Citation. Sugarman v. Sugarman, 797 F.2d 3, 1986)
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Brief Fact Summary.
Appellants, Leonard Sugarman and Statler Industries, Inc., are appealing a judgment for Appellee minority shareholders, Jon Sugarman et al., for damages that resulted from Appellants freezing out Appellees from corporate revenues.
Synopsis of Rule of Law.
In order to prove that majority shareholders are freezing out minority shareholders from financial benefits, the minority shareholders need to demonstrate a pattern of majority decisions that collectively indicate a plan to withhold the benefits to the minority.
Leonard and Appellees are all descendants from the original shareholders of Statler Industries. Statler was formed in 1969 and was owned by three brothers in equal shares. The three brothers include Leonard’s father, Myer, and Appellees’ father, Hyman. By 1974, the shares were bought and sold to result in Leonard, his immediate family and close associates owning over half of the outstanding shares. Leonard was president and chairman of the board at Statler but Appellees were denied positions with the company. Leonard and the board never issued dividend payments, and Appellants paid Leonard’s father a pension while denying Appellees’ father a pension. Appellants also paid Leonard excessive compensation for his position. The lower court cited these factors, plus the low share price offered by Leonard to Appellees as evidence that Appellants were freezing out Appellees from the financial benefits of share ownership.
The issue is whether Appellants violated a fiduciary duty owed to Appellee minority shareholders by freezing them out from financial benefits.
The United States Court of Appeals for the First Circuit held that the lower court was correct in holding Appellants liable for damages to the Appellee shareholders. Although the court declined to hold that any one factor alone established a freezing out, they held that the collective volume of the devices employed by Appellants demonstrated a freezing out of the minority shareholders. The only defense Appellants had was to argue that the trial court was in error in how it viewed the facts behind Leonard’s salary, his father’s pension and the amount offered per share.