Nussbaum v. Menon

A-3760-96T3 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: April 28, 1998

CORPORATIONS; SHAREHOLDERS; FIDUCIARY DUTY — An ex-shareholder’s inadequate or inept performance as an employee does not breach a fiduciary duty.

A New Jersey corporation in the business of importing seafood products had three shareholders until one of the shareholders bought out one of the others. The buy out was partially for cash, with the balance payable pursuant to a promissory note. The selling shareholder continued as an employee of the company. Even though his three year employment contract allowed the company to terminate his employment (and pay a related severance fee), the employment continued for the entire term of the contract. The selling shareholder used the title of Chairman of the Board and performed his job essentially as he had before he sold his stock.

About six months before the end of the three year employment period, the buying shareholder ceased making note payments to the selling shareholder. Just before the end of the three year period, the buying shareholder was indicted for multiple counts of fraud and for violations of FDA regulations. About six months after the selling shareholder’s employment ended, the company’s line of credit was terminated, leading to the filing of a petition in bankruptcy.

The selling shareholder sued for the balance of money owed to him. In response, the buying shareholder alleged that by reason of an implied covenant of good faith in the contract for sale of shares, the selling shareholder had a fiduciary duty both to him and to the company and that the selling shareholder’s poor performance as a company employee violated that obligation, causing the company to fail and thereby preventing the buying shareholder from paying the balance of the note. Accordingly, the buying shareholder claimed that the selling shareholder should not be permitted to recover on the note. The lower court found in favor of the selling shareholder and the Appellate Division agreed.

In the Appellate Division’s view, the major difficulty with the defense raised was that the buying shareholder confused a breach of fiduciary obligation with an inadequate or inept performance of an employee’s duties. There was no claim that the selling shareholder pocketed secret profits, or diverted the company’s customers or profits to himself or to some other entity he controlled. There was no charge of fraud, theft, deception, or any similar claim of dishonesty or self-dealing, rather, the claim was that the selling shareholder’s management style was bullying, obnoxious, and ineffective. Whether or not any of the factual allegations were true, none of the claims indicated any form of violation of fiduciary obligation.