Corporation's breach of trust against minority shareholders
Duncan v. Lichtenberger: A minority shareholder's rescission remedy for corporation's breach of trust against minority shareholders.
Shareholder Exit Through the Rescission Remedy
Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. App.—Fort Worth 1984, writ ref'd n.r.e.).
The Fort Worth Court of Appeals affirmed a unique remedial approach in Duncan v. Lichtenberger. That case was decided four years before Davis v. Sheerin and did not rely on the shareholder oppression doctrine as the basis for its holding. The case was not brought as a derivative action but was characterized by the court as “a suit grounded in equity where [the minority shareholders] sought damages for a breach of fiduciary duty owed by [majority shareholder], Waldron W. Duncan, to them.”
In Duncan, the parties were partners in a general partnership the ran a club. In June of 1978, the parties formed a corporation and transferred the assets of the original partnership and an additional $10,000 from each of them. Following the purchase of two of the other shareholder’s interests, Duncan became the 60% majority shareholder, with the two plaintiffs at 20% each. On October 31, 1978, both plaintiffs found themselves locked out of the club, and Duncan informed them that they were both fired. Duncan failed to give the plaintiffs notice of director and shareholder meetings, which he alone attended, paid himself management fees and officer compensation, and accumulated earnings in the corporation while withholding dividends (thereby imposing tax liability on the plaintiffs). There was also evidence that the defendant spoke openly about his admiration for two businessmen who were able to squeeze out their business partners. The jury found in favor of the plaintiffs on breach of fiduciary duty. The trial court rendered a judgment restoring to the plaintiffs the cash they paid and their share of the assets contributed at the time of incorporation. The court of appeals affirmed.
Rescission and Restitution
Holding: Using the Remedy of Rescission and Restitution
With respect to the liability issues, Duncan v. Lichtenberger was clearly wrong. The court based the judgment on the assumption that the majority shareholder owed fiduciary duties to the minority shareholders, while citing cases that clearly dealt with the duties that directors owe the corporation. In light of the Ritchie v. Rupe opinion, Duncan should have been brought as a derivative action, in which case it is questionable whether the equitable relief of rescission and restitution could have been granted in favor of the individual minority shareholders, although as noted above that result is a possibility in light of Ritchie’s (mis)interpretation of Patton v. Nicholas. However, Duncan most certainly could have been brought as a claim for breach of trust. Every instance of wrongdoing was a corporate action taken with the intent of disadvantaging the minority and which certainly impaired their rights of voice and proportionate share in the profits.
As a breach of trust case, rescission and restitution would most certainly have been an equitable remedy available. The Duncan court noted: “It has commonly been recognized by the courts that equitable relief is available for a breach of fiduciary duty.” The court also discussed the Patton case, noting that the Patton Court had held that a “wrong akin to breach of trust, for which the courts will afford a remedy” and noted that the only difference between Patton and “the present case is the form of relief prayed for.” The relief granted in Duncan, although described as "damages" was actually the rescission remedy, with respect to the incorporation of the partnership, and then restitution of the initial investment into the corporation. Because the corporation had been in business only a short time, the trial court obviously believed that it was possible to restore the status quo ante and that rescinding the investment and incorporation and returning the investment to the minority shareholder (thus leaving the majority shareholder with sole ownership of the business) worked no injustice--it was also what the plaintiffs apparently wanted.