty on the face of the complaint that the complaining party is not entitled to any relief.'" Id. (quoting State v. American Family Voices, Inc., 898 N.E.2d 293, 296 (Ind. 2008)). We review a Trial Rule 12(B)(6) dismissal "de novo, giving no deference to the trial court's decision." Id. "In reviewing the complaint, we take the alleged facts to be true and consider the allegations in the light most favorable to the nonmoving party, drawing every reasonable inference in that party's favor." Id. The dismissal of a complaint under Trial Rule 12(B)(6) "is seldom appropriate" because such dismissals "undermine the policy of deciding causes of action on their merits." BloomBank v. United Fid. Bank F.S.B., 113 N.E.3d 708, 720 (Ind.Ct.App. 2018), trans. denied.

         [¶14] Although not raised by the parties, we note that Indiana Trial Rule 12(B) provides:

If, on a motion, asserting the defense number (6), to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56. In such case, all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.

         [¶15] Here, both parties submitted matters outside of the pleading in arguing the motion to dismiss. Our Court has held:

when examination of the face of a complaint alone reveals that the plaintiff will not be entitled to relief under any set of circumstances, consideration of external materials aimed at substantiating or contradicting the complaint's factual allegations is irrelevant, because a fortiori the complaint fails to state a claim upon which relief can be granted under any factual scenario.

Dixon v. Siwy, 661 N.E.2d 600, 603 (Ind.Ct.App. 1996); see also Thomas v. Blackford Cty. Area Bd. of Zoning Appeals, 907 N.E.2d 988, 990 (Ind. 2009) ("If affidavits or other materials are attached to the 12(B)(6) motion, it is treated as one for summary judgment under Rule 56."). "In that instance, the trial court should exclude materials outside the pleadings which are submitted with a 12(B)(6) motion, rather than convert the motion into one for summary judgment, because the external materials are irrelevant to the motion." Id.

         [¶16] The trial court here did not exclude the evidence outside the pleadings, but there is no indication the extraneous materials played a part in the trial court's decision. See, e.g., Bd. of Commissioners of Union Cty. v. McGuinness, 80 N.E.3d 164, 167 (Ind. 2017) ("[I]t is apparent from the trial court's disposition of this motion that the designated affidavit played no part in its decision. Thus while it was error for the trial court to not formally exclude the affidavit in its order, that error was harmless."). At oral argument for this matter, both parties agreed that we should apply the motion to dismiss standard of review. As such, we address this matter under the motion to dismiss standard of review, base our decision solely upon the Shareholders' complaint, and exclude the extraneous materials submitted by the parties.

         [¶17] This appeal involves a direct action by shareholders of a publicly-held corporation. This type of action by shareholders was described by our Supreme Court in G&N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 234 (Ind. 2001):

A direct action is "[a] lawsuit to enforce a shareholder's rights against a corporation." Black's Law Dictionary 472 (7th ed. 1999). This action may be brought in the name of the shareholder "to redress an injury sustained by, or enforce a duty owed to, the holder." 2 Principles of Corporate Governance § 7.01, at 17 (A.L.I. 1994). Direct actions are typically appropriate to enforce the right to vote, to compel dividends, to prevent oppression or fraud against minority shareholders, to inspect corporate books, and to compel shareholder meetings.[3] Id.

         In this direct action, the Shareholders' claims pertain to: (1) the voting of the Lion Funds shares; and (2) the Reclassification Agreement, which implemented the merger. We must determine whether the trial court properly dismissed each of the Shareholders' claims.

         I. Counts III and V - Voting of the Lion Funds Shares

         [¶18] Because many of the Shareholders' arguments depend upon whether the Lion Funds properly voted their shares in Biglari Holdings, we begin by addressing this issue. In Count III, Shareholders allege that Biglari Holdings and the Board breached the company's articles of incorporation and violated the IBCL by "reacquir[ing] hundreds of thousands of shares of its common stock through the Lion Funds" and deeming those shares "legally outstanding" and eligible for voting. Appellants' App. Vol. II p. 57. Similarly, in Count V, Shareholders request declaratory relief that "the voting of the Reacquired Shares and treatment of said shares as voting stock violated the IBCL and the Charter." Id. at 58.

         [¶19] In the transactions at issue, Biglari Holdings used company funds to purchase additional shares of the Lion Funds. The Lion Funds then used the funds to purchase additional shares of Biglari Holdings. This system allowed S. Biglari, who is the sole owner of Biglari Capital-the general partner of the Lion Funds-to gain control over 54.7% of the voting stock of Biglari Holdings.

         [¶20] Shareholders argue the Lion Funds' voting of these shares violated two IBCL statutes-Indiana Code Section 23-1-27-2(a) and Indiana Code Section 23-1-30-2. Shareholders also contend that, "[e]ven if the trial court believed that these statutory provisions did not independently prohibit S. Biglari's misconduct, it should have read these provisions in conjunction to fulfill the legislative intent underlying the IBCL as a whole." Appellants' Br. p. 35.

         [¶21] Shareholders' arguments require that we interpret these statutes. The first step in statutory interpretation is determining if the legislature has spoken clearly and unambiguously on the point in question. Siwinski v. Town of Ogden Dunes, 949 N.E.2d 825, 828 (Ind. 2011). If a statute is clear and unambiguous on its face, no room exists for judicial construction. Id. "We are not at liberty to construe a facially unambiguous statute." Id. "However, if a statute contains ambiguity that allows for more than one interpretation, it opens itself up to judicial construction to effect the legislative intent." Id.

         A. ...


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