Belfer v. Merling

322 N.J. Super. 124, 730 A.2d 434 (App. Div. 1999)
  • Opinion Date: June 16, 1999

CORPORATIONS; SHAREHOLDERS; OPPRESSION; ATTORNEYS’ FEES—Oppressive action is not alone sufficient to warrant an award of attorneys fees to an oppressed shareholder; bad faith is also required.

Two principals of a family-owned corporation were divorced after a 30 year marriage. The couple executed a property settlement agreement (PSA) which was essentially a shareholder’s agreement, giving each party one-half ownership interest in the company and allowing the husband to be the chief executive officer for the “foreseeable future.” It also created a deadlock committee to deal with situations where the couple did not agree on major decisions and to forestall resort to the courts. After four relatively smooth years, the husband and his son, who was president of the company, had a dispute and the husband fired his son. That dispute triggered a meeting of the deadlock committee which took action that the husband believed was designed to oust him as chief executive officer. He immediately filed suit seeking remedies under New Jersey’s oppressed minority shareholder statute. The other shareholders counterclaimed alleging that the husband had misappropriated corporate funds and sought an order barring him from participating in the company as an employee, director or officer. The lower court found that the husband was not an oppressed shareholder and that, under the terms of the PSA, it was time for him to relinquish his duties as chief executive officer but ruled in the husband’s favor with respect to certain monies due him from a shareholder loan account. It awarded partial counsel fees to his former wife. No other request for fees was granted. Both sides appealed the counsel fee order and an appeal was taken with regard to the award concerning the husband’s loan account. The Appellate Division concluded that no counsel fees should have been awarded.

The wife and children asserted three bases as authority for a counsel fee award. First, they claimed entitlement under the express provision of the PSA. Next, they claimed that they were entitled to counsel fees under the oppressed minority shareholder’s statute which states: “if the court determines that any party to an action brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including counsel fees incurred in connection with the action to the injured party or parties.” Lastly, they claimed entitlement under the frivolous litigation statute. The lower court concluded the husband was not entitled to counsel fees under the oppressed minority shareholder statute. It did not find the entire action to be “facially frivolous,” and therefore awarded partial counsel fees only for those attorney’s fees attributable to the frivolous issues. The Appellate Division was more thorough in its analysis. While contracts permitting an aggrieved party to recover attorney’s fees are enforceable, the fee arrangement is subject to judicial review as to its reasonableness. Further, a claim for attorney’s fees pursuant to a contractual agreement is not an award of fees; rather it is an element of damages which must be proved in the same manner as any other item. Regardless, the Appellate Division concluded that the lower court erred when it found that the husband had breached the PSA. The husband contended that the deadlock committee had no jurisdiction to resolve the issues as to whether he could fire his son and that, therefore, he never breached the PSA by filing suit. Since the PSA specifically gave the husband the right and authority to run the day to day operation he was free to fire his son without calling the deadlock committee, unless and until the board of directors elected another chief executive officer. Hence, to the extent that the lower court suggested that the dispute resolution provision of the PSA was intended to resolve the differences of opinion on corporate policies, the Appellate Division disagreed. Further, when the wife convinced an arresting officer to allow her to see her husband’s briefcase containing personal documents, when the son decided to change the locks on the company’s doors, and when the wife called a special meeting of the board of directors, one of the purposes of which was to restrain the husband from operating the company, the husband had little choice but to seek relief in the courts. The Court found that the PSA did not prohibit that action. The PSA merely stated that the parties agreed that attempts were required to be made to settle any dispute arising out of the agreement before using the courts. Under the facts of the case, the Court concluded that neither party made an attempt to settle the dispute and that the husband was entitled to seek court relief without breaching the PSA. The lower court’s reliance on the oppressed minority shareholder statute as a basis for awarding counsel fees was noted only in a footnote with no accompanying explanation. The husband contended that no fee should have been awarded because his was a good faith, legitimate claim that his family was trying to squeeze him out of his own company. Bad faith must also be proved. Here, according to the Court, it could be said that the husband acted unreasonably in assuming he could control the company without regard to the wishes of the other shareholders and the other board members. It could also be said that he acted unreasonably in thinking that he could force his wife to buy his shares or to sell her shares to him especially in light of the party’s matrimonial agreement which operated as a shareholders’ agreement for all intents and purposes. Nevertheless, the Court could not say that he acted arbitrarily, vexatiously or without good faith. The husband had built up the business for 30 years, and the record did not support a finding that he acted in bad faith merely by acting to prevent himself from being frozen out of his own company. Thus, counsel fees could not be sustained under the oppressed minority shareholder statute. Lastly, the corporation itself could not claim attorney’s fees. The corporation was not entitled to indemnification under the terms of the PSA and was not a party to that contract, just as the individual parties were not entitled to counsel fees under either the oppressed minority shareholder statute or the frivolous litigation statue, neither was the corporation.