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Jiorle v. Mupo

A-2390-06T2 (N.J. Super. App. Div. 2009) (Unpublished)

CORPORATIONS; DIRECTORS — A corporate director cannot claim ignorance to avoid liability because the director should be familiar with the fundamentals of the business in which the corporation is engaged.

Two individuals formed a corporation for the sole purpose of acquiring and developing property. Both were named as officers and directors. The corporation then purchased property encumbered by a substantial real estate tax arrearage. A third-party became a fifty percent shareholder. After the new shareholder paid fifty percent of the agreed-upon value of the corporation, one of the original two shareholders caused a portion of the money to be distributed to the two original shareholders and their children. The balance was utilized for costs associated with the development project. The corporation also entered into a stock transfer agreement in which all of the corporation’s stock would be transferred to another corporation. Before the deal closed, the municipality obtained a final judgment of foreclosure for the unpaid taxes. The third-party investor was not told of this development. The stock transfer deal collapsed following the foreclosure action when the other corporation defaulted on its contract. According to the third-party shareholder, none of the details of this transaction were disclosed to him. He then sued the original two shareholders claiming that the disbursements were unauthorized and fraudulent and that the other two had breached their fiduciary duty to him by not advising him about the other company’s default in the stock transfer deal.

The lower court ruled in favor of the third-party investor. It concluded that one of the original shareholders had committed fraud, breached his fiduciary duty as a corporate officer, and had obtained improper personal benefits in that capacity. It awarded damages. As to the other original shareholder, it ruled that she had received improper personal benefits in her capacity as an officer, but that her conduct did not cause the investor any damages because she was not personally involved in either the stock transfer deal or in the authorization of any of the disputed corporate disbursements. Based presumably in part on the lower court’s instructions to it that punitive damages were appropriate to deter “others,” the jury also awarded punitive damages against the first shareholder, who appealed.

The Appellate Division affirmed in part and reversed in part. It agreed with the losing shareholder that the lower court erred in instructing the jury on punitive damages. Based on a decision issued after the trial and affirmed by the New Jersey Supreme Court, the Appellate Division held that a plaintiff’s counsel’s exhortation to the jury to award punitive damages to deter others constituted plain error under the Punitive Damages Act, and to the extent the argument was condoned by the jury instructions, the charge was also contrary to the Act. According to the Court, the jury charge that was used was a fundamental misstatement of the law because the Punitive Damages Act prohibited enhancing a punitive damages award for general deterrence purposes. Thus, it reversed the lower court’s holding relating to punitive damages. On the other hand, it agreed with the third-party investor that the retrial should be limited solely to determining the amount of punitive damages. It noted that the appealing shareholder raised no specific argument contesting the jury’s verdict in the first instance, and it found no reason to reverse its conclusion that punitive damages were warranted. It affirmed the award of compensatory damages because it found that the jury had concluded that, whether or not some of the third-party shareholder’s investment actually paid for services related to the project, the appealing shareholder’s conduct damaged the investor because his lack of disclosure “sealed the project’s fate.” Thus, it believed that restitution of the full amount of the third-party shareholder’s investment was an appropriate measure of damages. Further, although it stated that a stockholder traditionally had no individual claim for loss in value of its investment resulting from acts of a director in breach of a fiduciary obligation, it recognized that in the case of a closely-held corporation, which was the case here, there is substantial authority permitting departure from these norms and recognition instead of the real relationships of the principals. Accordingly, it ruled that procedural rules governing derivative suits may be suspended, and individual shareholders may sue officers directly for breaches of their fiduciary obligations. Based on this, it disagreed with the lower court’s focus on the non-appealing shareholder’s lack of direct involvement in, or knowledge of, the corporation’s operation.

As to the second director, the Court held that a corporate director cannot claim ignorance to avoid liability because a director should become familiar with the fundamentals of the business in which the corporation is engaged. It mentioned that even in a small corporation, a director is held to the standard of that degree of care that an ordinarily prudent director would use under the circumstances. Thus, the lower court, once having determined that the second shareholder obtained an improper personal benefit as a corporate director, should have come to the axiomatic conclusion that the third-party shareholder was damaged. However, it held that pursuant to the facts presented to the lower court, there was substantial evidence that the second shareholder was no longer a director or officer when the money was disbursed to her. Therefore, after it reviewed the lower court’s findings as to the second shareholder in the context of the entire verdict and the totality of the record, it was convinced that there was insufficient evidence upon which to conclude the second shareholder was liable for receiving an improper personal benefit while she was a corporate officer or director.

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