164 A.D.3d 1093
N.Y. App. Div.2018Background
- John B. Feldmeier, a former president, officer, director and minority shareholder of Feldmeier Equipment, Inc. (the Corporation), sued former co‑officer/directors Robert E. Feldmeier, Jeanne C. Jackson and Lisa F. Clark (individual defendants) alleging breaches of fiduciary duty, seeking damages and common‑law dissolution. Defendants counterclaimed for, among other things, unfair competition and breach of fiduciary duty.
- The Corporation is closely held with 50 shares; family transfers resulted in majority control via Hunt Lane Associates, LLC (Hunt). After John resigned in 2011 he became a non‑employee minority shareholder and started a competing business.
- John alleged individual defendants withheld distributions, increased their own compensation, engaged in nepotism, retained earnings, increased bad debts, and otherwise acted to deprive him of dividends.
- Defendants moved for summary judgment to dismiss the complaint; John cross‑moved for common‑law dissolution, advancement/reimbursement of defense expenses against counterclaims, and to restrain use of corporate funds by individual defendants to defend dissolution claims.
- Supreme Court granted defendants’ summary judgment and denied John’s cross‑motion. The Appellate Division affirmed dismissal of the substantive claims but modified to (1) require indemnification/advancement to John for expenses defending the counterclaims and (2) restrain individual defendants from using corporate funds to defend the dissolution claim and order reimbursement to the Corporation for such payments.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of fiduciary duty | Individual defendants changed compensation/distributions in bad faith to deprive John of dividends | Actions were facially valid business decisions entitled to business‑judgment deference; no misconduct | Defendants entitled to summary judgment; John failed to show misconduct or triable bad‑faith issues |
| Common‑law dissolution | Majority’s conduct (excessive compensation, withholding distributions) warranted dissolution | No oppression or looting; compensation and retention were business decisions that benefited growth | Dismissed: no common‑law dissolution where no breach/looting established |
| Reimbursement/advancement for defense of counterclaims | John sought advancement/reimbursement for defense costs against counterclaims | Defendants did not oppose indemnification standard application | Appellate Division: John raised genuine issues; court must award reasonable fees/advancement subject to repayment if defendants prevail |
| Use of corporate funds to defend dissolution claim | Individual defendants should be restrained from using corporate funds to defend the dissolution action | Defendants argued corporate defense was proper | Court erred in denying restraint; corporate funds may not be used to defend against dissolution; individual defendants restrained and Corporation to be reimbursed for such payments |
Key Cases Cited
- Deblinger v. Sani‑Pine Prods. Co., Inc., 107 A.D.3d 659 (2d Dept. 2013) (fiduciary‑duty elements and duties of officers/directors)
- Matter of Lorie DeHimer Irrevocable Trust, 122 A.D.3d 1352 (4th Dept. 2014) (elements of breach of fiduciary duty)
- Matter of Kenneth Cole Prods., Inc., Shareholder Litig., 27 N.Y.3d 268 (N.Y. 2016) (business‑judgment rule explained)
- Auerbach v. Bennett, 47 N.Y.2d 619 (N.Y. 1979) (deference to corporate business decisions)
- Marx v. Akers, 88 N.Y.2d 189 (N.Y. 1996) (conclusory allegations insufficient to defeat business‑judgment rule)
- Matter of Kemp & Beatley, 64 N.Y.2d 63 (N.Y. 1984) (common‑law dissolution standard; oppression)
- Leibert v. Clapp, 13 N.Y.2d 313 (N.Y. 1963) (waste of corporate assets and excessive compensation standard)
- Kruger v. Gerth, 22 A.D.2d 916 (2d Dept. 1964) (affirming dismissal where shareholder failed to raise triable issue)