Archives for July 2014

Shareholder Oppression: A Frustrated Mess?

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Yikes! That was a bad one.  But there is your James Marshall Hendrix reference for the day.

Shareholder oppression is another easy-to-say, hard-to-apply legal standard that can trigger the break-up of a closely held corporation.  Broadly, it applies where a dominant shareholder squeezes out or excludes a minority shareholder from having a say in the corporation’s business.

Iversen v. C.J.C. Auto Parts and Tires, Inc., 2014 IL App (2d) 130706-U gives some content to shareholder oppression as a remedy for an aggrieved stockholder.

The plaintiff, a 20% shareholder in a Chicago auto parts company, sued the other shareholders and the company after the defendants refused to buy the plaintiff’s shares or accept plaintiff’s offer to sell his shares to an outside buyer.

The plaintiff claimed the defendants ganged up on him to dilute his shares and prevent his retirement. The plaintiff sued the corporation and individual shareholders for oppression under the Illinois corporation statute, and brought civil conspiracy and breach of fiduciary claims.  The trial court dismissed all of the plaintiff’s claims.

Result: Dismissal affirmed.

Reasons:

The plaintiff failed to allege oppressive conduct under the law.  Section 12.56(a)(3) of the Business Corporation Act – 805 ILCS 5/12.56(a)(3) (the “BCA”)- gives a minority shareholder in a close corporation a remedy against directors that act oppressively, illegally or fraudulently with respect to the other shareholders.

 The BCA doesn’t define oppression.  

Courts interpret oppression to mean “arbitrary, overbearing and heavy-handed” conduct.  Examples of shareholder oppression include a corporate officer using a corporation for his own benefit to the exclusion of other stockholders, failing to follow corporate formalities, flouting by-laws freezing out minority stockholders.  (¶¶ 27-30).

The plaintiff here failed to allege defendants’ self-dealing, violation of corporate by-laws, mismanagement or waste of corporate assets. The defendants refusal to accede to plaintiff’s buy-out request didn’t equal  oppression since the shareholder agreement didn’t require a buy-out or the approval of plaintiff’s share sales attempts.  (¶¶ 34, 39).

The plaintiff’s conspiracy claim also failed.  Civil conspiracy requires both (a) an independent tort – underlying wrongful conduct, and (b) an agreement between the defendants to carry out the wrongful conduct.  Without a predicate tort, there can be no conspiracy. 

The plaintiff’s conspiracy claim against the corporate defendant failed because a corporation can only act through its agents.  And by definition, a corporation can’t conspire with itself. (¶¶ 40-41).

Comments:

This case illustrates the importance of choosing the right remedy.  In hindsight, I would have added a specific performance claim to require the defendants to adhere to the agreement’s buyout and share appraisal provisions.

The case’s practice tip value lies in its punctuating how important it is to thoroughly vet a shareholder agreement before investing.  With no specific terms in the shareholder contract obligating defendants to buy back plaintiff’s shares or to not squelch plaintiff’s sale attempts, the plaintiff was basically at the defendants’ mercy.

On the pleading front, it’s clear that a colorable oppression claim under the BCA requires allegations of a corporate officer’s self-dealing, exclusionary conduct, corporate mismanagement or a failure to follow by-laws.  Also, a valid conspiracy claim must be factually detailed to survive summary judgment.

 

Failure to Disclose Claim in Bankruptcy Torpedoes Later Injury Suit

What happens if  (a) you get injured (and you aren’t at fault and have a claim against the person who injured you) after you file for bankruptcy but (b) before you get a discharge and (c) you don’t inform the bankruptcy court of this claim? 

That’s the question examined in Schoup v. Gore, 2014 IL App (4th) 130911 (4th Dist. 2014), a case that will doubtlessly serve as a cautionary tale and make bankruptcy petitioners think twice before not informing the bankruptcy court of a potential civil claim.

In Schoup, the debtor filed bankruptcy in 2010 and obtained a discharge in 2012.  Several months into his bankruptcy, he was injured when he tripped on private property.  This gave the debtor a future premises liability claim against the property owners.  The debtor didn’t tell the bankruptcy court or trustee of the premises suit until after his bankruptcy case was discharged.  

Fresh off his discharge, the debtor filed his premises suit against the property owners.  The owners moved for summary judgment on the basis of judicial estoppel.  They argued that the plaintiff’s failure to disclose the premises suit as an asset in his bankruptcy case barred the premises liability action.  The trial court agreed and entered judgment for the property owners.  Plaintiff appealed.

Ruling: Affirmed.

Q: Why?

A: The judicial estoppel doctrine barred the plaintiff’s premises liability suit.  Judicial estoppel prevents a litigant from taking a position in one case and then, in a later case, taking the opposite position (i.e., you can’t claim that you’re an independent contractor in one case and then in a second case, claim that you’re an employee.)  Judicial estoppel’s purpose is to protect the integrity of the court system and to prevent a party from making a mockery of court proceedings by conveniently taking whatever position happens to serve that party at a given moment.  (¶ 9).  Judicial estoppel applies where a party (1) takes two contrary positions in legal proceedings; (2) successfully maintains that first position and benefits from it.  In the post-bankruptcy setting, a debtor who fails to disclose an inchoate lawsuit can’t later realize a benefit from his concealment. (¶ 14).

The plaintiff here took two positions: he impliedly represented to the bankruptcy court that he had no pending lawsuits and then filed a personal injury suit in state court after discharge.  The two positions were taken in judicial proceedings (Federal bankruptcy court and Illinois state court) and under oath (the plaintiff signed sworn disclosures in the bankruptcy court and filed a sworn complaint in state court).  The plaintiff also obtained a benefit from concealing the premises liability case as he received a discharge without any creditor knowing about the state court claim.  (¶¶ 17-18).

Conclusion: From a defense posture, the case is a great reminder to always check on-line bankruptcy records to see if a plaintiff suing your client has any prior bankruptcies.  More than once I’ve found that a plaintiff recently received a discharge before filing suit and never disclosed the lawsuit as an asset in the bankruptcy case.  In those situations, the plaintiff, not wanting to deal with a judicial estoppel motion (like the one filed by the defendants in this case), is usually motivated to settle for a reduced amount and in one case, even non-suited the case. 

From the lens of a debtor, the lesson is to fully disclose all assets – even lawsuits that haven’t materialized on the bankruptcy filing date.  Otherwise, they run the risk of having a creditor challenge the discharge or even having a future lawsuit dismissed.

Paper Lace In The House: Court Invalidates $5M Plus Contract to (Sort Of) Use Someone’s Last Name

hello-my-name-isI promise there will be no ‘What’s In a Name?’ (the Bard), “What’s My Name?” (Snoop Dogg) or “I’ve Got a Name” (the late great Jim Croce) references.  And while I’m on the subject – is there anything MORE 1970s AM-JAM or K-Tel then Jim Croce?  I don’t think so.  Well maybe that weird “Billy Don’t Be A Hero” song Ms. Sauer made us sing in third grade music class. (The video is even weirder!  the band members are clad in Civil War garb.  I S thee not!)  Maybe I’m projecting but there always seemed something vaguely dark and unnerving about that song.

No idea where I’m going with this. But consider: would you pay someone $5.5M at your death just because that someone promised to use your last name as a tack-on middle name for his sons?

The First District definitely would not in Dohrmann v. Swaney, 2014 IL App (1st) 131524 (1st Dist. 2014), where the Court entered summary judgment against a plaintiff who sued a former neighbor’s estate to recover about $5.5M in money and assets under a written contract.

In the 1980s, the plaintiff – then a 40-year-old surgeon with a wife and two kids – befriended his elderly neighbor – Mrs. Rogers – a widow who was in her early seventies.  In 2000, when Mrs. Rogers was 89 and the plaintiff was in his mid-fifties, Mrs. Rogers signed a contract drafted by the plaintiff’s estate planning attorney where Mrs. Rogers agreed to transfer at her death, her million-plus dollar apartment, its furnishings and a cool $4M in cash to the plaintiff all for – get this – the plaintiff’s promise to use the widow’s last name (Rogers) by adding it to plaintiff’s son’s middle names and for “past and future services.” That’s It. 

Mrs. Rogers’ stated reason for the transfer (according to plaintiff) was to perpetuate her family name which would provide her with psychological Comfort.

After Mrs. Rogers signed the contract, the plaintiff legally changed his sons middle names to include the Rogers reference.

Over the course of the next several years, Mrs. Rogers transferred the home into a trust and slid further into dementia and a guardian was eventually appointed to manage her affairs.

The plaintiff sued in the Circuit Court to enforce the agreement.  Mrs. Rogers’ (who died while lawsuit was pending) executor defended on the basis that the contractual consideration was grossly inadequate and shocked the conscience.  The trial court agreed and entered summary judgment for the estate.

Held: Affirmed

Reasoning:

The Court found that contractual consideration was lacking and the evidence showed a disparity in bargaining power and over-reaching by the plaintiff.

The black letter contract elements are (1) offer, (2) acceptance and (3) consideration.

Consideration consists of some right, interest or benefit flowing to one party and some corresponding forbearance, detriment or loss from the other.  Any act that benefits one side and disadvantages the other is generally considered sufficient consideration to form a binding contract.  But, where the consideration is so grossly inadequate as to “shock the conscience”, the contract fails.  (¶ 23).

A conscience-shocking failure of consideration is usually found in situations involving fraud and  blatantly one-sided (unconscionable) or oppressive contracts.  If there is a gross disparity in bargaining power or a blatant inequality of value exchanged, the Court will closely scrutinize the agreement and delve into the sufficiency of its consideration.  (¶ 23).  Where there is a complete failure of consideration, the Court can invalidate the entire transaction.  (¶ 24).

Here, the Court found that the contractual consideration was shockingly absent on its face.  For assets totaling $5.5M, all plaintiff had to do was file name change proceedings for his two adult (now) sons who promised to use the Rogers name as part of their name.  But in their depositions, the sons testified that their use of the Rogers name was sporadic at best: they only used it on certain applications and documents through the years.

The First District found that only staggered and unverified name use can hardly qualify for valid consideration: it was an illusory promise. (¶¶33-34).

The other plus-factor cited by the court was the glaring disparity in bargaining power between the parties.  Illinois courts will consider a contracting parties age, education and commercial experience when deciding whether to set aside a contract.

The plaintiff here was the stronger party in every way – physically, mentally and financially.  (¶¶ 37-39).  This obvious disparity  added support for the court’s finding of unfairness.