[Shareholder Oppression] New York Shareholder Oppression Elements

[Eric Fryar]

Rusyniak v. Gensini, Slip Copy, No. 5:07-CV-0279 (GTS/RFT), 2009 WL 1269911 (N.D.N.Y. May 05, 2009)—In this recent case, the United States District Court for the Northern District of New York issued an unpublished opinion denying a host of motions to dismiss and granting leave to the plaintiffs to file a Second Amended Complaint. The case involves a complicated and involved set of allegations of misconduct by the controlling shareholders in a closely-held corporation. Among many other causes of action, plaintiff sued the controlling shareholders/directors for breach of fiduciary duties against them as minority shareholders. The court held the following allegations were sufficient to survive a motion to dismiss: that the actions by the defendants to annul the plaintiff’s stock interest in the corporation in order to increase their own interests oppressed the plaintiff by denying the plaintiff his share in the corporate earnings resulting from the sale of two parcels of land. It is curious that the court reviewed the sufficiency of the pleadings under New York substantive law. While all of the conduct from which the claims arose occurred in New York, the jurisdiction of incorporation was Panama. Under the internal affairs doctrine, Panamanian law should govern this cause of action. Nevertheless, the court gives a great summary of the elements of an oppression claim under New York law:

“'Shareholders in a close corporation owe each other a duty to act in good faith.' Patti v. Fusco, No. 10717-05, 2005 WL 3372976, at *2 (N.Y. Sup.Ct., Nassau County 2005) (citing Matter of Cassata v. Brewster-Allen-Wichert, Inc., 248 A.D.2d 710 [N.Y.App. Div., 2nd Dept.1998] ). 'The relationship of such shareholders is a fiduciary one.' Fusco, 2005 WL 3372976, at *2 (citing Brunetti v. Musallam, 11 A.D.3d 280 [N.Y.App. Div., 1st Dept.2004] ) [other citation omitted].
More specifically, it 'is the fiduciary duty owed by ... majority shareholder [s] in a closely held corporation to a minority shareholder, not to engage in oppressive actions toward minority shareholders.' McCagg v. Schulte Roth & Zabel LLP, No. 601566/04, 2008 WL 4065920, at *8 (N.Y. Sup.Ct., New York County 2008); see also In re Dissolution of Upstate Medical Assoc. P.C., 739 N.Y.S.2d 766, 767 (N.Y.App.Div., 3rd Dept.2002). 'Although the term ‘oppressive actions' is not statutorily defined, the Court of Appeals has held that ‘oppression should be deemed to arise when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture.' In re Dissolution of Upstate Medical Assoc. P. C., 739 N.Y.S.2d at 767 (citing Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 73 [N.Y.1984] ['A shareholder who reasonably expected that ownership in the corporation would entitle him or her to ... a share of corporate earnings, ..., or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.'] ).
In addition, '[c]orporate directors and controlling shareholders of close corporations ... are held ‘to the extreme measure of candor, unselfishness and good faith.’ ' Harger v. Price, 204 F.Supp.2d 699, 707 (S.D.N.Y.2002) (citing Kavanaugh v. Kavanaugh, 226 N.Y. 185, 193 [1919] ). “They may not act ‘for the aggrandizement or undue advantage of the fiduciar [ies] to the exclusion or detriment of the shareholders.’ ' Harger, 204 F.Supp.2d at 707 (citing Alpert v. 28 Williams St. Corp., 63 N.Y.2d 557, 559 [1984] ). 'Surely they may not act if the sole purpose is reduction of the number of profit sharers, or ultimately to increase the individual wealth of the remaining shareholders.' Id. (citations and internal quotations omitted).”

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Posted By Eric Fryar to Shareholder Oppression at 5/18/2009 08:52:00 AM