Last week the Oregon Court of Appeals examined the remedies that a trial court may impose to remedy shareholder oppression. In Hickey v. Hickey, ownership of a family ranching business was divided among several siblings. One sibling acquired a majority interest by purchasing shares from others. As controlling shareholder, he engaged in self-dealing and commingling of assets, to the detriment of the remaining minority shareholder. The minority shareholder then filed suit under ORS 60.952 to impose remedies for oppression. The trial court ordered amendment of the bylaws and articles of incorporation to strip the voting rights of the majority shareholder and remove him from management.
The appellate court reviewed the nonexclusive list of remedies provided under ORS 60.952 to rectify oppressive conduct, including: (1) cancellation or alteration of any provision in the corporations articles of incorporation or bylaws, (2) removal from office of any director or officer, (3) appointment of a custodian to manage the business, (4) appointment of a provisional director, (5) retention of jurisdiction by the trial court for protection of the minority shareholder, or (6) dissolution of the corporation. While the trial court has many remedies to choose from, "[t]he remedy must correspond to the wrong--or legally recognized right--for which the remedy is provided under ORS 60.952."
The Court of Appeals reversed the trial court, holding that the effect of the remedy selected was to convert the minority shareholder into the majority shareholder. That constituted a windfall to the plaintiff and was not within the "reasonable expectations" of either party. The appellate court then remanded the case to the trial court with instructions to devise a more appropriate remedy, such as ordering a share purchase for fair value to remove one of the two shareholders from the business.
Last week the Oregon Court of Appeals addressed the liability of directors of a nonprofit corporation, reversing summary judgment for directors of a homeowners association on breach of fiduciary duty claims.
In WSB Investments, LLC v. Pronghorn Development Company, LLC, plaintiff was an owner of a timeshare and a member of the HOA that asserted various claims against the directors, including breach of fiduciary duty. In reviewing the trial court's grant of summary judgment, the court discussed the standards for directors' obligations to a nonprofit. While ORS 65.369(1) imposes liability for gross negligence or intentional conduct, the legislature has not defined gross negligence in this context. The court held that, for directors' liability, gross negligence means negligence characterized by near total disregard or indifference to the rights of others or the probable consequence of a course of conduct. The court further held that, while ORS 65.357 states the standard of care of uncompensated directors of a nonprofit, whether those standards have been violated must be determined with reference to the obligations set out in the governing documents.
Accordingly, the court found triable issues of fact as to,among other things, the use of reserve funds for operating expenses and failing to elect new board members in a timely fashion, all in violation of the HOA's governing documents.
Members and managers of a limited liability company are shielded from vicarious liability for the LLC's torts, but can be held personally liable if they either knew of the tortious acts or participated in them. That was the conclusion of the Oregon Supreme Court last week in Cortez v. Nacco Material Handling Group, Inc.
ORS 63.165(1) protects members and managers of an LLC from liability resulting "solely by reason of being or acting as a member or manager." The scope of that statutory immunity was at issue in Cortez. The court held that the immunity is comparable to that available to an officer or director of a corporation. According the to court, "members or managers who participate in or control the business of an LLC will not, as a result of those actions, be vicariously liable" for the LLC's torts. But a member or manager can be liable for its own negligent acts in managing the LLC, or for knowing of or participating in the LLC's torts.
There is little debate that the Lanham Act, 15 USC 1125(a), entitles direct competitors to sue each other for false advertising, while consumers (including business consumers) lack standing to sue under the Act. For parties that are neither competitors nor consumers, however, the landscape has been far from clear. In Lexmark International v. Static Control Components, Inc., the United States Supreme Court last week clarified that the class of plaintiffs entitled to assert a false advertising claim under the Lanham Act includes any party that suffers injury to a commerical interest in reputation or sales flowing directly from the deception.
Lexmark manufactures and sells laser printers, including the toner cartridges for those printers. Static Control does not sell printers or toner catridges but it manufactures a microchip that remanufacturers may use to refurbish Lexmark toner catridges. Although Lexmark and Static Control are not direct competitors, Static Control sells its microchips to Lexmark's competitors. Lexmark allegedly informed consumers that it was illegal to use Static Control's microchips to refurbish Lexmark toner catridges, and then sued Static Control for copyright infringement. Static Control countersued Lexmark under the Lanham Act for false advertising. The District Court dismissed Static Control's counterclaim on the ground that only a direct competitor has standing to sue.
The Supreme Court ruled that direct competition is not required to assert a Lanham Act false advertising claim, and that Static Control stated a claim for relief against Lexmark where Lexmark disparaged Static Control and its products, thereby causing injury to Static Control's reputation.
The Oregon Court of Appeals recently held that a business owner can pursue a defamation claim against an individual who posted a negative on-line review. In Neumann v. Liles, plaintiff, who operates a wedding venue, was the target of a review on google.com calling her, among other things, "two faced, crooked, and . . . rude." She sued the author of the review, who had been a guest at a wedding hosted at plaintiff's venue.
The on-line critic in response filed a "special motion to strike" under Oregon's SLAPP statute. SLAPP stands for "strategic lawsuit against public participation," and the anti-SLAPP statute creates a procedure for dismissing at an early stage an unfounded lawsuit designed to quash speech or activism on issues of public interest. While the statute protects certain speech-related activities, it does not shield defendants who engage in defamatory speech.
According to the Court of Appeals, the trial court should not have granted the anti-SLAPP motion to strike the complaint because plaintiff had offered sufficient evidence that the review was in fact defamatory. While defendant claimed that the review represented his opinion and was merely "figurative, rhetorical, or hyperbolic," the Court of Appeals concluded that most of the post was "nonrhetorical and factual" and contained specific, potentially defamatory, statements about plaintiff's honesty and business ethics. Accordingly, the trial court should have allowed the case to proceed to trial.
The Oregon Supreme Court this month held that a person offered at-will employment may be able to state a claim for promissory estoppel and fraud when the prospective employer retracts the offer.
In Cocchiara v. Lithia Motors, Inc., according to the facts put forward by plaintiff in response to a summary judgment motion, plaintiff was a long-time employee of defendant who, after suffering a heart attack, asked defendant for a transfer to a less stressful position. Defendant offered plaintiff a transfer to a new position, and plaintiff as a result turned down a job offer from another prospective employer. Soon thereafter, and before plaintiff made the transfer, the employer retracted the offer. Plaintiff sued for promissory estoppel and fraud.
The trial court and Court of Appeals held that plaintiff could not state a claim as a matter of law. Because the employment offered to him was at-will and could have been terminated at any time, those courts concluded he could not prove either reasonable reliance on the promise or damages. The Supreme Court disagreed, finding nothing in the law to support the conclusion that "a promisee's reliance is per se unreasonable if the underlying promise is for a contract at will." Reasonableness is an issue for the jury, considering all relevant circumstances. Likewise, the fact that the offered job was terminable at will does not mean as a matter of law that plaintiff cannot prove associated damages.
Last week the Oregon Court of Appeals again addressed the appropriate ratio of punitive to compensatory damages when compensatory damages are modest. One week after affirming an award of punitive damages that was 200 times compensatory damages in Lithia Medford LM, Inc. v. Yovan, the court, in Evergreen West Business Center, LLC v. Emmert, reinstated a jury award of punitive damages 600,000 times compensatory damages.
In Evergreen, the jury's verdict and damages awards were supported by evidence that the defendant LLC member had a substantial net worth and that he made a calculated decision to breach his fiduciary duties to the LLC in order to profit at its expense. The defendant breached his fiduciary duties by dealing behind the backs of the other LLC members to acquire real property that was owned by the LLC, but under threat of foreclosure.
Finding for the LLC, the jury had awarded $1 in compensatory damages and $600,000 in punitive damages. The trial court reduced the punitive damages award to $4 in order to maintain the 4-to-1 ratio that has been approved by the Oregon Supreme Court as consistent with the Due Process Clause in non-personal-injury cases.
Among his arguments on appeal, defendant contended that, as a member of the LLC, he did not owe it any fiduciary duty. In particular, he claimed the LLC statute provides that members of a manager-managed LLC who are not also managers owe no duties to the entity or the other members solely by reason of being a member. The Court of Appeals concluded that the statute was inapplicable because the defendant's fiduciary duty was not based solely upon his status as a member, but rather upon the fact that the defendant entered into a relationship of confidence with the company when he promised to prevent the foreclosure of the property on behalf of the LLC.
Next, the court discussed the punitive damages award of $600,000. Relying on the Oregon Supreme Court's decision in Hamlin v. Hampton Lumber Mills, Inc. and its own decision in Lithia, the court held that the reprehensibility of the defendant's conduct, which is the most important indicator of reasonableness of a punitive damages award, supported an award that exceeded a single-digit multiplier of nominal damages. Given the defendant's net worth and the gravity of his tortious conduct, the $600,000 in punitive damages was sufficiently admonitory and did not violate his right to due process.
See our discussion of Lithia here.
The Oregon Court of Appeals last week affirmed a jury award of $100,000 in punitive damages in a case where compensatory damages were $500. The Court applied the standards set forth by the Oregon Supreme Court last year in Hamlin v. Hampton Lumber Mills, Inc., finding that the defendant engaged in sufficiently reprehensible behavior to justify punitive damages 200 times compensatory damages.
In Lithia Medford LM, Inc. v. Yovan, defendant purchased an automobile from plaintiff, and soon thereafter found a discrepancy between the mileage on the odometer and the actual mileage. Following an extended dispute over how to resolve the issue, plaintiff sued to rescind the sale due to mutual mistake. Defendant counterclaimed for violation of the Oregon Unlawful Debt Collections Practices Act. The trial court reduced the jury's award of $100,000 in punitive damages to $2,000, to bring it in line with the modest amount of compensatory damages.
Hearing the case en banc, the Court of Appeals split on whether the trial court properly reduced the punitives award to a single-digit multiple of the compensatory damages. Judge Nakamoto, writing for the majority, stated that the consumer had proven that the car dealer "repeatedly used deceptive and abusive tactics against a financially vulnerable consumer to enhance its financial interests." The court also pointed to the dealer's "arrogant presentation to the jury of its position that it had done nothing wrong" to justify retaining the jury's punitive damages award. These facts supported the 200-1 ratio of punitive to compensatory damages.
Judge Wollheim, writing for the minority, advocated for reducing the punitives to $25,000, which is comparable to the statutory penalties available under the Unlawful Debt Collections Practices Act.
See our discussion of Hamlin, and its analysis of punitive damages in cases in which compensatory damages are small, here.
In Kollman v. Cell Tech International, Inc., decided last month by the Oregon Court of Appeals, one of the issues before the court was whether the plaintiff shareholder's claim against another shareholder for breach of fiduciary duty was derivative or direct. In a derivative action, a shareholder brings a lawsuit on behalf of the corporation and all of the shareholders benefit from any recovery. In a direct action, a shareholder sues on his own behalf and recovers individually. In Kollman, the Court of Appeals, applying Delaware law, held that, under some circumstances, a plaintiff shareholder may have a direct action against a fellow shareholder, even if the defendant's alleged breach of fiduciary duty caused a pro rata dilution of their respective shares of the corporation.
The plaintiff in Kollman alleged that the defendant shareholder, who was his former spouse and a corporate director, deceived him into giving up his positions as an officer and director of the corporation; that, once he was ousted, he was excluded from all meaningful participation in the management of the corporation; that his employment with the corporation was terminated; and that his former spouse increased her salary from $140,000 to $290,000. The plaintiff also alleged that his former spouse entered into a transaction with a third party that resulted in substantial dilution to his and his former spouse's ownership of the corporation. This transaction with the third party reduced their combined ownership in the corporation from approximately 80% to less than 10%.
Citing Delaware law, the Court of Appeals noted a two-prong test to determine whether a claim is derivative or direct: (1) who suffered the alleged harm--the corporation or the plaintiff shareholder; and (2) who would receive the benefit of the recovery or other remedy. In the typical direct action lawsuit, the plaintiff suffers some harm that the other shareholders do not suffer. However, in Gatz v. Ponsoldt, the Delaware Supreme Court held that plaintiff shareholders can have a direct claim for breach of fiduciary duty if the fiduciary expropriates economic value and voting power from the shareholders, even if the fiduciary does not retain the direct benefit of the expropriation.
In this case, the Court of Appeals agreed with the trial court that plaintiff's fiduciary duty claim is direct and not derivative. First, the Court held that the plaintiff suffered a unique harm because he was excluded from any meaningful participation in corporate affairs. Second, any recovery on behalf of the corporation in a derivative action would benefit the third party who already was the main beneficiary of the defendants' breach of fiduciary duty.
Controlling shareholders must be wary of how they structure transactions that have the effect of extracting value from their corporations, even if they suffer a pro rata decrease in voting power and ownership.
A title company is liable for negligence in a real estate transaction in which plaintiff thought he had purchased a lot that -- it was later discovered -- had already been sold to another party. Last week the Oregon Court of Appeals in Peterson v. McCavic affirmed a jury verdict for negligence against Amerititle, Inc., which had served as escrow agent and title insurer in the transaction.
Plaintiff undertook to purchase an empty lot in The Dalles, Oregon, but the property description in the earnest money agreement was changed after he signed it -- leading to his purchase of a lot about 50 feet from the one he thought he was buying. Plantiff learned of the mistake from the actual owners of the land he thought he had purchased, but only after spending several months building a house on the wrong lot.
Amertitle argued that, pursuant to the economic loss doctrine, it could be liable for negligence only if it had a special relationship with plaintiff. An escrow holder generally is a neutral party with no obligation to either party to the transaction. However, an escrow holder can assume a duty when it volunteers advice or otherwise acts outside the scope of its normal duties. Viewed in the light most favorable to plaintiff, the evidence showed that the escrow agent changed the property description in the earnest money agreement, and prepared closing documents based on that change, without direction from or knowledge of the parties to the transaction. By doing so, it acted outside the duties of a neutral party and incurred an obligation to exercise due care. On that basis, the court affirmed the jury verdict.
See our earlier discussion of the economic loss doctrine here.