Simmons v. Miller

Present: Carrico, C.J., Lacy, Keenan, Koontz, Kinser, and

Lemons, JJ.

CALVERT W. SIMMONS

v. Record No. 000785 OPINION BY JUSTICE DONALD W. LEMONS

April 20, 2001

MARGARET C. MILLER, ET AL.

FROM THE CIRCUIT COURT OF FAIRFAX COUNTY

Robert W. Wooldridge, Jr., Judge

In this appeal, we consider whether Virginia law permits

a minority shareholder in a closely held corporation to assert

individual claims, distinct from derivative claims, on behalf

of a corporation against a corporate officer or director for

breach of fiduciary duty. We also consider the trial court’s

ruling that there was insufficient evidence to sustain a claim

of statutory conspiracy pursuant to Code §§ 18.2-499 and -500

and its ruling that there was insufficient evidence of

proximate causation between the harm to the corporation and

certain alleged legal malpractice of corporate counsel.

Additionally, we consider cross-error assigned to the trial

court’s refusal to set aside the jury’s verdict on a

derivative claim for breach of fiduciary duty and conversion.

Finally, we examine the trial court’s refusal to strike the

jury’s verdict concerning a breach of an employment agreement

on the ground that the restrictive covenant in the agreement

was unnecessary to protect the employer, unduly restrictive of

the employee’s rights, and contrary to public policy.

I. Facts

Recitation of detailed facts is necessary to analysis of

this unique case. Margaret C. Miller (“Miller”) was the sole

officer, director, and shareholder of Las Palmas Tobacco, Ltd.

(“Las Palmas”), a Virginia corporation that had exclusive

rights to import and distribute Profesor Sila brand cigars on

the “east coast of the United States of America.” On June 26,

1996, Miller and Calvert W. Simmons (“Simmons”) entered into a

Stock Subscription Agreement giving Simmons a 30% ownership

interest in Las Palmas in exchange for $100 and Simmons’

guarantee of a $100,000 letter of credit issued for the

benefit of Las Palmas. According to the agreement, Simmons

was required to “cause Virginia Commerce Bank to expeditiously

issue an irrevocable Letter of Credit for the benefit of Las

Palmas to [Profesor Sila] Cigar Factor[y] in Las Palmas, Spain

for the sum of $100,000. . . . The Letter of Credit shall be

utilized by Las Palmas to purchase product from [Professor

Sila] on terms.” Additionally, in a Shareholders’ Agreement,

Miller and Simmons agreed that “at a future date, they w[ould]

fix a value for their shares and enter into a Cross-Purchase

Agreement.”

Miller testified that in early December, 1996, she

presented Simmons with a cross-purchase agreement and later,

in January, 1997, Miller and Maria M. Kear (“Kear”), an

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attorney licensed to practice in Virginia, went to Simmons’

office to “negotiate the terms of the cross-purchase

agreement.” Kear testified that she represented Miller at

this meeting and that she told Simmons that she was not

representing Las Palmas. Simmons testified that he felt that

Kear was being “very adversarial in the discussions” and asked

her to leave the meeting. Upon Kear’s departure, Simmons and

Miller were unable to agree on the valuation of Las Palmas.

On January 15, 1997, Miller sent a letter to Simmons that

included an offer of $13,290.59 to buy his 30% share of Las

Palmas. Simmons responded with a letter dated January 23,

1997 in which he stated that he did not wish to sell his

shares for $13,290.59 because he felt they were “worth

considerably more than that.”

On September 29, 1997, Simmons sent Miller a letter in

which, pursuant to Code § 13.1-771, he demanded inspection of

the accounting records of Las Palmas. The Las Palmas

financial records were prepared and maintained by Jeanne M.

Webb (“Webb”), an independent contractor. Simmons stated in

his letter:

In spite of my numerous phone calls, you have

failed and refused to communicate with me since

April 1, 1997. Currently, I do not have any

idea how Las Palmas is faring. In addition, it

has come to my attention that Las Palmas may

have transferred assets to another entity

without any consideration whatsoever.

3

In a letter dated October 3, 1997, Miller denied that Simmons

had the right to inspect the financial records and denied that

Las Palmas had transferred assets to another entity.

After being denied access to the Las Palmas financial

records, Simmons requested that his lawyer, Gary W. Lonergan

(“Lonergan”), obtain an explanation from Kear. In October of

1997, Lonergan called Kear to request the financial records.

Kear denied that Las Palmas’ assets had been transferred to

another entity. Kear testified that:

Lonergan . . . told me that . . . Mr. Simmons

had been told that Las Palmas Tobacco Limited

has been shut down and the assets had been

moved to another company. He asked me what I

knew about that. And I told him I didn’t know

anything about it. And he said well, that’s

what we’ve been told and I’m trying to get

financial records, and I told him I would call

Miss Miller and ask if the company had been

closed down. And I did that and I called him

back and I told him Miss Miller said the

company had not been closed down.

Miller told Kear that the financial documents Lonergan

requested were with Anatole G. Richman (“Richman”), who was

performing an evaluation of the company. When Kear called

Richman, he told her that he was not finished with the

evaluation because Webb had not completed her work with the

financial records.

Lonergan wrote Kear on October 23, 1997 indicating that

Simmons had been told by the bookkeeper that “[s]he has no

4

financial records [and] Las Palmas has been ‘wrapped up.’ ”

The letter also stated:

I believe that an explanation is in order.

Furthermore, there is no doubt that Mr. Simmons

is entitled to see the financial records of Las

Palmas: either Maggie Miller has them or Anatole

C. Richmond [sic] has them. Mr. Simmons and I

would like to see them by the close of business

on Friday, October 31, 1997.

Five days later Kear responded in a letter:

[P]lease be advised that I disagree “that an

explanation is in order.”

As I advised you on October 14, 1997, when

the financial records and the corollary

business evaluation are complete, I will have

them delivered to you; I have not wavered from

my position. Mr. Richman’s assistant advised

me yesterday that they are not finished with

the evaluation and Maggie Miller advised me

yesterday that Jeanne Webb has not completed

the financial records. Therefore there is

nothing for you to review at this time. I do,

however, hope to have these documents within

the next two (2) weeks.

On January 27, 1998, Lonergan again sent Kear a letter

requesting access to the financial records. Lonergan

testified that within a day or two of sending the letter, he

received a financial report prepared by Richman and dated

January 28, 1998. The report concerned the “value of Las

Palmas . . . as of February 10, 1997 [and] . . . is based on

the assumption that the Company has ceased operations and is

not a going concern.”

5

Miller testified that on February 9, 1997, Las Palmas

ceased doing business. According to Miller, Las Palmas

terminated its business because its supplier, Profesor Sila,

refused to ship any more cigars. Miller testified that Dr.

Nader Bayzid (“Dr. Bayzid”), the owner of Profesor Sila,

complained that an acceptable letter of credit had not been

received. Thereafter, Dr. Bayzid wrote her indicating that he

was not going to ship further products and that he intended to

start a new company in the United States.

Kear and Miller were friends who first met in 1985. Each

is godmother to one of the other’s children and Miller

previously had been employed as a clerical assistant in Kear’s

law office. Furthermore, Kear’s office was in the same

building as the office of Las Palmas and Kear visited Miller

there.

Kear admitted that she prepared and signed the articles

of incorporation for Las Palmas and was reimbursed for the

incorporation fee by Las Palmas. However, Kear stated that

other than the articles of incorporation and a collection

matter in February of 1998, she never did any work for Las

Palmas. Kear further testified that, in the summer of 1996,

Miller told her that there was an additional person (Simmons)

involved in ownership of Las Palmas and that her new partner

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said that the attorney for the company had to be someone he

selected.

Kear also testified that sometime after January 10, 1997,

Miller asked her to file articles of organization for Las

Palmas Tobacco International, L.L.C. (“International”). On

February 6, 1997, Kear mailed the articles of organization to

the State Corporation Commission and, on February 10, 1997,

the SCC issued a certificate of organization for “Las Palmas

Tobacco International, L.L.C.” An unsigned “Limited Liability

Company Operating Agreement” listing Miller and Profesor Sila

as equal owners was maintained in Kear’s files. Kear was the

initial registered agent and organizer of the corporation.

According to Kear, Miller told her:

[S]he was going to use the international

company to import a lower brand cigar that was

being made in the Dominican [Republic and]

. . . they would sell the cheap ones and it was

going to be international business . . . they

were going to have their high end domestic

sales with Limited [meaning Las Palmas Tobacco,

Ltd.] and their low end international with

International [meaning Las Palmas Tobacco

International, L.L.C.].

Kear admitted that she never asked why Las Palmas could not

serve this purpose, nor did she ever inquire why Simmons did

not have an ownership interest in International.

7

Kear also admitted that she edited a letter Miller

drafted to Simmons in late February of 1997. Among other

edits, the following language was removed by Kear:

You have made it extremely clear by holding out

for some fairy-tale return on your no-risk, no

liability, completely passive role in Las

Palmas Tobacco that you do not place any value

on the business relationships that I have

forged with my supplier nor my role as sole

employee of this entity. I wonder what might

happen if I resign from this concern, liquidate

the corporation and seek other opportunities.

Karim Bayzid testified that when he came to work for

International in January of 1997, he saw the nameplate for Las

Palmas on the door of the office. Additionally, checks

payable to Karim Bayzid were written on the account of Las

Palmas. Webb testified that she was not aware of any

adjustments on the books of Las Palmas that reflected payments

received from International for use of the office space,

furniture, or equipment. Miller’s testimony revealed that Las

Palmas’ sole supplier of cigars became the sole supplier for

International and that International sold cigars to some of

the customers who had previously purchased from Las Palmas.

II. Proceedings Below

This appeal arises out of a lawsuit filed by Simmons

against Miller and Kear. In a sixteen count motion for

8

judgment, 1 Simmons alleged that Miller and Kear secretly and

wrongfully replaced Las Palmas with a different corporation,

International.

In addition to Miller and Kear, Simmons named Karim O.

Bayzid, Dr. Nader Bayzid, Profesor Sila Cigars, and Profesor

Sila, L.C., as defendants 2 in various counts of the motion for

judgment. None of these additional defendants except Karim

Bayzid responded to the motion for judgment and default

judgment was entered as to them. The trial court granted

Karim Bayzid’s motion to strike on all counts against him and

no matters on appeal involve him. Consequently, the appellees

in this case are only Miller and Kear.

Simmons asserted individual claims against Miller and

Kear as follows:

Count 1: Conspiracy to Injure Simmons in his Trade,

Business or Profession, Code §§ 18.2-499 and 18.2-500, against

Miller and Kear.

Count 2: Breach of Fiduciary Duty against Miller only.

1

A derivative action is an action in equity and may not

be brought on the law side of the court. However, since

neither party nor the trial court recognized this deficiency,

any objection is now waived. Rule 5:25. Code § 8.01-270

provides in part that, “[n]o case shall be dismissed simply

because it was brought on the wrong side of the court.”

2

Karim Bayzid is employed by International. Dr. Bayzid,

Karim Bayzid’s father, is the owner and operator of Profesor

Sila, L.C., which supplied cigars to Las Palmas and

International.

9

Count 3: Conspiracy to Induce Breach of Fiduciary Duty

against Miller and Kear.

Count 4: Fraud and Deceit against Miller and Kear.

Count 5: Conspiracy to Commit Fraud against Miller and

Kear.

Simmons asserted derivative claims on behalf of Las

Palmas against Miller and Kear as follows:

Count 6: Breach of the Employment Agreement against

Miller only.

Count 7: Tortious Interference with the Employment

Agreement against Kear only.

Count 8: Conspiracy to Induce Breach of the Employment

Agreement against Miller and Kear.

Count 9: Tortious Interference with Las Palmas’

Contracts and Business Relations with its Customers and

Distributors against Miller only.

Count 10: Conspiracy to Interfere with Las Palmas’

Contracts and Business Relations with its Customers and

Distributors against Miller and Kear.

Count 11: Tortious Interference with Las Palmas’

Contracts and Business Relationship with Profesor Sila Cigars

against Miller only.

Count 12: Unlawful Conversion against Miller only.

10

Count 13: Conspiracy to Injure Las Palmas, Code §§ 18.2-

499 and 18.2-500, against Miller and Kear.

Count 14: Breach of Fiduciary Duty against Miller only.

Count 15: Conspiracy to Induce Breach of Fiduciary Duty

against Miller and Kear.

Count 16: Legal Malpractice against Kear only.

At the conclusion of plaintiff’s case in chief, Miller’s

and Kear’s motions to strike were granted as to Counts 4, 5,

7, and 8. The jury returned a verdict against Miller on

Counts 1, 2, 3, 6, 9, 10, 11, 12, 13, 14, and 15. The jury

returned a verdict against Kear on Counts 1, 13, and 16.

After post-trial motions, the court struck the jury’s verdict

against Miller on Counts 1, 2, 3, 9, 10, 11, 13, and 15 and

struck the jury’s verdict against Kear on Counts 1, 13, and

16. In addition to default judgments entered against Dr.

Bayzid, Profesor Sila Cigars, and Profesor Sila, L.C., the

trial court’s final order dismissed claims against Kear and

Karim Bayzid and granted judgment to Simmons in his derivative

capacity on behalf of Las Palmas against Miller only.

III. Issues On Appeal

The issues on appeal have been considerably narrowed from

those presented at trial. Simmons contends that the trial

court erred in granting Miller’s motion to strike his

individual claim for breach of fiduciary duty and Kear’s and

11

Miller’s motions to strike his individual claim for statutory

conspiracy. Simmons asserts that a minority shareholder in a

closely held corporation may maintain an individual claim for

these causes of action. In addition, Simmons argues that the

trial court erred in granting Kear’s and Miller’s motions to

strike his derivative claim of statutory conspiracy because he

contends that he presented sufficient evidence that they

conspired to injure Las Palmas in violation of Code §§ 18.2-

499 and -500. Finally, Simmons contends that the trial court

erred in granting Kear’s motion to strike his derivative claim

of legal malpractice because he presented sufficient evidence

that Kear’s negligence proximately caused injury to Las

Palmas.

Kear assigns no cross-error and urges this Court to

affirm the rulings of the trial court. Miller assigns three

cross-errors. First, Miller contends that the trial court

erred in failing to strike Simmons’ derivative claim of breach

of fiduciary duty on the ground that there was insufficient

evidence to support that claim. Miller also claims that the

trial court erred in denying her motion to strike the breach

of the employment agreement claim on the ground that the non-

compete clause was contrary to public policy, unnecessary to

protect the employer, and unduly restrictive of the employee’s

rights. Finally, Miller argues that the trial court erred in

12

failing to strike the conversion claim because the evidence

was insufficient to support that claim.

IV. Standard of Review

We review the trial court’s decision to grant or deny the

motions to strike the evidence and set aside the jury’s

verdict in accordance with well-established principles.

Where the trial court has set aside a jury

verdict, that verdict is not entitled to the

same weight as a verdict which has been

approved by the trial court. Nevertheless,

this Court will accord the party who received

the verdict the benefit of all substantial

conflict in the evidence, as well as all

reasonable inferences that could be drawn

therefrom. However, if a jury necessarily has

reached its conclusions based on speculation

and conjecture, the plaintiff’s case fails.

O’Brien v. Everfast, Inc., 254 Va. 326, 330 491 S.E.2d 712,

714 (1997) (citations and internal quotation marks omitted).

V. Analysis

A. Breach of Fiduciary Duty

Simmons maintains that a shareholder in a closely held

corporation is not confined to a derivative action on behalf

of the corporation to redress claims against a corporate

officer or director for breach of fiduciary duty to the

corporation. Rather, Simmons contends that the shareholder

may sue individually and representatively, and if “double

recovery” results, the claimant shareholder should be

permitted to elect between remedies. The jury returned

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verdicts in favor of Simmons individually (Count 2) in the

amount of $10,000, and in his derivative capacity (Count 14)

in the amount of $10,000, against Miller for breach of

fiduciary duties. Noting that upholding both verdicts “would

constitute a penalty, not compensation,” the trial court

struck the jury verdict on the individual claim, finding “that

in Virginia, claims like those Simmons brought in this case

are cognizable as derivative, not individual, actions.”

A derivative action is an equitable proceeding in which a

shareholder asserts, on behalf of the corporation, a claim

that belongs to the corporation rather than the shareholder.

Rales v. Blasband, 634 A.2d 927, 932 (Del. 1993). Derivative

suits play an “important role in protecting shareholders of

corporations from the designing schemes and wiles of insiders

who are willing to betray their company’s interests in order

to enrich themselves.” Surowitz v. Hilton Hotels Corp., 383

U.S. 363, 371 (1966). See also Brown v. Bedford City Land &

Improvement Co., 91 Va. 31, 38, 20 S.E. 968, 970 (1895).

The overwhelming majority rule is that an action for

injuries to a corporation cannot be maintained by a

shareholder on an individual basis and must be brought

derivatively. See Crocker v. Fed. Deposit Ins. Corp., 826

F.2d 347, 349 (5th Cir. 1987); Cowin v. Bresler, 741 F.2d 410,

414 (D.C. Cir. 1984); Lewis v. Chiles, 719 F.2d 1044, 1049

14

(9th Cir. 1983); Lewis v. S. L. & E., Inc., 629 F.2d 764, 768

n. 10 (2nd Cir. 1980); Brown v. Presbyterian Ministers Fund,

484 F.2d 998, 1005 (3rd Cir. 1973); Fifty States Management

Corp. v. Niagara Permanent Savings & Loan Ass’n, 58 A.D.2d

177, 179 (N.Y. App. Div. 1977); Landstrom v. Shaver, 561

N.W.2d 1, 12 (S.D. 1997); Rose v. Schantz, 201 N.W.2d 593, 598

(Wis. 1972).

The reasons underlying the general rule are

that 1) it prevents a multiplicity of lawsuits

by shareholders; 2) it protects corporate

creditors by putting the proceeds of the

recovery back in the corporation; 3) it

protects the interests of all shareholders by

increasing the value of their shares, instead

of allowing a recovery by one shareholder to

prejudice the rights of others not a party to

the suit; and 4) it adequately compensates the

injured shareholder by increasing the value of

his shares.

Thomas v. Dickson, 301 S.E.2d 49, 51 (Ga. 1983).

As one leading commentator has noted:

A shareholder ordinarily cannot, as an

individual as distinguished from a

representative of the corporation, sue

directors or other corporate officers for

mismanagement, negligence or the like, on a

cause of action which belongs to the

corporation. The remedial rights of minority

shareholders with respect to wrongs committed

against the corporation by the officers and

directors in the management of corporate

affairs are derivative rights and any action

taken by the shareholders to redress such

wrongs must be for the benefit of the

corporation.

15

12B William M. Fletcher, Cyclopedia of the law of Private

Corporations § 5924, at 497-99 (perm. ed. 2000 rev. vol.)

(citations and footnotes omitted). See also, 1 F. Hodge

O’Neal, Close Corporations § 1.02 (1971, updated 1994).

Recognizing the general rule, Simmons, nonetheless, urges

the adoption of a closely held corporation exception

permitting maintenance of an individual claim for breach of

fiduciary duties under limited circumstances. In Coastal

Pharmaceutical Co. v. Goldman, 213 Va. 831, 837, 195 S.E.2d

848, 853 (1973), this Court noted:

[W]e are aware of the several definitions of a

“close corporation” written by various scholars

on and off the bench, [but] . . . [w]e fear the

most precise definition may be imperfect to

every occasion, and we find it unnecessary to

choose among the scholars or to write a hard

and fast definition of our own.

While it is also unnecessary in this case to write such a

definition because the parties agree that Las Palmas is a

closely held corporation, we note that this corporation has a

small number of shareholders with no active trading market for

their shares, and substantial majority stockholder

participation in the management, direction, and operations of

the corporation. See, e.g., Donahue v. Rodd Electrotype Co.

328 N.E.2d 505, 511 (Mass. 1975); see Masinter v. WEBCO Co.,

262 S.E.2d 433, 435 (W.Va. 1980).

16

A number of states permit an individual claim under the

following principle advocated by the American Law Institute:

In the case of a closely held corporation

[§ 1.06], the court in its discretion may treat

an action raising derivative claims as a direct

action, exempt it from those restrictions and

defenses applicable only to derivative actions,

and order an individual recovery, if it finds

that to do so will not (i) unfairly expose the

corporation or the defendants to a multiplicity

of actions, (ii) materially prejudice the

interests of creditors of the corporation, or

(iii) interfere with a fair distribution of the

recovery among all interested persons.

2 American Law Institute, Principles of Corporate Governance:

Analysis and Recommendations § 7.01(d), pg. 17.

The rationale for the proposed exception appears to be

based upon concerns that derivative claims inure to the

benefit of all shareholders, including, in some cases, those

who have engaged in wrongdoing. Additionally, several courts

have suggested that closely held corporations, in some cases,

function more like a partnership than a corporate entity. See

Galbreath v. Scott, 433 So.2d 454, 457 (Ala. 1983); Barth v.

Barth, 659 N.E.2d 559, 562 (Ind. 1995); Donahue, 328 N.E.2d at

512; Meiselman v. Meiselman, 289, 307 S.E.2d 551, 557 (N.C.

1983).

Despite gaining some judicial acceptance over the past

decade, the closely held corporation exception is not the

majority rule and has been subject to criticism. Delaware,

17

for example, has yet to embrace the concept of a direct

shareholder action in a closely held corporation. In Bagdon

v. Bridgestone/Firestone, Inc., 916 F.2d 379, 384 (7th Cir.

1990), the Seventh Circuit noted that under Delaware law a

claim that a majority shareholder established a competing

business should have been brought as a derivative suit rather

than a direct one. The Court noted that, “[c]ommercial rules

should be predictable; this objective is best served by

treating corporations as what they are, allowing the investors

and other participants to vary the rules by contract if they

think deviations are warranted.” Id.

We decline to adopt a closely held corporation exception

to the rule requiring that suits for breach of fiduciary duty

against officers and directors must be brought derivatively on

behalf of the corporation and not as individual shareholder

claims. Adherence to the general rule without this proposed

exception prevents multiplicity of lawsuits by shareholders.

A recovery by the corporation protects all shareholders as

well as creditors. Finally, as expressed in Bagdon,

consistent application of commercial rules promotes

predictability. If shareholders and the corporation desire to

vary commercial rules by contract, they are free to do so.

Accordingly, the trial court did not err in striking the

jury’s verdict on Count 2.

18

Although striking the jury’s verdict on Simmons’

individual claim for breach of fiduciary duty, the trial court

denied Miller’s motion to strike the jury’s verdict on

Simmons’ derivative claim for breach of fiduciary duty.

Miller asserts that she was entitled to the benefit of the

statutory business judgment rule 3 codified at Code § 13.1-690,

which provides:

A. A director shall discharge his duties

as a director, including his duties as a

member of a committee, in accordance with his

good faith business judgment of the best

interests of the corporation.

B. Unless he has knowledge or

information concerning the matter in question

that makes reliance unwarranted, a director

is entitled to rely on information, opinions,

reports or statements, including financial

statements and other financial data, if

prepared or presented by:

1. One or more officers or employees of the

corporation whom the director believes, in good

3

Miller was sued in her capacity as “a director, officer

and majority shareholder.” By its express terms Code § 13.1-

690 applies to directors only. As one commentator has noted,

“[t]he General Assembly elected not to enact a statutory

standard of conduct for officers. See Revised Model Act

§ 8.42. As a result, development of the standard of conduct

for officers will be left to the courts.” Allen C. Goolsby,

Virginia Corporation Law and Practice § 9.7, n.62. However,

in this case, the jury instruction on the business judgment

rule was given without objection and made no distinction

between Miller’s various roles. It became the law of the

case. See Rice v. Charles, 260 Va. 157, 169, 532 S.E.2d 318,

325 (2000). Additionally, on appeal, Simmons does not argue

any theory of liability based upon Miller’s status as majority

shareholder.

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faith, to be reliable and competent in the

matters presented;

2. Legal counsel, public accountants, or

other persons as to matters the director

believes, in good faith, are within the person’s

professional or expert competence; or

3. A committee of the board of directors of

which he is not a member if the director

believes, in good faith, that the committee

merits confidence.

C. A director is not liable for any action

taken as a director, or any failure to take any

action, if he performed the duties of his office

in compliance with this section.

D. A person alleging a violation of this

section has the burden of proving the violation.

Code § 13.1-690 applies to the “discharge [of] duties as

a director,” and makes no distinction between duties of care

and loyalty. We recognized in Willard v. Moneta Building

Supply, Inc., 258 Va. 140, 151, 515 S.E.2d 277, 284 (1999)

that “Code § 13.1-690(A) does not abrogate the common law

duties of a director.” However, the protection of § 13.1-

690(C) applies only to acts “taken as a director, or any

failure to take any action,” and is confined to the exercise

of business judgment on behalf of the corporation. When the

acts in question do not meet these criteria, Code § 13.1-690

does not apply.

The acts cited by Simmons as constituting Miller’s breach

of duty to Las Palmas include: “secretly organizing Las Palmas

20

International/Profesor Sila.” Clearly, the organization of

International, a competitor, was not a corporate act of Las

Palmas. In taking this action, Miller was not exercising

business judgment on behalf of Las Palmas. Although

implicating a common law duty of loyalty, this act does not

fall within the scope of Code § 13.1-690. Miller was not

entitled to protection under the statutory business judgment

rule.

The evidence viewed in the light most favorable to

Simmons amply supports the jury’s verdict that Miller breached

her duty of loyalty to Las Palmas. Accordingly, the trial

court did not err in refusing to set aside the jury’s verdict

on Simmons’ derivative claim for breach of fiduciary duty

against Miller.

B. Statutory Conspiracy under Code §§ 18.2-499 and -500.

The trial court set aside the jury’s verdict on Simmons’

individual claim of statutory conspiracy under Code §§ 18.2-

499 and -500, adopting the same reasoning that led to denial

of an individual claim for breach of fiduciary duty, namely

that a derivative action is the sole means of redress for

injury to the corporation. The trial court set aside the

jury’s verdict on Simmons’ derivative claim of statutory

conspiracy because the evidence was insufficient to support

the verdict. We need not reach the question concerning

21

maintenance of an individual claim for statutory conspiracy

because we agree with the trial court that the evidence was

insufficient to support the verdict, whether brought

individually or derivatively. 4

The trial judge did not indicate in his opinion letter

what deficiency in the evidence resulted in granting the

motion to strike the jury verdict. Code § 18.2-500 provides

civil damages for violation of Code § 18.2-499. In pertinent

part, Code § 18.2-499 permits such liability where “[a]ny two

or more persons . . . combine, associate, agree, mutually

undertake or concert together for the purpose of (i) willfully

and maliciously injuring another in his reputation, trade,

business or profession by any means whatever.” In order to

sustain a claim for statutory conspiracy under Code §§ 18.2-

499 and -500, the plaintiff must prove by clear and convincing

evidence that the conspirators acted with legal malice, that

is, proof that the defendant acted intentionally,

purposefully, and without lawful justification. See Feddeman

& Co. v. Langan Assoc., 260 Va. 35, 44, 530 S.E.2d 668, 673

(2000); Tazewell Oil Co. v. United Virginia Bank, 243 Va. 94,

4

On appeal, Simmons’ allegations of statutory conspiracy,

whether individual or derivative, involve only conduct of

Miller and Kear. Neither Miller nor Kear argues that an

attorney-client relationship existed between them, making it

legally impossible for them to be found liable for statutory

conspiracy; consequently, we do not reach that issue.

22

108, 413 S.E.2d 611, 619 (1992). Code §§ 18.2-499 and -500 do

not require a plaintiff to prove that a conspirator’s primary

and overriding purpose is to injure another in his trade or

business. Advanced Marine Enterprises v. PRC Inc., 256 Va.

106, 117, 501 S.E.2d 148, 154 (1998); Commercial Business

Systems, Inc. v. BellSouth Services, Inc., 249 Va. 39, 47, 453

S.E.2d 261, 267 (1995).

Clearly, the evidence is sufficient as to Miller to

satisfy the requirement of showing that she acted

intentionally, purposefully, and without lawful justification.

But under Code §§ 18.2-499 and -500, it is also necessary to

prove that Kear combined, associated, agreed, mutually

undertook, or concerted together with Miller in such conduct.

Reviewing the evidence in the light most favorable to

Simmons, the allegations concerning Kear’s conduct include:

a. Kear and Miller were friends and godmothers to each

other’s children;

b. Kear’s office was in the same building as the office

of Las Palmas;

c. Kear provided a draft cross-purchase agreement to

Miller and later edited the document;

d. Kear attended a contentious meeting between Miller

and Simmons;

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e. Kear signed and filed Articles of Organization for

International and listed herself as organizer and registered

agent;

f. Kear maintained an unsigned “Limited Liability

Company Agreement for Las Palmas Tobacco International,

L.L.C.” in her files, listing Miller and Profesor Sila as

equal owners; and

g. Kear edited a letter drafted by Miller to Simmons

concerning valuation of Las Palmas.

Notably absent from the proof is any indication that Kear

knew of Miller’s conduct concerning the assets of Las Palmas.

In his brief, Simmons declares that Kear “never inquired about

the purpose of the new company.” Simmons acknowledges that

Miller told Kear that International had a different market

than Las Palmas, namely, “Canada and the Pacific Rim,” and

that one of the purposes for creation of International was to

facilitate a visa into the United States for Karim Bayzid.

Simmons then complains that “Kear never inquired why Las

Palmas Tobacco, Ltd. could not accomplish either objective.”

In these respects, Simmons proves too much and reinforces

Kear’s claim of lack of evidence to support a statutory

conspiracy. Upon review of the facts of this case in the

light most favorable to Simmons, we hold that the trial judge

did not err in striking the derivative claim for statutory

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conspiracy because the evidence was insufficient to support

the claim. Because the individual claim for statutory

conspiracy depended upon identical proof, the trial judge did

not err in also striking that claim.

C. Legal Malpractice

The jury returned a verdict against Kear on Simmons’

derivative claim of legal malpractice; however, the trial

court granted Kear’s motion to strike the jury verdict because

the evidence was insufficient as a matter of law. It is

axiomatic that in claims of legal malpractice the plaintiff

bears the burden of proof that the attorney’s negligence

proximately caused the client’s loss. Hazel & Thomas, P.C. v.

Yavari, 251 Va. 162, 166, 465 S.E.2d 812, 815 (1996). “[I]f

the evidence is such that reasonable minds could not differ as

to the outcome, the issue of proximate cause should be decided

by the court, not the jury.” Gregory v. Hawkins, 251 Va. 471,

476, 468 S.E.2d 898, 893 (1996) (citations and internal

quotation marks omitted). In the present case, the trial

court observed, “it was not the formation of International

that caused Simmons[’] harm, but rather International’s

activities.” As recited in our discussion of the statutory

conspiracy claims, the lack of proof of Kear’s knowledge of or

participation in the conversion of Las Palmas’ assets is

significant. Although the standard of proof for a legal

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malpractice claim is by a preponderance of the evidence, we

hold that the trial judge did not err in striking the jury’s

verdict because the evidence was insufficient as a matter of

law.

D. Breach of Employment Agreement —

The Non-competition Clause

The jury rendered a verdict against Miller in favor of

Simmons in his derivative capacity for breach of the non-

competition clause in Miller’s employment agreement with Las

Palmas. Miller assigns cross-error to the trial court’s

denial of her motion to strike the jury’s verdict. The clause

in controversy provides:

For a period of three (3) years after this

termination or expiration of the Agreement,

Employee shall not directly or indirectly, own,

manage, control, be employed by, participate

in, or be connected in any manner with

ownership, management, operation, or control of

any business similar to the type of business

conducted by Employer at the time this

Agreement terminates.

In Advanced Marine Enterprises, 256 Va. at 118, 501

S.E.2d at 155, we stated:

To determine whether a non-competition

agreement may be enforced, a chancellor must

consider the following criteria:

(1) Is the restraint, from the standpoint of

the employer, reasonable in the sense that it

is no greater than necessary to protect the

employer in some legitimate business interest?

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(2) From the standpoint of the employee, is the

restraint reasonable in the sense that it is

not unduly harsh and oppressive in curtailing

his legitimate efforts to earn a livelihood?

(3) Is the restraint reasonable from the

standpoint of a sound public policy?

The employer bears the burden of proving that the restraint is

reasonable under the facts of the case. Blue Ridge Anesthesia

v. Gidick, 239 Va. 369, 371-72, 389 S.E.2d 467, 468-69 (1990).

Because restrictive covenants restrain trade, non-competition

clauses are strictly construed against the employer. Grant v.

Carotek, Inc., 737 F.2d 410, 412 (4th Cir. 1984). Whether a

restrictive covenant is enforceable is a question of law to be

determined by the court. See Orkin Exterminating Co. v.

Walker, 307 S.E.2d 914, 916 (Ga. 1983). The analysis of the

three interrelated factors cited in Advanced Marine requires

consideration of the restriction in terms of function,

geographic scope, and duration.

Las Palmas imported one particular brand of cigars grown

and manufactured in the Canary Islands. However, under the

terms of the non-competition clause, the restricted function

encompasses “any business similar to the type of business

conducted by [Las Palmas].” The restricted function is

considerably broader than Las Palmas’ business activity.

The non-competition clause is without geographical

limitation. Under its terms, Miller is prohibited from

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engaging in the business of importing cigars anywhere in the

world. By contrast, Las Palmas had exclusive rights to import

and distribute Profesor Sila cigars for the “east coast of the

United States of America.” Finally, the three-year

restriction upon competition in this agreement is a lengthy

duration.

In determining the reasonableness and enforceability of

restrictive covenants, trial courts must not consider

function, geographical scope, and duration as three separate

and distinct issues. Rather, these limitations must be

considered together. We have previously found restrictive

covenants lasting as long as three years to be reasonable

under the circumstances of the particular case. See Blue

Ridge Anesthesia, 239 Va. at 374, 389 S.E.2d at 470; Roanoke

Eng’g Sales Co. v. Rosenbaum, 223 Va. 548, 556, 290 S.E.2d

882, 887 (1982). However, in this case, upon consideration of

the lengthy duration of the restriction, the expansion of

restricted functions, and the lack of any geographical

limitation, we hold that the restrictive covenant was greater

than necessary to protect the legitimate business interests of

Las Palmas, and unduly harsh and oppressive in curtailing

Miller’s legitimate efforts to pursue her livelihood. As an

unnecessary and unreasonable restraint of trade, the non-

competition clause is offensive to the public policy of the

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Commonwealth and is not enforceable. The trial court erred in

refusing to set aside the jury’s verdict against Miller for

breach of the non-competition clause in her employment

agreement with Las Palmas.

E. Conversion

The jury rendered a verdict against Miller in favor of

Simmons in his derivative capacity for conversion of Las

Palmas’ assets. Miller assigns cross-error to the trial

court’s denial of her motion to strike the jury’s verdict. A

person is liable for conversion for the wrongful exercise or

assumption of authority over another’s goods, depriving the

owner of their possession, or any act of dominion wrongfully

exerted over property in denial of, or inconsistent with, the

owner’s rights. See Hartzell Fan, Inc. v. Waco, Inc., 256 Va.

294, 300, 505 S.E.2d 196, 201 (1998); Bader v. Central

Fidelity Bank, 245 Va. 286, 289, 427 S.E.2d 184, 186 (1993).

Viewed in the light most favorable to Simmons, there is

ample evidence to support the jury’s verdict on the claim of

conversion. Simmons presented evidence that Miller deprived

Las Palmas of the use and value of its property, including the

lease of office space, furniture, equipment, cash, and

customer lists. The trial court did not err in denying

Miller’s motion to strike the jury’s verdict.

VI. Conclusion

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With the exception of the trial court’s failure to set

aside the jury’s verdict against Miller for breach of the non-

competition clause of the employment agreement, we will affirm

the judgment of the trial court. We will reverse the judgment

in favor of Simmons on Count 6 of the motion for judgment.

Affirmed in part,

reversed in part,

and final judgment.

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