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Krzastek v. Global Resource Industrial and Power, Inc.

A-1815-06T2 (N.J. Super. App. Div. 2008) (Unpublished)

CORPORATIONS; SHAREHOLDERS — Where New Jersey has the most relevant interest in the outcome of litigation between shareholders of a closely held corporation, and applying the law of the state of incorporation would result in essentially the same conclusions on the same facts, New Jersey courts may apply New Jersey law.

A businessman with extensive experience in the engineering, procurement, and construction of power plants requested financial backing and bonding from a specific lender. The principal of the lender told the businessman that his company had the bonding capacity to cover the type of work desired. Ultimately, the two incorporated a closely held corporation in Massachusetts for the purpose of doing power plant startups. The businessman held a seven percent ownership interest and was to receive an annual salary under his employment contract. Under his employment agreement, the businessman would be entitled to six months’ severance pay if terminated for other than cause. However, he was to remain employed so long as the company remained reasonably profitable. Under its worst projection, the business plan for the company called for one project in the first eighteen months. The businessman was a New Jersey resident, and the home office was anticipated to be located in New Jersey. One month after the employment contract was executed, the company entered into a joint venture, under New York law, with an electrical company to construct a power plant in New York. The businessman had procured this project, and was pursuing other projects for the company when, just eleven months after signing his employment contract, he was terminated. The New York power plant project generated over $12 million in profits.

The businessman sued for breach of contract and for the value of his seven percent ownership interest. The lower court found for the businessman, holding that the lender had misrepresented its bonding capability, and had caused the businessman’s firing without any prior notice or warning or prior complaints and despite the company being profitable. Therefore, it awarded the businessman damages and severance pay under the employment agreement. The lower court also found the lender’s principal had violated duties of loyalty and his fiduciary obligations, thereby depriving the businessman of the value of his stock. The court held that the termination of a shareholder’s status as an employee is a common means of oppression in a close corporation under New Jersey’s oppressed minority shareholder statute, and that the appropriate remedy, in this case, was to order a buy-out of the businessman’s equity interest in the corporation. The lower court also awarded attorneys’ fees and lost wages and a lost bonus to the businessman. An appeal followed.

The Appellate Division affirmed the lower court’s decision, but for the lost wage award. It found that New Jersey had the most relevant interest in the outcome of the litigation given its contacts to the closely held corporation. The backdrop to this finding was the Court’s conclusion that governing Massachusetts and New Jersey substantive law would result in the same conclusions on the facts. The Court noted that the lower court’s critical finding was that both jurisdictions recognized that shareholders in closely held corporations owe one another the duty of utmost good faith and loyalty and that minority shareholders to whom that duty has been breached, are entitled to be made whole. It held the lower court did not abuse its discretion in awarding the businessman a bonus because he had procured the New York project, but it also held that the lower court had improperly awarded lost wages in addition to severance pay and attorneys’ fees. The Court believed that such an allowance made the businessman more than whole.

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