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| Return of Investment as an Oppression Remedy: Gage v. Rosenbaum, No. 09-4023, 2010 WL 1856344 (Bankr. E.D. Tex., May 7, 2010). [Download Opinion] |
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On May 7, 2010, the United States Bankruptcy Court in the Eastern District of Texas issued an unpublished memorandum and order that
raises some very significant shareholder oppression issues. The case was brought by a minority shareholder in a Texas corporation against
the majority shareholder. The case had originally been filed in state court, but the defendant had declared bankruptcy on the eve of trial.
Ultimately, the dispute was tried before the Bankruptcy Judge to liquidate the minority shareholder's claim in bankruptcy and to determine
dischargeability. The corporation was formed to sell a goat dewormer product. The plaintiff had invested about $324,000 and received about
25% of the shares. The court found that the majority shareholder had fraudulently induced the plaintiff to invest through a number of
misrepresentations, including that the majority shareholder would not take a salary. The majority shareholder and his wife and daughter
secretly took hundreds of thousands of dollars out of the corporation, ultimately rendering the corporation insolvent and worthless. The court
found in favor of the plaintiff on claims of shareholder oppression, breach of fiduciary duties, and fraud.
The conduct on which the court principally based the finding of oppression was the wholesale misappropriation of corporate funds by the
majority shareholder and his family--in the court's words, using the corporation as a "personal piggy bank." The court held that conduct that
rendered the minority shareholder's interest worthless substantially defeated the minority shareholder's reasonable expectations. This holding
is particularly interesting because the conduct involved a violation of duties owed solely to the corporation. However, the corporation was not
a party. The plaintiff did not assert any derivative claims, and the court specifically dismissed a claim under the Texas Theft Liability Act as
belonging solely to the corporation. Therefore, the court's opinion clearly recognizes that shareholder oppression is an individual claim
belonging to the minority shareholder and may be based on conduct which the minority shareholder would not otherwise have standing to
challenge (absent a derivative claim), where that conduct has the effect of defeating reasonable expectations of share ownership.
Second, the court's remedy was unusual. The most common remedy in oppression cases is a forced buy-out of the minority shareholder's
interest at a fair price determined by the court. In this case, that remedy would not have been effective because the corporation was defunct
and had no value. Therefore, the court awarded the same remedy for oppression as for fraud, an award of damages equal to the minority
shareholder's initial investment. The court did not discuss the choice of remedy for oppression, but the opinion seems to equate the violation
of the minority shareholder's reasonable expectations that were central to his decision to invest with fraudulent representations on which the
plaintiff relied in deciding to make the investment. Under the facts of this case, the court's remedy makes good sense. Probably, the same
remedy would be appropriate in a number of oppression cases.
Finally, the court held that shareholder oppression is a defalcation by a fiduciary and is thus nondischargeable under Section 523(a)(4) of the
Bankruptcy Code.
raises some very significant shareholder oppression issues. The case was brought by a minority shareholder in a Texas corporation against
the majority shareholder. The case had originally been filed in state court, but the defendant had declared bankruptcy on the eve of trial.
Ultimately, the dispute was tried before the Bankruptcy Judge to liquidate the minority shareholder's claim in bankruptcy and to determine
dischargeability. The corporation was formed to sell a goat dewormer product. The plaintiff had invested about $324,000 and received about
25% of the shares. The court found that the majority shareholder had fraudulently induced the plaintiff to invest through a number of
misrepresentations, including that the majority shareholder would not take a salary. The majority shareholder and his wife and daughter
secretly took hundreds of thousands of dollars out of the corporation, ultimately rendering the corporation insolvent and worthless. The court
found in favor of the plaintiff on claims of shareholder oppression, breach of fiduciary duties, and fraud.
The conduct on which the court principally based the finding of oppression was the wholesale misappropriation of corporate funds by the
majority shareholder and his family--in the court's words, using the corporation as a "personal piggy bank." The court held that conduct that
rendered the minority shareholder's interest worthless substantially defeated the minority shareholder's reasonable expectations. This holding
is particularly interesting because the conduct involved a violation of duties owed solely to the corporation. However, the corporation was not
a party. The plaintiff did not assert any derivative claims, and the court specifically dismissed a claim under the Texas Theft Liability Act as
belonging solely to the corporation. Therefore, the court's opinion clearly recognizes that shareholder oppression is an individual claim
belonging to the minority shareholder and may be based on conduct which the minority shareholder would not otherwise have standing to
challenge (absent a derivative claim), where that conduct has the effect of defeating reasonable expectations of share ownership.
Second, the court's remedy was unusual. The most common remedy in oppression cases is a forced buy-out of the minority shareholder's
interest at a fair price determined by the court. In this case, that remedy would not have been effective because the corporation was defunct
and had no value. Therefore, the court awarded the same remedy for oppression as for fraud, an award of damages equal to the minority
shareholder's initial investment. The court did not discuss the choice of remedy for oppression, but the opinion seems to equate the violation
of the minority shareholder's reasonable expectations that were central to his decision to invest with fraudulent representations on which the
plaintiff relied in deciding to make the investment. Under the facts of this case, the court's remedy makes good sense. Probably, the same
remedy would be appropriate in a number of oppression cases.
Finally, the court held that shareholder oppression is a defalcation by a fiduciary and is thus nondischargeable under Section 523(a)(4) of the
Bankruptcy Code.
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