Chomiak v. Kasian, or how to get sued by your business partners

From fake loans to $80,000 bonuses to certain shareholders in lieu of dividends to all, the defendants in Chomiak v. Kasian provided a variety of avenues for a successful shareholder oppression action. On August 3, 2017, the Appellate Division of the New York Supreme Court issued an opinion affirming the lower court's ruling for the plaintiffs, who were the defendants' relatives and co-shareholders.

The defendants owned 52% of the business at issue, Twin Bay Village, and the plaintiffs owned 48%. The plaintiffs' involvement in the business was limited, at least recently, and the defendants ran the business, which had been in the family since 1957.

The defendants:

  • held a shareholder meeting in 2001 without notifying the plaintiffs and passed a corporate resolution awarding themselves $80,000 per year bonuses, untied to their performance or that of the company, despite the fact the corporation had not paid dividends to its shareholders since 1995;
  • issued 100 shares of stock in 2004, in addition to the 100 shares then outstanding, and then divided those purported shares between themselves without permitting the plaintiffs an opportunity to purchase additional shares, diluting the minority shareholders;
  • claimed to have issued $750,000 in loans to the corporation between 2005 and 2013, which their financial evidence did not support; and
  • amended the corporation's bylaws in 2009 to state that a shareholders who had ceased to be active participants in the business could be forced to sell their shares by a majority of shareholders (such as the defendants).

In 2009, the defendants determined that the fair value of the corporation's shares was $1,139 and demanded that the plaintiff's sell their shares. The plaintiffs instead filed suit for shareholder oppression in the form of a breach of fiduciary duty and statutory action.

The New York court applied the reasonable expectations standard and found that the plaintiffs' reasonable expectations that the defendants would protect the interests of all shareholders had been frustrated. The Appellate Court affirmed.

The takeaway of Chomiak is, as in many shareholder or "partnership disputes", that when your business is organized as a corporation, you are not acting for yourself, but for the corporation and its shareholders. The fact that the controlling shareholders operate or manage the corporation does not diminish the rights of the minority shareholders.

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