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Gage v. Rosenbaum: Return of Investment

A minority shareholder's return of investment remedy for breach of trust by the corporation.

return of investment

Return of Investment as a Remedy

Gage v. Rosenbaum, No. 09-4023, 2010 WL 856344 (Bankr. E.D. Tex., May 7, 2010)

On May 7, 2010, the United States Bankruptcy Court in the Eastern District of Texas issued an unpublished memorandum and order taking a unique approach to shareholder oppression remedies.  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 holdingis 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.

Return of Investment Remedy 

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.

Post-Ritchie v. Rupe, the shareholder oppression doctrine does not exist, but the equitable remedies fashioned by courts under the shareholder oppression doctrine would be available for the breach of trust cause of action.

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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