Court Opinion

ID: 9643205
Source: CourtListenerOpinion
Date Created: 2023-08-22 20:21:59.387137+00
Date Added: 2024-06-11T18:10:58.238898
License: Public Domain

FLANDERS, Justice,
concurring in part and dissenting in part.
I respectfully dissent from the majoritys conclusion that the trial justice erred by *1389failing to direct a verdict in favor of defendant Armenio Teixeira (Armenio) on the claim filed against him by the plaintiff A Teixeira & Co., Inc. (the corporation) for usurpation of a corporate opportunity. Although I agree with the majority’s determination that Armenio owed a fiduciary duty to the corporation and to its other shareholders, I disagree with its holding that there was insufficient evidence of a genuine corporate opportunity to buy Mendon Liquors (Mendon), a competing business. I also disagree with the majority’s conclusion that Armenio did not violate his fiduciary obligations to the corporation (and to his fellow shareholders) when he bought an interest in Mendon for himself without having first given the corporation the opportunity to do so and without having first made full disclosure to his fellow shareholders of the proposed terms of the purchase.
I do not believe that a self-dealing fiduciary like Armenio should be able to consummate such a transaction for his own account merely because in his estimation “the opportunity is one that the corporation has no interest in or does not have any expectancy in obtaining or have the financial ability to obtain.” Rather, I believe that after authorizing the corporation’s president, Honorato Custodio (Custodio), to communicate with Mendon and to negotiate for the purchase of this competing business, neither Armenio nor any of the other shareholders should have been free to buy this competing business for themselves without having first given the corporation the opportunity to do so. Furthermore, I conclude that there was sufficient evidence presented for a jury to conclude that Armenio violated his fiduciary duties to the corporation and to his fellow shareholders by participating in such a personal purchase of a competing business while he was still a shareholder of this close corporation and while he was still participating not only in its management but also in its decision to pursue the very opportunity he secretly took for himself.
I concur with the majority’s conclusion that in the circumstances of this case Arme-nio owed a fiduciary duty to the corporation in his capacity as a minority shareholder participating in the management of this close corporation.5 Initially, whether a fiduciary duty exists “is a question of law for the court.” E.g., A. Teixeira & Co. v. Teixeira, 674 A.2d 407, 408 (R.I.1996). This court has previously recognized “the unique set of circumstances presented by closely held corporations,” Fournier v. Fournier, 479 A.2d 708, 712 (R.I.1984); see also G.L.1956 § 7-1.1-51 (providing special provisions relating to close corporations), and acknowledged that “shareholders in a closely held family corporation may well have * * * a fiduciary duty to deal fairly with one another,” Estate of Meller v. Adolf Meller Co., 554 A.2d 648, 651 (R.I. 1989); see also Bader v. Alpine Ski Shop, Inc., 505 A.2d 1162, 1167 (R.I.1986) (“a fiduciary relationship exists between a corporation and its stockholders”); Demonios v. Demoulas Super Markets, Inc., 424 Mass. 501, 677 N.E.2d 159, 179 (1997) (“[i]n the case of a close corporation, which resembles a partnership, duties of loyalty extend to shareholders, who owe one another substantially the same duty of utmost good faith and loyalty in the operation of the enterprise that partners owe to one another, a duty that is even stricter than that required of directors and shareholders in corporations generally”) (citing Donahue v. Rodd Electrotype Co. of New England, Inc., 367 Mass. 578, 328 N.E.2d 505 (1975)). See generally Harry G. Henn & John R. Alexander, Laws of Corporations § 268 at 735 (3d ed. 1983) (“Relationships among shareholders of closely-held corporations have been held to a higher fiduciary standard than is recognized in other corporations”); 3 William Meade Fletcher et al, Fletcher Cyclopedia of the Law of Private Corporations § 844.20 at 219 (1994 rev. ed.) (“close corporation shareholders, as such, stand in fiduciary relationship to each other”); F. Hodge O’Neal & Robert B. Thompson, 2 O’Neal’s Close Corporations § 8.08 at *139075 (3d ed. 1992) (“[w]here several owners carry on an enterprise together (as they usually do in a close corporation), their relationship should be considered a fiduciary one similar to the relationship among partners[;][t]he fact that an enterprise is incorporated should not substantially Change the relationship”). Moreover, because “it [is] implicit that people who enter into a small business enterprise * * * place their trust and confidence in each other,” Hagshenas v. Gaylord, 199 Ill.App.3d 60, 145 Ill.Dec. 546, 554, 557 N.E.2d 316, 324 (1990), there is further support for finding a fiduciary duty because it “exists in all cases in which a confidential relationship has been acquired.” Id.6
Unlike his cousin, Caesar Teixeira (Caesar), who was not a shareholder of the corporation and therefore “owed no duty either to the corporation or to the majority shareholders to refrain from participation in the purchase of Mendon Liquors,” A. Teixeira & Co., 674 A.2d at 408, Armenio was a shareholder in the corporation, which, as was found by the trial justice, “originat[ed] out of a friendly business venture, [and was] operated informally and with at least some participation from all of the shareholders in corporate management and decision-making from the date of incorporation until * * * September, 1983,” the date after which the corporation conducted its business “in a polarized and more formal manner.” Apparently, pri- or to Armenio’s usurpation of the corporation’s opportunity to purchase Mendon, there was ongoing and sometimes even daily communication among the shareholders of the corporation, which was operated in a manner similar to that of a partnership. Moreover, Armenio actively participated with the other shareholders in organizing the corporation, in its ultimate purchase of Pop’s Liquors, and in the decision to pursue the Mendon acquisition. Thus in these circumstances it is entirely appropriate to conclude that Armenio owed fiduciary duties to the corporation and to his fellow shareholders. See 2 O’Neal’s Close Corporations § 8.08 at 75 (“[i]n view of the informal way in which the affairs of most close corporations are conducted, there is usually no necessity for distinguishing between the fiduciary duties of the controlling participants in their various capacities as shareholders, directors, and officers”).
However, after concluding that Armenio owed a fiduciary duty to the corporation, the majority then faults the trial justice for failing to direct a verdict in his favor on the corporation’s claim that he breached his fiduciary duties by usurping the corporation’s opportunity to buy Mendon.
Given the highly deferential standard of review on a motion for a directed verdict,71 respectfully dissent from this aspect of the majority’s opinion.
I
Existence of a Corporate Opportunity
I believe that the trial justice properly denied Armenio’s motion for a directed ver-*1391diet because, after reviewing the plaintiffs evidence in a light most favorable to the plaintiff, the trial justice properly concluded that factual issues remained concerning the existence of a corporate opportunity upon which a reasonable jury could draw different eonclusions.
A reprise of the pertinent facts shows why this is so. The plaintiff incorporated on September 15, 1981, and acquired a liquor license to operate the previously purchased Pop’s Liquors in January 1982. Later that year, in December 1982, the president of the corporation, Custodio, learned that Mendon, the corporation’s closest competitor, was for sale. Accordingly he notified Armenio and the other shareholders of this fact during an informal meeting at which they discussed Mendon’s availability. Although his authority to pursue this opportunity had not been formally voted upon and duly encapsulated in the minutes of the shareholders’ meeting, the evidence was undisputed that Custodio had been authorized by the corporation’s other shareholders to negotiate for the corporation’s purchase of Mendon in accordance with the informal means by which this close corporation (like so many others of its small size) handled its business affairs.
Over the course of the four or five months (December 1982 through March 1983) during which he made five or six telephone calls and had a meeting with one of the owners of Mendon, Custodio kept the other shareholders advised of the status of his inquiries and of Mendon’s responses. In his communications with Mendon, Custodio discussed the possibility of the corporation’s purchasing it. Moreover, one of the owners of Mendon met with Custodio personally to talk over this potential purchase, and Custodio expected one of Mendon’s principals to get back to him with a price and suggested terms. (Custodio testified that he recalled a figure of $122,000 as an offer he might have thrown at them.) Although Custodio was never granted the opportunity to review Mendon’s inventory, make a deposit, sign a buy/sell agreement, or examine Mendon’s receipts, accounts receivables, gross sales, financial statements, or tax returns, his inability to do so, in retrospect, is hardly surprising, given Caesar’s initiation of and involvement in competing negotiations for his own personal account during the same period that Custodio was trying to establish a negotiating beachhead with Mendon on behalf of the corporation.
Caesar testified that he first learned of the potential sale of Mendon via a newspaper advertisement in January 1983 — one month after Custodio began talking to Mendon’s owners at the behest of Armenio and the other shareholders. Caesar stated that after he learned about Mendon’s being for sale, he immediately contacted Mendon’s owners and began to negotiate to buy the business. These discussions culminated in June 1983 when Act, Inc., then newly incorporated (with Caesar, Armenio, and another person holding equal shares), gave Mendon a firm agreement to purchase. Although the closing did not occur until August 1983, some months after the corporation’s last contact with Mendon, it is clear that there was a substantial period (at least from January 1983 through March 1983) during which both the corporation and Caesar, on behalf of what eventually became Act, Inc., were jointly wooing Mendon. Thus Custodio’s inability to obtain from Mendon the information he needed to pursue the proposed acquisition might well have been the result of the similar interest expressed by Caesar whose spadework soon resulted in Armenio’s participation in the purchase of this business.
Moreover, at no time after he authorized Custodio to communicate with Mendon so that the corporation could explore a possible acquisition did Armenio or any of the other shareholders raise any question concerning the corporation’s financial ability to purchase Mendon. Indeed, it would have been a most curious circumstance if Armenio and his fellow shareholders had authorized Custodio to negotiate the acquisition on behalf of the corporation if they also believed the corporation would have been unable to buy this competitor in any event. Although the corporation had lost money during its first year of operation and owed its shareholders some *1392money, Custodio testified that the corporation had several financing alternatives to accomplish the proposed Mendon purchase and the owners of Mendon were willing to consider financing such an acquisition themselves. Moreover, in a close corporation environment, it is not just the corporation’s assets and credit but those of its shareholders as well that are potentially available to be tapped in the event of a potential acquisition. Thus it ill lies in Armenio’s mouth, after authorizing Custodio to try to buy this company for the corporation, to claim that the corporation would nevertheless have been unable to do so and that therefore he was free to participate in usurping this corporate opportunity for himself.
On the contrary, having authorized the corporation’s president to pursue a corporate opportunity, Armenio did not have the right to determine unilaterally whether the corporation had the ability to purchase Mendon. Rather, “a fiduciary who is interested in pursuing an opportunity should not make the decision as to whether the venture is also of interest to the corporation. Instead, to ensure fairness to the corporation, opportunities must be presented to the corporation without regard to possible impediments, and material facts must be fully disclosed, so that the corporation may consider whether and how to address these obstacles. * * * Without such a rule, the fiduciary’s self-interest may cloud his judgment or tempt him to overlook his duties.” Demoulas, 677 N.E.2d at 181; see also id. at 179 (“[i]n the case of a close corporation, which resembles a partnership, duties of loyalty extend to shareholders [that are] * * * even stricter than [those] required of directors and shareholders in corporations generally”). As we recently stated in Long v. Atlantic PBS, Inc., 681 A.2d 249, 256 n. 8 (R.I.1996), the fiduciary duty owed to a shareholder in a close corporation “is one of the most rigorous that the law imposes * * * ‘Not honesty alone, but the punctilio of an honor the most sensitive, is * * * the standard of behavior.’ ” (quoting Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 546 (1928) (Cardozo, C.J.)).
Here it was up to the corporation and its shareholders — and not to Armenio acting alone or in concert with Caesar or with any other third-party investors — to determine whether any obstacles faced by the corporation in its pursuit of a possible Mendon acquisition were insurmountable. See Demou-las, 677 N.E .2d at 183 (“the existence of a legal or other impediment is a matter for a corporation’s board to consider when deciding whether to accept or decline an opportunity that has been disclosed to it, and the existence of any impediment does not excuse the failure of a fiduciary to present the opportunity to the board and to disclose all material details before pursuing it himself’). Otherwise, shareholders in a close corporation would have carte blanche to take secret steps on their own to capture the opportunity for themselves and then, after the fact, to pooh-pooh the corporation’s chances of ever having been able to close on this prospective business opportunity, thereby effectively ensuring that the corporation will be unable to consummate such a transaction. Under this formulation of the law, a close corporation’s failure to accomplish any prospective acquisition would tend to be a self-fulfilling prophecy: any shareholders (like Armenio) who might be looking to advance their own personal interests at the expense of the corporation would have a clear field to try and cut their own deals on the sly, thereby frustrating the corporation’s prospects for doing so. And if successful, these self-dealing fiduciaries could then turn around and claim that they were at liberty to do so all along because, after all, they reasonably believed the corporation would have been unable to complete such a purchase in any event.
Accordingly, after considering this evidence in the light most favorable to plaintiff corporation, without weighing the evidence or evaluating the credibility of the witnesses, and after drawing all reasonable inferences that support the corporation’s position, I believe that factual issues remained upon which reasonable persons might draw different conclusions regarding whether a corporate opportunity existed and whether plaintiff corpo*1393ration had the ability to take advantage of that opportunity. Thus in my opinion Arme-nio’s motion for a directed verdict was properly denied.
II
Armenio’s Actions to Deprive the Corporation of Its Opportunity to Purchase Mendon
Armenio also claimed that Caesar acted independently to initiate the purchase of Mendon and that the corporation had abandoned its efforts in that regard. For the same reasons detailed above, I believe that the trial justice and the jury were entitled to conclude that the corporation’s efforts to pursue the Mendon opportunity were secretly usurped and interfered with by Armenio and his fellow buying group of investors. Furthermore, the mere fact that Caesar may have acted independently to initiate the purchase of Mendon should not shield Armenio from liability when, despite his being fully aware of the corporation’s expressed and demonstrated interest in Mendon, he decided to buy a piece of this competing business for himself without first offering it to the corporation or ascertaining whether its interest had ended.
III
Conclusion
For these reasons I would affirm the judgment against Armenio except that I would vacate the award of punitive damages against him because of a lack of “ ‘evidence of such willfulness, recklessness or wickedness, on [his] part * * *, as amount[s] to criminality, which for the good of society and warning to the individual, ought to be punished.’ ” Palmisano v. Toth, 624 A.2d 314, 318 (R.I.1993). In addition, the judgment should be modified to give the corporation the option to purchase Armenio’s shares in Act, Inc. for the price he paid for them. With respect to the other defendants, I join in the majority’s opinion.

. Because all the governance arrangements for this corporation were otherwise valid, its technical noncompliance with G.L.1956 § 7-1.1-51 does not affect the analysis of the shareholders’ fiduciary duties to one another.

. Although a subsequent decision of an Illinois court of coordinate appellate authority factually distinguished Hagshenas, it did so on the basis that the defendant shareholder in the later case was “a mere shareholder” with no “ability to hinder, influence, or control the corporation.” Dowell v. Bitner, 273 Ill.App.3d 681, 210 Ill.Dec. 396, 403, 652 N.E.2d 1372, 1379 (1995) ("something more than the mere status as a shareholder in a close corporation is required to impose a fiduciary duty"). Here, in stark contrast, Arme-nio was much more than “a mere shareholder” (as the majority aptly notes, the shareholders in the corporation actively participated in management decisions) and thus he was properly found to have owed the corporation and its shareholders a fiduciary duty.

. "The standard of review on a motion for a directed verdict is well settled: the trial justice, and this Court on review, considers the evidence in the light most favorable to the nonmoving parly, without weighing the evidence or evaluating the credibility of witnesses, and draws from the record all reasonable inferences that support the position of the nonmoving party. * * * If, after such a review, there remain factual issues upon which reasonable persons might draw different conclusions, the motion for a directed verdict must be denied, and the issues must be submitted to the jury for determination.” DeChristofaro v. Machala, 685 A.2d 258, 262 (R.I. 1996).