Tuesday, February 26, 2013

Barth v. Barth case brief

Barth v. Barth case brief summary
659 N.E.2d 559

SYNOPSIS: The trial court dismissed plaintiff minority shareholder's complaint, brought individually, alleging misuse of corporate assets for failure to state a claim upon which relief could be granted. The Court of Appeals (Indiana) reversed the trial court's dismissal because requiring a derivative action would have exalted form over substance. Defendants, closely held corporation and majority shareholder, sought transfer.

-The minority shareholder brought a lawsuit individually, rather than derivatively on behalf of the corporation, against the closely held corporation and the majority shareholder.
-The minority shareholder alleged that the majority shareholder had paid excessive salaries to himself and to family members, used corporate employees to perform personal services without compensating the corporation, dramatically lowered dividend payments, and appropriated corporate funds for personal investments.

The court held that because this was a closely held corporation, the trial court in its discretion could treat the minority shareholder's action raising derivative claims as a direct action, exempt it from those restrictions and defenses applicable only to derivative actions, and order an individual recovery, if it found that to do so would not: (i) unfairly expose the corporation or the majority shareholder to a multiplicity of actions: (ii) materially prejudice the interests of creditors of the corporation: or (iii) interfere with a fair distribution of the recovery among all interested persons.

-The general rule is that shareholders of a corporation may not maintain actions at law in their own names to redress an injury to the corporation even if the value of their stock is impaired as a result of the injury.
-This rule will not always stand in relation to a close corporation.
a. Shareholders in a CC stand in fiduciary relationship to each other, and must deal fairly and honestly and openly with the corporation and their fellow shareholders.
b. Shareholder litigation in a CC will often not implicated the policies that mandate requiring derivative suits when more widely held corporations are involved.In the case of a CC, the court in its discretion may treat an action raising derivative claims as a direct action only if it finds that it will not:
1.  unfairly expose the corp. or the Ds to a multiplicity of actions.
2. materially prejudice the interests of the creditors of the corporation.c. interfere with a fair distribution of the recovery among all interested partners.

OUTCOME: The court granted transfer, vacated the opinion of the appellate court, and remanded the cause to the trial court for reconsideration of its order of dismissal.

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