[Shareholder Oppression] Interesting Award in Texas Shareholder Oppression Case

[Eric Fryar]

[http://www.fryarlawfirm.com/Shareholder/Texas/Rosenbaum.html]

Return of Investment as an Oppression Remedy:
Gage v. Rosenbaum, No. 09-4023, 2010 WL 1856344 (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On May 7, 2010, the United States Bankruptcy Court in the Eastern District of Texas issued an unpublished memorandum and order that raises some very significant shareholder oppression issues. The shareholder oppression claim was tried before the Bankruptcy Judge to liquidate the minority shareholder's claim in the majority shareholder's personal bankruptcy and to determine dischargeability. The plaintiff had invested about $324,000 and received about 25% of the shares. The court found that 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 held that the majority shareholder's use of the corporation as his "personal piggy bank" defeated the plaintiff's reasonable expectations and constituted shareholder oppression. There are three significant issues raised by the opinion. First, the court based its finding of oppression on conduct that violated fiduciary duties owed only to the corporation under Texas law. Yet the court found oppression because the effect of misappropriating corporate funds was to defeat the shareholder's reasonable expectations. Second, the plaintiff apparently did not request a forced buy-out at fair value, and such a remedy would have been useless because the basis of the suit was that the corporation had been stripped of its value. Rather, the court awarded the plaintiff the amount he initially invested. Third, the court held that shareholder oppression is a type of defalcation by a fiduciary and is not dischargeable in bankruptcy. Read the complete analysis of the Texas Shareholder Oppression opinion.

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Posted By Eric Fryar to Shareholder Oppression at 5/14/2010 03:36:00 PM

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