It was the stuff of which a good minority oppression claim is easily cooked up. The party in control of the corporation had used the corporate bank accounts as his personal piggy bank while operating a competing business, paid himself inflated office rents and bankrolled an extra-marital affair with money taken from the business.
None of that, however, could carry the day in a lawsuit brought by the minority shareholders of a New Jersey corporation because they waited years to complain.
Minority Shareholder Oppression Alleged by Ousted Officer of Closely Held Corporation
In a suit heard in the Eastern District of New York, but applying New Jersey law, the trial judge dismissed all of the minority oppression claims, finding that the lawsuit was too late. Digital Camera International, Ltd. V. Antebi, et al., 11-cv-182 (E.D.N.Y. July 13, 2017).
The lawsuit is ample warning that the minority shareholders who waive their rights when things seem to be going well are not going to be heard to complain later. The acquiescence by minority owners to wrongful conduct by the majority is likely to be a complete defense to a lawsuit based on those claims.
Plaintiff Digital Camera International Inc. was a New Jersey corporation that sold cameras at wholesale. The protagonists to the shareholder oppression were Barry Antebi, his wife, Marlene, and Ely Eddi. Antebi was removed from operations in a dispute with Eddi.
After the falling out and Antebi was removed from management, the corporation brought suit alleging a variety of misconduct by Antebi, alleging breach of fiduciary duty and fraud. Antebi counter-claimed, alleging that he was the subject of oppressive conduct by the majority
Trial Court Makes Findings of Officer Misconduct
At trial, the court made findings of fact that included the following:
- Eddi and another of the shareholders operated a competing company, Digital Data Devices, which received loans from Digital Camera.
- The shareholders made a practice of paying personal expenses with corporate charge cards and maintained a ledger for those expenses. Personal expenses were intended to be deducted from profits otherwise due, but those purchases were never repaid.
- The accuracy of the ledger could not be established.
- Personal expenses were listed as business expenses on tax returns.
- Antebi used corporate assets to fund an extra marital affair.
- The competing business, Digital Data Devices, rented space to Digital Camera at inflated prices.
- Antebi paid his personal taxes with
The Court proceeded to examine each of the allegations made by the litigants, both as claims of wrongdoing and in connection with the counterclaim filed by Mr. Antebi to address his alleged oppression as a minority shareholder.
On each issue, the Curt held that the acts were indeed wrongful, but that they were well known and could not be pursued.
For example, the Court held that although the shareholders had indeed breached their fiduciary duties by paying personal expenses with corporate assets, the company had ratified the transactions by a keeping a ledger for the express purpose of alllowing employees to use the corporation’s credit cards, “as opposed to proscribing the practice.”
In like fashion, the plaintiff had signed a check that was used to pay Antebi’s personal tax bill and therefore knew of the practice. He could not now claim a breach of duty, the Court held.
On the issue of whether antebi was an oppressed schareholder, the trial court held that the claim was barred by the doctrine of acquiescence, which “precludes shareholders from sitting by or acquiescing in the wrong conduct of the corporatio then seeking a remedy for that coduct long after the conduct has occurred.”
If nothing else, this case has shown, again and again, why a knowing waiver of wrongful conduct cannot be conveniently withdrawn.
Ultimately, the court could only award the amounts that Antebi admitted were a debt to the corporation, as offset by an unpaid load to the corporation.
The fact that the owners of this closely held corporation ignored conduct that was not only in violation of the rights of the other shareholders, and it appears quite questionable as to the ultimate justification of business expenses to the taxing authorities, would not come as much of a surprise to anyone who works with small businesses.
Many, many principals of closely held businesses view the concept of business expense broadly and the books are kept to minimize profits and maximize colorable expenses. In valuing a business, the process of restating perquisites and expenses as income is often a significant chore. What the court is saying here, however, is that shareholders cannot participate or ignore conduct and then try to sue on the same behaviors.
It was offensive to the court on two levels. First, parties are bound in litigation by their conduct in the real world through such doctrines as laches (unreasonable delay) and estoppel (prohibition against unfairly changing positionss). Second, as a matter of accepted principles of business law, corporations have a right to ratify actions. Having ratified objectionable conduct, the shareholders cannot fairly expect to complain later.