Interesting Award in Texas Shareholder Oppression Case

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On May 7, 2010, the United States Bankruptcy Court in the Eastern District of Texas issued an unpublished memorandum and order that raises some very significant shareholder oppression issues.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.

New Texas Shareholder Oppression Opinion

United States District Court Judge Barbara M.G. Lynn issued a brief, unpublished opinion addressing Texas shareholder oppression law in Bulacher v. Enowa, L.L.C., Slip Copy, 2010 WL 1135958 (N.D.Tex., March 23, 2010). A minority shareholder in sued for oppression and other claims. The case was filed in state court. The defendants removed the case to federal court and moved to dismiss the shareholder oppression claim, apparently for failure to state a claim for which relief may be granted. The denied the motion on the following grounds:

"Bulacher contends that the Defendants engaged in oppressive conduct by launching a concerted effort to dilute and deprive Bulacher of the value of his 17% interest in the company. Specifically, Bulacher alleges that the Defendants used prepaid consultant fees to artificially lower the company's income performance, and thereby reduce Bulacher's quarterly income-based bonuses, before his termination; that his termination was intended to, among other things, prohibit his access to critical financial and/or business information related to the company; that the Defendants attempted to induce Bulacher to sign an agreement allowing Enowa to repurchase his 17% interest in the company at a price that was a mere fraction of its true market value; and that the Defendants paid excessive bonuses and/or distributions to themselves after his termination. Texas courts take a broad view of the application of oppressive conduct to a closely-held corporation such as Enowa. In this context, the facts alleged by Bulacher are sufficient to state a claim for shareholder oppression under Texas law."

For a more in depth analysis of Texas shareholder oppression doctrine, visit the resources maintained by Fryar Law Firm.

Eric Fryar