Taylor v. AIA Services Corp., Docket No. 36916
Idaho Supreme Court
September 7, 2011
Opinion Author: Burdick, Chief Justice
Concurring in Opinion: Eismann, Justice; Trout, Justice Pro Tem; Hosack, Justice Pro Tem
Concurring and Specially Concurring in Part: J. Jones, Justice
If a Stock Redemption Agreement violates a statutory restriction on the source of funds, is the Agreement unenforceable?
Summary of Ruling:
In 1995, Appellant Taylor – a majority shareholder of Respondent AIA Services Corp. (“AIA Services”) – and AIA Services entered into a Stock Redemption Agreement. After AIA Services failed to make the payments due under the Agreement, Taylor sued AIA Services, among others, seeking to recover the amounts owed. The district court granted partial summary judgment in favor of Respondents, holding that the Stock Redemption Agreement was unenforceable under the 1995 version of I.C. § 30-1-6. Taylor appealed, asserting numerous arguments about why the Stock Redemption Agreement was enforceable.
The Court affirmed the district court’s ruling that the Stock Redemption Agreement violated the 1995 version of I.C. § 30-1-6 (which is no longer in effect but governs the agreement at issue in this case) because AIA Services had no earned surplus and was not authorized to use capital surplus to redeem the shares. (The Court’s analysis of this issue is partially summarized here.) Then, the Court addressed the implication of that violation.
First, citing its precedent, the Court stated the general rule that a contract that “rests on illegal consideration” is illegal. Here, where the corporation’s consideration under the Stock Purchase Agreement violated I.C. § 30-1-6, the Stock Purchase Agreement was illegal.
Next, the Court turned to the implications of the Stock Purchase Agreement’s illegality. Under the general rule, “the court will leave the parties as it finds them and refuse to enforce the contract.” Therefore, under the general rule, the Agreement would be unenforceable.
Idaho recognizes several exceptions to the general rule, however, pursuant to which an illegal contract will nonetheless be enforced:
- “when public policy requires that some relief be granted”
- “when parties are not ‘in pari delicto’ or when fraud, undue influence or duress are present relief may be granted to the innocent party”
- when an insured signs a void insurance contract and “unenforceability would ‘defeat the purpose for which a statute has been enacted’”
Here, Appellant asserted numerous arguments in favor of enforcing the illegal agreement, which the Court rejected in turn. First, the Court rejected Appellant’s argument that the shareholders had acquiesced to the Agreement for over twelve years because waiver and estoppel cannot validate an illegal contract. Second, the Court rejected Appellant’s argument that he was “justifiably ignorant” and not “in pari delicto” because Appellant, as majority shareholder, CEO, and Chairman of the Board, was not justifiably ignorant about how the corporation would pay to redeem his shares. Third, the Court rejected Appellant’s argument that he was fraudulently induced to enter the Agreement by the corporation’s general counsel, which issued an opinion letter that the Agreement was legal, because an opinion may only form the basis of fraud if coupled with an intent to mislead, of which there was no evidence. Fourth, the Court rejected Appellant’s argument that the Agreement’s violation of I.C. § 30-1-6 was merely “technical” because the use of capital funds to redeem shares is precisely what the statute prohibits. Finally, the Court rejected Appellant’s argument that the Agreement should be enforced as a matter of public policy because, to the contrary, the Agreement “implicated concerns that it was intended to favor [Appellant] at the expense of minority shareholders and creditors.”
Justice J. Jones specially concurred in the Court’s analysis of this issue. Citing with approval Minnelusa Co. v. A.G. Andrikopoulos, 929 P.2d 1321 (Colo. 1996), he limited his concurrence as follows:
I would suggest that the Court’s opinion not be taken, without some caution, as precedent for the proposition that any contract made in contravention of any corporate governance statute will be held to be void and unenforceable. As indicated in Minnelusa, careful consideration must be devoted to the particular statute in question—to ensure that it embodies an important public policy—before a contract made in contravention of it is declared to be void and unenforceable.
Link to Opinion:
Link to Court:
Campbell, Bissell & Kirby, PLLC
Roderick C. Bond Argued.
For Respondents AIA Services Corporation et al.:
Hawley, Troxell, Ennis & Hawley
D. John Ashby Argued.
For Respondents Connie Taylor et al.:
Risley Law Office, PLLC
David R. Risley Argued.
Wendy Gerwick Couture