UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 99-20725

JAMES P. HOLLIS,

Plaintiff-Appellee,

versus

DAN H. HILL,

Defendant-Appellant.

Appeal from the United States District Court

for the Southern District of Texas

November 17, 2000

Before POLITZ, JOLLY, and BARKSDALE, Circuit Judges.

POLITZ, Circuit Judge:

James P. Hollis seeks a court-ordered buy-out of his 50% interest in a Nevada

corporation. The district court found that Dan Hill, holder of the other 50% interest,

breached the fiduciary duty he owed to Hollis and ordered a buy-out of Hollis’ shares

based on the corporation’s value more than one year prior to the date of judgment. Hill

timely appeals. For the reasons assigned, we affirm in part and vacate and remand in
1Hill explained that FFUSA relied heavily on South Central Mortgage for two reasons. Hill’s

experience with South Central and hisrelationship with its president, Todd Etter, persuaded him that

the company could be relied upon to service the notes properly. This was particularly important in

the event that a note was defaulted. In addition, South Central was among the few firms outsourcing

the marketing of its notes. Most other mortgage companies preferred to keep the entire operation

in-house by maintaining their own sales forces. As FFUSA was strictly a marketing company, few

other firms would complement its business as well as South Central.

2

part.

BACKGROUND

In early 1995, Hill and Hollisjointly founded First Financial USA, Inc. (FFUSA),

a Nevada corporation which marketed first lien mortgage notes and other non-security

financial products. All of the whole mortgage notes placed by FFUSA were obtained

from and serviced by South Central Mortgage.1 Hill and Hollis also owned equal

shares of First Financial United Investments, Ltd., L.L.P. (FFUI), a Texas limited

liability partnership organized in June 1996 to sell securities products as a

broker/dealer. This action focuses on the parties’ rights and obligations respecting

FFUSA.

Hill was a 50% owner of FFUSA, was a director and served as its president, and

operated its Houston office. He testified his duties were “to set up the company, set

up all the administration, hire the personnel, set up the tracking systems, support reps,

recruit reps, and generally help in the strategizing of the company direction.” Hollis

owned the other 50% interest in FFUSA, was a director and served as its vice
2A valuation report by Dixon & Company dated December 17, 1997, estimated the company’s

value to be between $1.3 million and $3.5 million.

3

president. Hollis operated its Melbourne, Florida office, with duties including

recruiting, training and supporting representativesin theirmarketing efforts, seeking out

new revenue sources, and participating in management. Their wives completed the

board of directors and were employed by the firm.

From its inception through 1997, FFUSA did very well financially and paid

substantial salaries to Hill and Hollis. In early December 1997, however, Hill began

to complain that Hollis was not carrying an equal share of the firm’s work load and

made known his belief that Hollis was getting more money than he deserved. He

stopped paying Hollis’ salary. Hollis proposed several ways to resolve the dispute,

including mediation, relocating to Houston, placing a disinterested person on the board

to break the deadlock, or exchanging his interest in FFUI for Hill’s interest in FFUSA.

Hill rejected all of the proposals. In March 1998, Hill proposed to buy Hollis’ interest

in FFUSA in exchange for a ten-year, $1.5 million consultant agreement.2 When Hollis

rejected the proposal, Hillthreatened to close FFUI and establish his own broker/dealer

business.

Meanwhile, Hill took FFUSA’s annuity business and, without Hollis’

knowledge, placed it into a sole proprietorship called “Dan Hill d.b.a. First Financial
4

U.S.A.” Hill explained that this move was in response to a cease and desist letter

FFUSA received from the State of Texas prohibiting it, as a corporation not licensed

in Texas, frommarketing insurance products. Hill, a resident of Texas, created the sole

proprietorship so that FFUSA could continue the marketing of insurance products and

executed a contemporaneous assignment transferring all accounts of the sole

proprietorship back to FFUSA. Hill charged the corporation a fee for providing this

“service.” He later split this fee with Hollis.

Hill also stopped sending FFUSA financial reports to Hollis. On May 11, 1998,

Hollis visited the Houston office of FFUSA and FFUI and requested copies of financial

reports and other documents. Hill refused, claiming that he and the key Houston office

employees had appointments that day and that they did not have time to go over the

books with Hollis. Hollis later, through his attorney, asserted his right as a shareholder

of FFUSA and limited partner of FFUI to inspect the books and records of the two

firms. On the eve of the inspection, Hill and Hollis agreed to negotiate. Hollis testified

that the result was an agreement under which Hill would acquire Hollis’ interest in

FFUI and would draw a salary of $200,000 from FFUSA, and Hollis would draw an

annual salary of $120,000 therefrom for encouraging FFUSA’s representatives to

produce business and for supplying them with the necessary paperwork. Under the

agreement, both men retained a 50% interest in FFUSA.
5

By August 1998, the tension between Hollis and Hill resurfaced. Hill stopped

sending company reports to Hollis and unilaterally undertook a number of measures he

claims were intended to lower the firm’s costs, including reducing officer salaries by

50%. On October 16, 1998, he informed Hollis that he had decided to reduce his own

annual salary to $80,000 and would reduce Hollis’ salary to zero dollars. In a

November 1998 letter, Hill told Hollis that: “[his] position as an inactive officer

commands no salary;” phone service in the Florida office would be canceled; and the

lease for the Florida office would be terminated. Hollis was informed that he was no

longer authorized to use the company cellular phone and that FFUSA would no longer

pay the expense of his leased vehicle. Hill terminated the employment of Hollis’ wife.

Hill significantly reduced costs in the Houston office, as well. He testified that cost

cutting measures were necessary because he had received word from Etter that South

Central Mortgage would likely not be able to provide FFUSA the steady stream of

business it had in the past. He conceded, however, that he had made very little effort

to produce new lines of business for FFUSA.

Hollis filed the instant action on December 8, 1998, alleging shareholder

oppression. A few weeks later Hill terminated Hollis as vice-president and eliminated

all of his company benefits. Hollis continued as corporate secretary, board member,

and 50% shareholder. The financial condition of FFUSA worsened and, according to
3

In ruling from the bench, the district court opined that the absence of a non-compete agreement

was of no consequence and that Hill’s actions were subject to the corporate opportunity doctrine.

Any finding of the breach of duty of loyalty based on usurpation of a corporate opportunity

necessarily related to opportunities available to FFUI. Hollis has made no claims as an FFUI

shareholder and has not claimed that Hill usurped a corporate opportunity. The trial court

appropriately did not specifically find a violation of the corporate opportunity doctrine. We assume

that the district court intended this discussion to support its finding of oppression.

6

Hill’s expert, the firm had decreased in value to $100,000 by May 11, 1999. On April

30, 1999, Hill, acting through his attorney, made an unsuccessful “capital call” on

Hollis.

The district court, applying Nevada law, concluded that Hill’s conduct was

oppressive and ordered him to buy Hollis’ shares in FFUSA. The court cited the

capital call and the firing of Hollis as the “easiest objective data” supporting the claim

of oppression, and added that the “more egregious” act of moving the annuity business

to the Hill-sole-proprietorship should not have occurred without the approval of the

board of directors. The court also suggested that Hill’s interference with the flow of

information to Hollis and his threat to start a business that competed with FFUI were

oppressive acts.3 The court ordered Hill to purchase Hollis’ shares for $667,950,

which represented the value ofthe corporation on February 28, 1998, the date the court

found that the oppression began. Adding attorney’s and expert’s fees, the total award

to Hollis was $792,915. This appeal followed.

ANALYSIS
4TEX. BUS. CORP. ACT ANN. art. 8.02A (Vernon 1980).

5Transcontinental Gas Pipeline Corp. v. Transportation Insur. Co., 953 F.2d 985, 988 (5th

Cir. 1992) (citations omitted).

6McCallum v. Rosen’s Diversified, Inc., 153 F.3d 701,703 (8th Cir. 1998) (quoting Farr v.

Farm Bureau Ins. Co., 61 F.3d 677, 679 (8th Cir. 1995)).

7

We apply Texas law in this diversity action. Texas, like most other states,

follows the “internal affairs doctrine.” That is, the internal affairs of the foreign

corporation, “including but not limited to the rights, powers, and duties of its board of

directors and shareholders and matters relating to its shares,” are governed by the laws

of the jurisdiction of incorporation.4 Nevada corporate law therefore determines the

existence and scope of duties between Hollis and Hill. “In order to determine state

law, federal courts look to final decisions of the highest court of the state. When there

is no ruling by the state’s highest court, it is the duty of the federal court to determine

as best it can, what the highest court of the state would decide.”5 

Generally, in determining what a state’s highest court would hold with respect

to a particular issue, “we may consider relevant state precedent, analogous decisions,

considered dicta, scholarly works and any other reliable data.”6 In the present

situation, however, the most reliable source of assistance, namely dispositive decisions

from the Nevada courts, are non-existent. In addition, the corporate law of Nevada

gives limited guidance, and determining where the Nevada Supreme Court would look
7See F. HODGE O’NEAL & ROBERT B. THOMPSON, O’NEAL’S OPPRESSION OF MINORITY

SHAREHOLDERS § 7:13 (2d ed. 1985).

8Definitions of “oppression” in this context have tended to take one of three forms. A number

of courts have defined oppression in terms of the fairness of the action taken by the majority, using

phrases such as “burdensome, harsh and wrongful conduct ... ‘a visible departure from the standards

of fair dealing, and a violation of fair play on which every shareholder who entrusts his money to a

corporation is entitled to rely.’” Id. at § 7:13, 79-80 (quoting Skierka v. Skierka Bros., Inc., 629

P.2d 214, 221 (Mont. 1981)). Other courts have made reference to the fiduciary duties existing

between majority and minority shareholders, while still others have found oppression based on the

disappointment of the minority’s reasonable expectations. O’NEAL & THOMPSON at 80.

9The Nevada dissolution statute allows for dissolution and the appointment of a receiver upon

application of the holders of one-tenth of the company’s stock whenever:

(a) The corporation has willfully violated its charter;

(b) Itstrustees or directors have been guilty of fraud or collusion or gross mismanagement in the

conduct or control of its affairs;

(c) Its trustees or directors have been guilty of misfeasance, malfeasance or nonfeasance;

(d) The corporation is unable to conduct the business or conserve its assets by reason of the act,

neglect or refusal to function of any of the directors or trustees;

(e) The assets ofthe corporation are in danger of waste, sacrifice or lossthrough attachment,

foreclosure, litigation or otherwise;

(f) The corporation has abandoned its business;

(g) The corporation has not proceeded diligently to wind up its affairs, or to distribute its assets

8

for such guidance on the issues presented herein presents a challenge. We therefore

must resolve the questions posed by evaluating the available Nevada case law

addressing similar factual scenarios and by looking to other jurisdictions when

necessary.

Nearly every state statutorily permits holders of a certain percentage of corporate

sharesto petition the courts for dissolution under particular enumerated circumstances.

Thirty-six states7list the oppression of minority shareholders by controlling

shareholders as grounds for dissolution.8 Nevada does not.9 Hollis, however, has not
in a reasonable time;

(h) The corporation has become insolvent;

(i) The corporation, although not insolvent, isfor any cause not able to pay its debts or other

obligations as they mature; or

(j) The corporation is not about to resume its business with safety to the public.

NEV. REV. STAT. § 78.650 (1999).

10Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. App. Ct. 1984).

11944 P.2d 861 (Nev. 1997).

9

sought dissolution of FFUSA under NEV.REV.STAT. § 78.650. Instead, he contended,

and the district court found, that Hill’s actions amount to a breach of fiduciary duty

owed him and that equitable relief is therefore available.10 Before us, then, is the

question whether a duty of loyalty was breached by Hill and, ifso, whether the district

court erred in granting a retroactive buy-out remedy.

A. Existence of a Fiduciary Duty

We find that a fiduciary duty existed between Hollis and Hill. The facts reveal

that they agreed to begin a business together, incorporating it under the name FFUSA.

They retained equal ownership in the corporation, and became officers and directors,

agreeing to the work obligations and salary of the other. With only two shareholders

and management responsibilities divided between them, a fiduciary relationship was

created not unlike that in a partnership.

We find this case analogous to Clark v. Lubritz11 where five doctors agreed to

join their practices to form a preferred provider organization called Nevada Preferred
12It is unclear from the opinion whether the doctors elected to incorporate as a statutory close

corporation under NEV. REV. STAT. § 78A.020. Nevada, not unlike many other states, allows

corporations held by fewer than thirty persons to select a set ofspecial governance rules. It matters

not in our analysis of this case, however, because these rules do not alter the fiduciary duties running

between corporate participants.

13Clark, 944 P.2d at 863.

14Id. at 864-65.

10

Professionals (NPP). They agreed orally that each would contribute $15,000, and that

they would share profits and losses equally. Soon after the agreement, they decided to

incorporate.12 After a dispute over NPP’s benefit plan sales, Lubritz resigned as

president and director, intending to relegate himself to “just being a stockholder.”13

Over the next four years, he continued to perform limited services for NPP and

continued to receive an equal share of the firm’s proceeds. In the fifth year, however,

the other doctors voted, unbeknownst to Lubritz, to reduce the portion of proceeds

distributed to Lubritz while increasing their distributions. When Lubritz learned that

he was receiving a lesser share of the firm’s profits, he sued. The court found for

Lubritz, both on a breach of contract theory, based on the doctors’ original oral

agreement, and for breach of fiduciary duty, based on the four shareholders’

concealment of the unequal distribution of profits.14

In Clark, despite the incorporation of NPP, the court imposed fiduciary duties

between the shareholders akin to that of a partnership. The evidence revealed that the
15Id. at 863.

16We note that both parties argue over the relevance of Hollis’ status as an “equal” rather than

“minority” shareholder. We find this distinction immaterial to the present dispute. While we

acknowledge that in Clark the plaintifftruly was a “minority” shareholder, in the sense that he owned

only 1/5 of the stock, we find this difference insignificant in light of Hill’s virtually unfettered control

of FFUSA. Further, the court in Clark never spoke of “minority” shareholder status, partially

because it treated the organization as a de facto partnership, but also because the partners who

decreased his salary clearly controlled the organization, much like Hill controlled FFUSA in the case

at bar. Furt hermore, other jurisdictions have agreed that the question of minority versus majority

should not focus on mechanicalmathematical calculations, but instead, “The question is whether they

have the power to work their will on others—and whether they have done so improperly.” Bonavita

v. Corbo, 692 A.2d 119, 123 (N.J. Super. Ct. Ch. Div. 1996). See also, infra note 20. 

17FFUSA was not incorporated as a close corporation, but, as observed in footnote 12, this does

not affect our analysis in the instant action. Relevant references herein to “close corporation” also

mean “closely held” corporation.

11

doctors continued to treat each other as partners; no actualstock was issued, no annual

shareholder meetings were held, officers and directors were not actually elected, and

the bylaws were not used in operating NPP.15 In the case at bar only two shareholders

existed, and there appear to have been no shareholder meetings, election of directors,

or adherence to by-laws. Thus, the analogy to a partnership seems perhaps even

stronger here, and we see no reason why the Nevada Supreme Court would not treat

the agreement between Hollis and Hill in the same manner as the agreement in Clark.

16

We find our decision buttressed by the legal authority dealing with close

corporations.17 We concede that many of Hill’s alleged “oppressive” acts, including

the diminution and eventual termination of salary, the failure to deliver financial

information, the closing of one of the company’s offices, termination of employment,
18As one court has observed, “a ‘fiduciary’ duty to every baggage handler at United Airlines just

because the employee owns a share ofstock would put employee-owned firms at such a competitive

disadvantage that they would soon collapse.” Nagy v. Riblet Products Corp., 79 F.3d 572, 577

(7th Cir. 1996).

19Closely held corporations are characterized by a small number ofstockholders, the absence of

a ready market for the corporate stock, and substantial majority stockholder participation in the

management, direction, and operation of the company. Donahue v. Rodd Electrotype Co., 328

N.E.2d 505 (Mass. 1975).

12

and the cessation of benefits, are classic examples of acts typically shielded from

judicial scrutiny under the business judgment rule. Generally, employees who are

adversely affected by such officer and director decisions may not claim oppression by

those in control of the corporation, even if they are also shareholders of the

corporation.18 Certain actions by a director, however, receive much different treatment

when the corporation only has a few shareholders, including that director.

In the context of a closely held corporation, many classic business judgment

decisions can also have a substantial and adverse affect on the “minority’s” interest as

shareholder. Close corporations present unique opportunities for abuse because the

expectations of shareholders in closely held corporations19 are usually different from

those of shareholders in public corporations. As a leading commentator has noted:

Unlike the typicalshareholder in a publicly held corporation, who may be

simply an investor or a speculator and does not desire to assume the

responsibilities of management, the shareholder in a close corporation

considers himself or herself as a co-owner of the business and wants the

privileges and powers that go with ownership. Employment by the

corporation is often the shareholder’s principal or sole source of income.
20F. HODGEO’NEAL&ROBERTB. THOMPSON, 1O’NEAL’SCLOSECORPORATIONS § 1:08, at 31-

32 (3d ed. 1998).

21It is not critical that Hill and Hollis each owned 50% of FFUSA and therefore neither was a

majority shareholder. A fiduciary duty exists between shareholders by virtue of the fact that one of

the shareholders has control over the corporation’s assets. Indeed, a duty has been found to run from

the minority to the majority where the minority shareholder had veto power over corporate action.

Smith v. Atlantic Properties,Inc., 422 N.E.2d 798 (Mass. App. Ct. 1981). Hill acknowledges that

he had control over FFUSA.

22328 N.E.2d 505 (Mass. 1975).

23The Massachusetts court borrowed this oft-quoted statement from then-Chief Judge Cardozo:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty

of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting

at arm’s length, are forbidden to those bound by fiduciary ties. . . . Not honesty alone, but the

13

Providing employment may have been the principal reason why the

shareholder participated in organizing the corporation. Even if

shareholders in a close corporation anticipate an ultimate profit from the

sale of shares, they usually expect (or perhaps should expect) to receive

an immediate return in the formofsalaries as officers or employees of the

corporation, rather than in the form of dividends on their stock. Earnings

of a close corporation are distributed in major part in salaries, bonuses

and retirement benefits. . . .20

In this setting, it is not difficult for a controlling stockholder to frustrate such

expectations and deny a return on investment through means that would otherwise be

legitimate.21

For this reason, a number of jurisdictions, including Massachusetts in the

landmark case Donahue v. Rodd Electrotype Co.,22 have held that the duty existing

between controlling and minority shareholders in close corporations is the same as the

duty existing between partners.23 In Donahue, the court required a majority
punctilio of an honor the most sensitive, is then the standard of behavior. 

Id. at 516 (quoting Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928)).

24Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993);Toner v. Baltimore Envelope Co., 498 A.2d

642 (Md. 1985); Delahoussaye v. Newhard, 785 S.W.2d 609 (Mo. Ct. App. 1990).

25See F. HODGE O’NEAL & ROBERT B. THOMPSON, 2 O’NEAL’S CLOSE CORPORATIONS § 8:15,

at 89 (3d ed. 1998).

14

shareholder, whose shares were purchased by the corporation, to make available to the

minority an equal opportunity to sell a ratable number of shares to the corporation at

an identical price. While Donahue’s equal opportunity principle has been rejected by

some courts,24 its recognition of special rules of fiduciary duty applicable to close

corporations has gained widespread acceptance.25

We find that because FFUSA bore all the traditional characteristics of a close

corporation, although not formally incorporated as such, the reasoning behind placing

a fiduciary duty on controlling shareholders applies to these facts. Both Hill and Hollis

began the organization in order to participate personally in its management, and made

money principally through salaries as officers. There is no evidence that either

received large dividends or sought to benefit fromthe sale of his interest. We thus find

close corporation jurisprudence an equally persuasive basis for imposing a fiduciary

duty on Hill and for finding that he breached that duty. Further, as noted above, in

Clark the Nevada Supreme Court applied to the doctorshareholders the fiduciary duty
26Masinter v. Webco, 262 S.E.2d 433 (W.Va. 1980); Alaska Plastics, Inc. v. Coppock, 621

P.2d 270 (Alaska 1980).

27Compare MASS. GEN. LAWS Ch. 156 B, § 99 (allowing only deadlock as grounds for

dissolution), with Zimmerman v. Bogoff, 524 N.E.2d 849 (Mass. 1988) (finding breach offiduciary

duty based on 50% shareholder’s failure to pay debts owed to another business held by other 50%

shareholder); ME. REV. STAT. ANN. tit.13-A, § 1115 (West 1999) (allowing dissolution only upon

showing of deadlock, fraud, illegality, waste, that the corporation has abandoned its business, or the

existence of a provision in the articles of incorporation permitting dissolution under the

circumstances), with Rosenthal v. Rosenthal, 543 A.2d 348 (Me. 1988) (recognizing fiduciary duty

might exist where plaintiff alleged he was forced out of the family businesses in bad faith and that he

sold his share of those businesses at an unfairly low price); OHIO REV. CODE ANN. § 1701.91

(Anderson 2000) (allowing involuntary dissolution for deadlock only), with Crosby v. Beam, 548

15

applicable to partners rather than the duty of loyalty that applies to corporate actors.

Whether couched in terms of a de facto partnership or a close corporation, Clark

provides a strong indication that the Nevada Supreme Court would find fiduciary

obligations between shareholders in a corporation such as FFUSA operated by

shareholder-directors.

Hill’s contentions that no such duty existed in the present case are not

persuasive. That Nevada does not list oppression among its bases for statutory

dissolution under NEV. REV. STAT. § 78.650 does not preclude the existence of a

fiduciary duty. The dissolution statutes do not provide the exclusive remedies for

oppressed shareholders; courts have equitable powers to fashion appropriate remedies

where the majority shareholders have breached their fiduciary duty to the minority by

engaging in oppressive conduct.26 In addition, a number of states have found breaches

of fiduciary duty on bases which would not support dissolution under their statutes.27
N.E.2d 217 (Ohio 1989) (allowing directshareholder action for damages based on breach offiduciary

duty); GA. CODE ANN. § 14-2-940 (1999) (allowing dissolution of corporations which have not

elected to become statutory close corporations only upon showing of deadlock likely to result in

irreparable harm, fraud, illegality, or waste), with Thomas v. Dickson, 301 S.E.2d 49 (Ga. 1983)

(affirming minority shareholder’s right to bring direct action for improper squeeze out).

28In addition, as at least one commentator has noted, it is unclear how the Delaware courts might

decide a case involving a “classic freeze out” such as this one. Robert A. Ragazzo, Toward a

Delaware Common Law of Closely Held Corporations, 77 Wash. U.L.Q. 1099 (1999). While it is

true that some of the Delaware opinions, most notably Nixon v. Blackwell, 626 A.2d 1366 (Del.

1993), contain very forceful dicta indicating that Delaware islikely not to apply heightened fiduciary

duties to participants in close corporations, the Delaware Supreme Court has yet to consider the

precise issue in this case, namely whether a controlling shareholder isliable for actions taken with the

purpose and effect offreezing out anothershareholder. In Riblet Products Corp. v. Nagy, 683 A.2d

37 (Del. 1996), the Delaware Supreme Court decided, upon certified question from the Seventh

Circuit, that majority stockholders are not liable for violation of a fiduciary dutyto an employee under

contract for issues involving that employment. Though observing that Delaware has not chosen to

follow Wilkes v. Springside Nursing Home, Inc., 353 N.E.2d 657 (Mass. 1976), discussed infra,

the court also indicated that it might have decided the case differently if Nagy had alleged that his

termination amounted to a wrongful freeze out of his stock interest.

16

We likewise decline Hill’s invitation to apply the law of Delaware. While

mindful of the cases cited by Hill where courts applying Nevada law have looked to

Delaware on unrelated issues of corporate law, we conclude that cases such as Clark

remain a better indication of the Nevada court’s position with respect to issues

involving close and closely held corporations. The opinions of the Delaware courts are

often influential in matters of corporate law, but no more so in Nevada than any of the

other states that have followed Donahue.

28

Nor do we accept Hill’s suggestion that our analysis should reflect Nevada’s
29For this proposition, Hill cites Keith P. Bishop, The Delaware of the West: Does Nevada Offer

Better Treatment for Directors?, 7 No. 3 INSIGHTS 20 (1993).

30Both parties spoke at length during oral argument about the effect of Smith v. Gray, 250 P.

369 (Nev. 1926). We find that Smith provides little guidance on the issue presented today. While

the court noted that minority shareholders generally may bring a case in equity to challenge

oppressive conduct by majority shareholders, the case not only proves so dated asto be questionable

authority at best with respect to the current court’s position, it involved a business incorporated in

Arizona, not Nevada.

17

desire to provide management-friendly corporate law.29 If indeed that is Nevada’s

desire, it would not necessarily be furthered in the context of the close or closely held

corporation where disputes typically pit manager/shareholder against

manager/shareholder.30

B. Breach of Fiduciary Duty

Convinced of the existence of a fiduciary duty between shareholders in a close

corporation, we turn to the scope of that duty and examine whether Hill breached his

duty in the case at bar. As previously noted, the scope of this fiduciary duty has varied

among the jurisdictions which have adopted Donahue. One context in which the scope

has been frequently litigated has been with regard to salary and employment decisions.

Again, Nevada has not addressed this issue and we must look to the law of other

jurisdictions for guidance.

In another landmark Massachusetts case, Wilkes v. Springside NursingHome,
31353 N.E.2d 657 (Mass. 1976).

18

Inc.,

31 four associates formed a corporation in 1951 for the purpose of operating a

nursing home. Each paid in $100 with the understanding that each of them would be

a director and would participate in the management ofthe corporation. The corporation

paid no dividends, but by 1955 each was receiving $100 per week as salary. When

relations became strained between Wilkes and one of the other investors, Wilkes

declared hisintention to sell hisshares. The other three board members met, eliminated

Wilkes’salary, declined to reelect himas director, and terminated his employment with

the corporation.

The Massachusetts court reiterated that, under Donahue, shareholders in close

corporations owe each other a duty of utmost good faith and loyalty. It curtailed

Donahue’s equal opportunity rule by holding that the duty was not breached if the

majority acted pursuant to a legitimate business purpose. In order to avoid hampering

management’s effectiveness in operating the corporation, the court reasoned, such a

rule was necessary in order to preserve management’s discretion in declaring dividends,

negotiating mergers, establishing the salaries of officers, dismissing directors, and

hiring and firing of employees. The court also held that when a legitimate business

purpose exists, the minority shareholder must be given an opportunity to demonstrate

that the purpose could have been achieved through means less disruptive to its
32Nelson v. Martin, 958 S.W.2d 643 (Tenn. 1997); Wrightsel v. Ross-Co Redi-Mix, Inc., No.

1791, 1993 WL 97780 (Ohio Ct. App. Mar. 26, 1993); W & W Equip. Co., Inc., v. Mink, 568

N.E.2d 564 (Ind. Ct. App. 1991); Duncan v. Lichtenberger, 671 S.W.2d 948 (Tex. Ct. App. 1984);

Masinter v. Webco Co., 262 S.E.2d 433 (W.Va. 1980).

19

shareholder interests. The court found that the majority shareholders of Springside

lacked a legitimate business purpose for ousting Wilkes, and found that the duty they

owed Wilkes had been breached forseveral reasons. The company had a longstanding

policy that each investor would be a director in the corporation and that employment

would go hand-in-hand with stock ownership. Wilkes was one of the company’s four

founders and had invested time and capital with the expectation that he would continue

to participate in its management. Perhaps most importantly, eliminating Wilkes’ salary,

in combination with the fact that the corporation never declared a dividend, guaranteed

that he would not obtain a return on his investment. These facts led the court to infer

a design to pressure Wilkes to sell his shares at a price below their value.

That a controlling shareholder cannot, consistent with his fiduciary duty,

effectively deprive a minority shareholder of hisinterest as a shareholder by terminating

the latter’s employment orsalary has been widely accepted. The states considering the

issue directly essentially have adopted the approach of Wilkes.

32 In addition,

shareholder oppression under the dissolution statutes, which is often defined in the

same terms as the fiduciary duty between shareholders, frequently has been found
33F. HODGE O’NEAL & ROBERT B. THOMPSON, O’NEAL’S OPPRESSION OF MINORITY

SHAREHOLDERS § 7:13, at 81 (2d ed. 1985). See, e.g., Notzke v. Art Gallery,Inc., 405 N.E.2d 839

(Ill. App. Ct. 1980); Exadaktilos v. Cinnaminson Realty Co., 400 A.2d 554 (N.J. Super. Ct. Law

Div. 1979).

34See, e.g., Ingle v. Glamore Motor Sales, Inc., 535 N.E.2d 1311 (N.Y. 1989) (holding that a

minority shareholder in a close corporation did not have a fiduciary-rooted exception against at-will

discharge where the corporation repurchased hisshares pursuant to a repurchase-upon-terminationof-employment clause in a shareholders’ agreement); Gallagher v. Lambert, 549 N.E.2d 136 (N.Y.

1989) (same). Neither Gallagher nor Ingle was deprived of a return on his investment because in both

cases the company repurchased shares at a previously agreed upon price. 

35See Douglas K. Moll, Shareholder Oppression v. Employment at Will in the Close

Corporation: The Investment Model Solution, 1999 U. Ill. L. Rev. 517. Nevada follows the

employment-at-will rule. Hansen v. Harrah’s, 675 P.2d 394 (Nev. 1984).

36Merola v. Exergen Corp. 668 N.E.2d 351 (Mass. 1996); Riblet Products Corp. v. Nagy, 683

A.2d 37 (Del. 1996).

20

under circumstances similar to those described in Wilkes.

33 The opinions make clear,

however, that shareholders do not enjoy fiduciary-rooted entitlements to their jobs.34

Such a result would clearly interfere with the doctrine of employment-at-will.35 Rather,

the courts have limited relief to instances in which the shareholder has been harmed as

a shareholder.36 The fiduciary duty in the close corporation context, as in the context

of public corporations, appropriately is viewed as a protection of the shareholder’s

investment. The precise nature of an investment in a close corporation often is not

clear, particularly when the shareholder is also an employee. It is therefore important

to distinguish investors who obtain theirreturn on investment through benefits provided

to them as employees from employees who happen also to be investors. To that end,

courts may consider the following non-exclusive factors: whether the corporation
21

typically distributes its profits in the form of salaries; whether the shareholder/employee

owns a significant percentage of the firm’s shares; whether the shareholder/employee

is a founder of the business; whether the shares were received as compensation for

services; whetherthe shareholder/employee expectsthe value ofthe sharesto increase;

whether the shareholder/employee has made a significant capital contribution; whether

the shareholder/employee has otherwise demonstrated a reasonable expectation that the

returns from the investment will be obtained through continued employment; and

whether stock ownership is a requirement of employment. The minority’s shareholder

interest is not injured, however, if the corporation redeems shares at a fair price or a

price determined by prior contract or the shareholder is otherwise able to obtain a fair

price.

Overlaying these factors to the relevant facts at bar, we conclude that Hollis

demonstrated an injury as a shareholder. He was a founder and 50% shareholder of

FFUSA. His positions as vice president and director clearly resulted therefrom. He

had no reason to expect he would be able to sell his FFUSA shares for a higher price,

meaning that the value of his investment was tied directly to his employment. The

benefits he received from his investment were distributed in the form of salary and

certain perquisites; the firm never declared a dividend and paid no salary to its

directors. Hill totally deprived Hollis of those benefits by terminating his employment
22

and salary, closing the Florida office, and cutting him off from company benefits. As

a result, Hollis’ shares in FFUSA were rendered worthless. No offer was made by the

corporation to purchase Hollis’ shares at a fair price upon termination, and Hollis did

not have the option of selling his shares to another buyer.

C. Remedy

The district court found Hill liable for breach of his fiduciary duty and ordered

a buy-out of Hollis’s shares. The court determined that Hill began his oppressive

conduct on February 28, 1998, and thus ordered the buy-out as of that date, calculating

the value of the shares at $667,950. While we essentially agree with the district court’s

remedial approach, we conclude that its decision to backdate the buy-out to February

28 is clear error.

We again look to Nevada law, particularly Hines v. Plante, to determine the

remedies available herein. In Hines, the Nevada Supreme Court found that the

statutory language only identified an appointment of a receiver as a remedy for

shareholder actions; however, the courtrecognized that, “The appointment of a receiver

pendente lite is a harsh and extreme remedy which should be used sparingly and only

when the securing of ultimate justice requires it. A corollary of this rule is that if the

desired outcome may be achieved by some method other than appointing a receiver,
37Hines v. Plante, 661 P.2d 880, 881-82 (Nev. 1983) (internal citations omitted).

38See, e.g., Alaska Plastics, Inc. v. Coppock, 621 P.2d 270 (Alaska 1980); Maddox v.

Norman, 669 P.2d 230 (Mont. 1983); Delaney v. Georgia-Pacific Corp., 564 P.2d 277 (Or. 1977);

and Davis v. Sheerin, 754 S.W.2d 375 (Tex. Ct. App. 1988). 

23

then this course should be followed.”37 This is the same reasoning that other courts

have used to allow court ordered buy-outs even in the absence of specific statutory

authority.38 We cannotsay, under the circumstances ofthis case, that the district court’s

decision to allow such a remedy was clearly erroneous. 

We do disagree, however, with the trial court’s decision to use February 1998

as the valuation date for the buy-out. Although Hollis’ relationship with Hill began to

decline significantly in February 1998, many of the actions upon which we base our

finding of oppression occurred after this date. Hollis continued to receive his agreed

upon salary until September of 1998, when it was reduced by 50%. His salary was not

reduced to zero until October of 1998. Hill’s unilateral decision to close the Florida

office, discontinue the car lease payments, and terminate phone service was not

communicated to Hollis until November of 1998. Hollis’ original complaint was filed

in the district court in December of 1998. As an equal shareholder, Hill commanded

as much authority to assert control over the corporation as did Hollis. His failure to act

on this authority until December of 1998 was his choice. The presumptive valuation

date for other states allowing buy-out remedies is the date of filing unless exceptional
39See Musto v. Vidas, 754 A.2d 586 (N.J. Super. Ct. App. Div. 2000); Waller v. American

Intern. Distrib. Corp., 706 A.2d 460 (Vt. 1997).

40Exxon Corp. v. Burglin, 4 F.3d 1294, 1302 (5th Cir. 1993) (“The award of attorney’s fees is

governed by the law of the state whose substantive law is applied to the underlying claims.”); Nev.

Rev. Stat. § 18.010 (1999); Nev. Rev. Stat. §§ 18.020, 18.005 (1999).

24

circumstances exist which require an earlier or later date to be chosen.39 No such

circumstances exist in this case. Therefore, we conclude that the date of valuation for

the court ordered buy-out should be the date suit was filed herein. Use of this date will

take into consideration all of Hill and Hollis’ actions, inactions, and prudent and

imprudent business decisions which affected the value of the business during the

intervening period.

We therefore VACATE the calculation of the value of Hollis’ shares by the

district court and REMAND for further proceedings to determine the proper valuation

of Hollis’ shares consistent herewith. We likewise VACATE the award of attorney’s

fees and the fees of expert witnesses, and REMAND for reconsideration of those

settings in light of relevant Nevada law.40 In all other respects, the decision appealed

is AFFIRMED. 
E. GRADY JOLLY, Circuit Judge, dissenting:

Because I find that the cause of action and remedy

here would not be adopted by Nevada courts, I

respectfully dissent. 

The question that needs to be answered in this case,

whether framed as a breach of fiduciary duty or a

statutory right, is whether Nevada recognizes a cause of

action for oppression of minority shareholders. I find

no basis to conclude that it does. The Nevada dissolution

statute, Nev. Rev. Stat. § 78.650, sets out a statutory

basis for the remedy effectively imposed here, and the

statute does not allow dissolution for the oppression of

minority stockholders. The Nevada case cited to justify

the extension of fiduciary duty to cover shareholder

oppression, Clark v. Lubritz, 944 P.2d 861 (Nev. 1997),

treated the business as a partnership because the parties

treated the corporation as a partnership. To follow Clark

here, where there is nothing in the past history or

present arrangement indicating that the parties have
41 See Keith Paul Bishop, Battle for Control of ITT Corporation

Spotlights Nevada (and Delaware) Corporate Law: Did Nevada Law Get

Stockholders a Better Deal?, 12 Insights, January 1998, at 15

(“Nevada has worked hard to challenge Delaware’s pre-eminence as

the domicile of choice for corporations.”); Keith Paul Bishop, The

Delaware of the West: Does Nevada Offer Better Treatment for

Directors?, 7 Insights, March 1993, at 20 (“Delaware faces

aggressive competition for new corporations from the state of

Nevada which aims at being the ‘Delaware of the West.’”); Michael

J. Sullivan, Extensive Changes Made to Nevada Corporation Law

Enacted, 6 Insights, January 1992, at 27 (describing managementfriendly changes made to corporate law, and comparing Nevada law to

Delaware law). 

-26- 26

treated the business as anything other than a corporation,

effectively finds that Nevada will ignore corporate

structure, when, on a case-by-case basis, equity justifies

it. 

Furthermore, all indications are that Nevada attempts

to pattern its corporate law after the management-friendly

approach of Delaware,41 a state that clearly prohibits a

cause of action for oppression of minority shareholders.

See Nixon v. Blackwell, 626 A.2d 1366, 1380-81 (Del. 1993)

(finding that majority shareholders owe no special

fiduciary duties to minority shareholders); F. Hodge

O’Neal & Robert B. Thompson, O’Neal’s Oppression of

Minority Shareholders § 7.13 (2d ed. 1985). Even if
-27- 27

Nevada is not as friendly to corporate structures and

management as Delaware, there is no basis to find that

Nevada would adopt the law of Massachusetts, which seems

to be at the other end of the spectrum respecting

corporate formalities. In sum, I am convinced that, given

the general acknowledgment that Nevada is corporate

friendly, as shown through its statutory dissolution

provision and its tendency to follow Delaware law, the

cause of action and remedy here would not be recognized.

I therefore respectfully dissent.