Cookies Food Products v. Lakes Warehouse

430 N.W.2d 447 (1988)

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Nature of the Case

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Facts

Cookies was founded in 1975 to produce and distribute its original barbecue sauce. After a year, the company was in the slumps. D was one of its shareholders (200 shares) and an owner of auto parts business, Speed's Automotive, and Lake, a company that distributed auto parts to Speeds. Cookies' board approached D with the idea of distributing the sauce for 20% under wholesale price, which he could then resell at full wholesale price. D agreed, In May 1977, the agreement was formalized by executing an exclusive distribution agreement with Lakes. Under the agreement, Cookies was responsible only for preparing the sauce. Lakes assumed all costs of warehousing, marketing, sales, delivery, promotion, and advertising. Cookies retained the right to fix the sales price of its product and agreed to pay Lakes 30% of its gross sales for these services. Under this agreement, the sales went sky high. In 1979, the board amended the original agreement to give Lakes an additional 2% of gross sales to cover the freight costs for the ever-expanding market. Then D was allowed to make long-term advertising commitments. Also, the board amended the agreement to allow P Corp, to cancel the agreement if D dies. In 1981, the original owner of P offered to sell his shares. The Corp declined, but D offered $10 per share, twice the original price. Subsequent to this, he became the majority shareholder (53%). After this D replaced 4 members of five members board with members, he selected. Subsequent changes made in the corporation under D's leadership formed the basis for this lawsuit. First: the board extended the term of exclusive distribution and extended the scope of services. Second: D moved from his role as a director to take an additional role in product development. This created a dispute over royalties that D was to receive. D's role in product development began in 1982 when P diversified its product to include taco sauce. Under the royalty plan, the board paid D a flat rate per case. Third: since 1982, the board twice approved additional compensation for D: 1) payment of $1000 per month consultant fee in lieu of salary, 2) the board amended the original agreement to give D additional 2% to allow sales promotion outside Iowa. As a result, by 1986 Cookies regularly shipped products to several states through the country. The lower court concluded that D did not breach his duty to Corporation or its shareholders and D's compensation was fair. On appeal, Ps challenge the district court's allocation of the burden of proof with regard to the four claims of self-dealing; the standard employed by the court to determine whether D's self-dealing was fair and reasonable to Cookies; the finding that any self-dealing by D was done in good faith and with honesty and fairness and the finding that D breached no duty to disclose crucial facts to Cookies' board before it completed deliberations on D's self-dealing transaction and the district court's denial of restitution and other equitable remedies as co compensation for D's alleged breach of his duty of loyalty.