New Developments

Massachusetts court on buyout remedy and shareholder fiduciary duty

The Massachusetts Supreme Judicial Court has held that buyout is not within a court’s equitable power to impose as a remedy for violation of a shareholder’s fiduciary duty. In Brodie v. Jordan, (watch the oral argument here) the plaintiff inherited from her husband one-third of the shares of a closely held corporation. The two defendants owned the remaining shares. Plaintiff’s husband and the other shareholders had a falling out in the early 1990s. Plaintiff’s husband died in 1997. The corporation has paid no money to plaintiff or her husband since 1995. The defendants have not provided financial or operational information to plaintiff, they have not performed a valuation of the company, nor has the corporation held an annual meeting for five years. The Superior Court found that the defendants violated their fiduciary duty of utmost good faith and loyalty, required under Donahue and Wilkes, “by excluding her from corporate decision-making, denying her access to company information, and hindering her ability to sell her shares in the open market.” The Appeals Court affirmed and defendants did not seek further review of the liability issue. The Superior Court judge ordered the defendants to buy out the plaintiff at a price to be determined by a court-appointed expert. No corporate document requires a shareholder to sell or buy shares.

Justice Cowin, speaking for the court, made a subtle but potentially far reaching assertion. After quoting various examples of freeze-outs from Donahue, she concludes, “What these examples have in common is that, in each, the majority frustrates the minority’s reasonable expectations of benefit from their ownership of shares. We have previously analyzed freeze-outs in terms of shareholders’ ‘reasonable expectations’ both explicitly and implicitly.” She cites two Massachusetts cases (including Wilkes) then cites the standard New Jersey, New York, and North Carolina cases that use the reasonable expectations test to determine oppression.

As near as I can tell, Justice Cowin’s description of Massachusetts law is incorrect. I’ve found no appellate case that analyzes the Donahue/Wilkes fiduciary duty in terms of the minority’s reasonable expectations. In a footnote Justice Cowin notes that Massachusetts is different from those other states in that no Massachusetts statute permits a claim for relief for oppression. However, says she, the standards for determining a breach of fiduciary duty and finding oppression are often the same. That’s probably an accurate description of the law in other states, but not (until now) in Massachusetts.

No matter. Justice Cowin then holds that the goal in a freeze-out case is to restore the minority to the position it would have been in had there been no freeze-out. Here, because no corporate document permits or requires a buyout and no market for the corporation’s shares exists, ordering a buyout provides a different and more favorable remedy than plaintiff would have had if defendants had not violated their fiduciary duties. Justice Cowin then makes a slippery slope argument that buyout would be appropriate in every freeze-out case. Finally, she drops a footnote that distinguishes cases from other states that permit forced buyouts. She correctly notes that those states have statutes that permit involuntary dissolution and, by inference, the courts in those states have arrogated the power to order a buyout. In Massachusetts, by contrast, dissolution is only permitted for deadlock.

So it seems that Massachusetts is now using one of the standards for oppression as its test for determining whether the Donahue/Wilkes fiduciary duty has been violated. Where this leaves the rather elaborate weighing process in Wilkes is unclear. Could it be that Massachusetts is finally ready to abandon the notion that close corporation shareholders owe one another the same duties partners owe one another?

Further, of course, this raises one of the more problematic issues of the reasonable expectations test. That is, when the complaining shareholder did not purchase shares from the corporation, to what extent should the corporation and other shareholders be required to honor that shareholder’s reasonable expectations? A stark example is a shareholder who obtains shares from a parent. The parent and child may have very different, and reasonable, expectations about the optimal investment horizon. Whose expectations should be other shareholders respect?

Washington State Supreme Court on partner liability

The Supreme Court of Washington has held that a tort plaintiff may recover against the partner of a general partnership without suing the partnership or exhausting partnership assets where the general partner is independently liable for the tort. In Gildon v. Simon Property Group, Inc., plaintiff was employed by a mall tenant as a cleaning service worker. She fell while performing her cleaning services and sued Simon Property, which she believed to be the mall owner, on a theory of premises liability. She later moved to amend her complaint to name the title owner of the mall, a general partnership. The trail court denied the motion on the ground that the amendment would not relate back and also dismissed the action on the ground that the partnership was an indispensable party and that the statute of limitations had run so that plaintiff could not file a separate action against the partnership. Simon Property was one of the partnership’s two general partners.

Justice Madsen held that that the partnership was not an indispensable party because Gildon could recover directly against Simon Property as a “possessor” of the mall. She also rejected Simon Property’s argument that the action should be dismissed because Gildon could not recover from Simon Properties without exhausting the partnership assets, which was not possible because the statute of limitations against the partnership had run. Justice Madsen held that the partnership need not be sued because UPA § 307(a) is permissive (citing my friend and colleague Kelly Kunsch). She then held that § 307(d)(5) permits Gildon to execute against Simon Properties. That section reads,

(d) A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under Section 306 [imposing joint and several liability on partners] and:

(5) liability is imposed on the partner by law … independent of the existence of the partnership.

Here, Simon Property is liable as a partner for the partnership’s debt (UPA § 306) and is independently liable for premises liability as a possessor.

This strikes me as clearly correct, though somewhat convoluted. The UPA’s liability scheme is generally intuitive: partners are jointly and severally liable for partnership debts (§ 306). However, a judgment against the partnership is not a judgment against the partner and a partnership judgment creditor may not execute against a partner’s property without a judgment against the partner (§ 307(c)).

Section 307(d) is not intuitive, however. It deals with the situation in which a claim against a partnership is asserted against one or more partners rather than against the partnership, which is permitted under § 307(a). In that setting, a judgment creditor typically cannot execute against the partner’s assets (even though the judgment is against the partner!) until the partnership’s assets are exhausted (§ 307(d)(1)). This seems to run counter to the point of permitting a plaintiff to sue the partnership or one or more partners, or both. However that rule is subject to four exceptions applies (§ 307(d)(2-5)), one of which applied in this case.