Oppressed Shareholder Settlement Void

Shareholders in New Jersey's Wild West City cannot distribute assets to resolve an oppressed shareholder action due to an unresolved claim involving an employee's accidental shooting. The case is a warning, perhaps, that prudence requires some due diligence before a release is signed to ensure  that there is not a lurking claim that could upset the settlement.

Purchase of Minority Interest

Oppressed shareholder actions almost invariably end with the compelled purchase and sale of the minority shareholder's interest. An unresolved claim, however, that could give a third party an interest in the company's assets may prevent any resolution of the dispute.

Stabile v. Stabile (Stabile v. Stablie.pdf) involved a dispute between the members of several family owned businesses owning a large tract of land in rural Sussex County, New Jersey and operating Wild West City, a western theme park. The businesses also held a liquor license and owned a contiguous restaurant. The litigation among the family members began in September 2005, when James Stabile filed suit alleging various breaches of duties by the directors of the business and minority shareholder oppression. In June 2006, the Court entered an order that the plaintiff was be bought out at fair value. The real estate holdings were appraised at about $11.45 million.

On July 7, 2006, Scott Harris, an actor working at Wild West City, was participating in a staged gunfight. He was shot in the head by another actor using a gun that did not contain blanks, but live ammunition brought to work another employee. (One of the owners and the park manager were indicted and are still awaiting trial. Story here.) Harris suffered a catastrophic brain injury filed suit. Harris then was granted permission to intervene in the case so that his attorney would receive copies of court papers. He was not permitted any participation in the merits of the action.

Settlement of Oppressed Shareholder Claim

The dispute went to trial and ultimately was settled with an agreement to convey a tract of real property to the plaintiff. When Harris found out about the settlement he sought to set aside the argument on the basis that his still as yet unresolved claim damages - he presented a life care plan with a cost of $23 million - rendered all of the companies insolvent. The trial judge denied the application, finding the claim "tenuous" in light of the fact that Harris was an employee and the claim likely was prohibited by the worker's compensation bar against personal injury suits against an employer.

The Appellate Division reversed, holding that Harris was entitled to status as a creditor and that the claim, even if it had not been tried to a judgment, rendered the businesses' insolvent. Harris sought to set aside the settlement under the Uniform Fraudulent Transfer Act, N.J.S.A. 25:2-29, and the Court found that the transfer was barred both because the size of the claim was greater than the assets of the corporation and the transfer was made to an insider for an antecedent debt and the plaintiff had reason to know of that the transferor was, in fact, insolvent.

Transfer of Shareholder Interest Barred

The Court rejected the plaintiff's argument that he was not actually an "insider" because he was, in fact, an oppressed minority, finding that the case had settled before that determination was made. In any event, because the plaintiff was also a family member he was deemed an insider despite the claim of oppression. The court remanded the case with instructions to conduct a plenary hearing on the merits of the personal injury claim.

The events seem extreme, but this decision contains some cautionary aspects. Most cases are resolved with an agreement that includes full releases and indemnification for the departing shareholder. At the same time, however, the Fraudulent Transfer Act gives the claim holder who establishes a fraudulent transfer the right to set aside the conveyance or, perhaps more troubling for the outgoing shareholder, to levy against the transfer asset or secure a judgment in the amount of the fraudulent transfer.

A minority shareholder that settles a claim without conducting some due diligence to assure that there are no outstanding claims that could render the company insolvent is at significant risk. It seems unlikely, but minority shareholders often contend that they have been excluded from management and the fact is that many are not intimately familiar with the day-to-day operations. Looking at this case, you probably want to make sure that at a minimum the oppressed minority conducts a search for pending lawsuits, gets a representation that there are no undisclosed claims and make sure that there has been no lapse in liability coverage.