deathThe death of a shareholder amidst a court battle for control of a closely held business can have a dramatic effect on the direction and outcome of the case.

We saw it happen in my post a few weeks ago about the Catalina Beach Club case which started as a deadlock dissolution case between feuding 50/50 factions, but was discontinued abruptly after the petitioning faction gained voting and board control by acquiring an additional 25% interest from the estate of one of the respondent shareholders who died a few months after the suit began, much to the chagrin of the surviving 25% respondent now downgraded to non-controlling, minority shareholder.

Not one but two deaths in another, fractious family-owned business resulted in shifts in control with game-changing consequences for the positions and leverage of the litigants. The resulting travails of two generations of the Lewis family are laid bare in a recent decision by Albany Commercial Division Justice Richard M. Platkin in Heller v Lewis, 2015 NY Slip Op 51867(U) [Albany County Dec. 21, 2015], in which he denied preliminary injunctive relief sought by the majority-turned-minority faction.


Heller involves a closely held corporation formed in the mid-1990s known as Hyperbaric Technologies, Inc. (“HTI”) which designs and markets hyperbaric chambers. The initial three, co-equal shareholders and directors were Eric Lewis, his uncle Peter Lewis, and his mother MaryRose Lewis. The business was run by Peter as CEO and by Peter’s brother, Richard (MaryRose’s husband and Eric’s father), as CFO.

HTI’s products are manufactured exclusively under contract with Breton Industries, Inc. (“Breton”) which is owned by brothers Peter and Richard. As you already may suspect, the non-alignment of ownership interests between HTI and Breton contributed to the tensions which first materialized in 2014 when Peter claimed that HTI owed him about $280,000 in back salary. Allegedly, in reviewing Peter’s demand, Eric and MaryRose examined HTI financial records showing that both Peter and Richard had paid themselves hundreds of thousands of dollars in “unauthorized” bonuses and payments of personal credit cards and attorney’s fees.

Eric’s Death and the Putsch Against Peter

Eric died at the age of 51 in November 2014. His one-third share in HTI passed to a trust for the benefit of his and his wife Tracey’s children. At shareholder and director meetings in January 2015, based on their findings of financial improprieties, MaryRose and the Trustee (as successor to Eric’s shares) fired the first shot by removing Peter from the Board, voting the Trustee and Eric’s widow, Tracey, onto the Board, and terminating Peter’s employment as CEO. Curiously, they did not move against Richard but shortly afterward he voluntarily resigned as HTI’s CFO.

Peter Fires Back With a Lawsuit

Peter fired the next shot, in February 2015, by suing HTI for damages for breach of his employment contract. HTI, under the then-control of the three directors who fired him (MaryRose, the Trustee, and Tracey), filed counterclaims against Peter for fraud, conversion, breach of contract, breach of fiduciary duty, and misappropriation.

For about a half-year following Peter’s ouster and Richard’s resignation, the three directors ran the business and controlled the finances of HTI without taking compensation. In mid-June 2015, they held a directors meeting at which they approved a dividend plan calling for monthly distributions to the shareholders.

The Pendulum Swings Back After MaryRose’s Death

The fickle finger of fate interceded again about two weeks later when MaryRose died at the age of 78. Guess who succeeded to her HTI shares: her husband Richard, Breton co-owner and stalwart ally of his brother Peter. As the newly ensconced majority shareholders, Peter and Richard promptly scheduled a shareholders meeting in August 2015 at which they removed the Trustee and Tracey as directors and voted themselves onto the Board as sole directors. Then they convened a special directors meeting at which the pending lawsuit brought by Peter against HTI was settled including general releases and a stipulation of discontinuance signed by a newly appointed attorney for the corporation. The settlement agreement provided for reinstatement of Peter’s employment contract and the payment to him of back pay over $100,000 and other benefits, and re-hiring Richard as CFO.

In subsequent proceedings in Peter’s lawsuit, the court permitted the substitution of HTI’s new attorney and accepted the stipulation of discontinuance but struck language in it that would have discontinued Peter’s claims and HTI’s counterclaims “on the merits, with prejudice.”

The Trustee Takes the Offensive

A few days after the court heard the application to substitute counsel and discontinue Peter’s lawsuit, the Trustee filed a lawsuit against Peter and Richard asserting direct and derivative claims patterned on the (discontinued) counterclaims in Peter’s lawsuit alleging financial improprieties, plus new claims challenging the legality of the “new” Board’s settlement of Peter’s lawsuit and seeking judicial removal of Peter and Richard as directors (read complaint here).

The Trustee also filed a motion for preliminary injunctive relief, asking Justice Platkin to restrain the payment of salary, bonus and benefits to Peter and Richard; to compel the payment of shareholder dividends pursuant to the June 2015 directors’ resolution; to prohibit Breton from taking any action adversely affecting HTI; and compelling access to HTI’s books and records.

The Court’s Decision

Justice Platkin’s decision had good news and bad news for the Trustee.

On the plus side, Justice Platkin agreed that the Trustee had demonstrated “a fair (but not overwhelming) likelihood of success” on his claim seeking a declaration that Peter’s and Richard’s August 2015 actions on behalf of HTI to settle Peter’s lawsuit “are void (or voidable) under Business Corporation Law § 713 as the product of self-dealing.” Justice Platkin rejected Peter’s and Richard’s argument that the actions were properly approved by Richard’s vote as HTI’s sole disinterested director. Invoking the principle that “a director complicit in another director’s alleged wrongdoing or who was a beneficiary of the alleged wrongdoing may be deemed an interested director,” Justice Platkin found that Richard was not disinterested because he

had a substantial interest in the Board’s determination to settle [Peter’s lawsuit]. One such interest appears to have been based upon [Richard’s] desire to return to  compensated employment with HTI, a decision that rested solely with [Peter]. A further interest arises out of the allegations that [Richard] was complicit in [Peter’s] alleged misappropriation of HTI funds and engaged in similar misappropriations with his brother’s cooperation. As a result, [Richard] appears to have had a substantial financial interest in discontinuing [Peter’s lawsuit] so as to avoid disclosure of his alleged wrongdoing and the prospect of legal liability therefor.

While the court’s finding of a likelihood of success on the merits of this claim may bode well for the Trustee later in the case, it didn’t suffice for purposes of interim relief. Justice Platkin found that the Trustee did not satisfy the irreparable injury requirement for injunctive relief, primarily because the Trustee “possesses an adequate remedy at law: money damages” for the allegedly improper compensation being taken by Peter and Richard.

Justice Platkin also denied the Trustee interim relief concerning Peter’s and Richard’s refusal to implement the dividend policy adopted by the previous Board members in June 2015, finding that it interfered with directors’ independent decision-making duty. He also denied interim relief against actions by Breton adverse to HTI, finding that Peter and Richard as officers and directors of Breton owed no fiduciary duty to HTI.

Justice Platkin lastly denied the Trustee’s request to compel access to HTI’s corporate books and records under BCL § 624 due to the Trustee’s “failure to make proper written demand” or “to demonstrate that such a demand would be futile.”

The claims in the Heller case are garden variety. As an outsider, what I find most interesting about the case are not the legal issues, but the family alliances and estrangements that drive the choices made in the boardroom and the courtroom. Perhaps most intriguing in that regard is Richard’s presumptively divided loyalties, both familial and financial, between his brother on the one hand and his wife and son on the other, both before and after their deaths. To paraphrase Tolstoy’s famous opening line in Anna Karenina, the unhappy Lewis family certainly has proven itself unhappy in its own way.