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Grato v. Grato

April 6, 1994


Judges Baime, Conley and VILLANUEVA.

The opinion of the court was delivered by: Conley, J.A.D.

Argued February 28, 1994

This appeal and cross-appeal involve the dissolution of closely-held family corporations and the continuation by defendants, majority shareholders, of the business under a different corporate name. The trial judge concluded defendants' conduct breached their fiduciary duties and awarded plaintiffs the value of their interest in the business as it has been continued under the new corporate name. Defendants appeal; plaintiff Lois Grato cross-appeals her award based upon a 10% interest in the business, as opposed to 15%. We affirm the conclusion of a breach of fiduciary duty under the peculiar circumstances here, but conclude that valuation of plaintiffs' interest in the business should have been based upon the value of the business as it operated under the old corporate entities just prior to their dissolution. *fn1 We find no merit to the cross-appeal and affirm that aspect of the final judgment without further comment. R. 2:11-3(e)(1)(E).

The parties' business relationships concern three corporations and a partnership engaged in the trucking business. In 1976, Grato & Sons Trucking Company, Inc. (Grato) was formed; its place of business was out of Lois and Louis, Sr.'s residence in Palisades Park. One hundred shares of stock each were issued to Lois and Louis, Sr., and ten shares of stock each were issued to two of their sons, Louis and William. Eventually, their two other sons, Stephen and Thomas, joined Grato and became shareholders.

William was the leading salesman and was in charge of all the business and finances for Grato. Lois performed bookkeeping services, some selling and handled a number of accounts. Louis was the mechanic and Steven was the dispatcher. Thomas performed a variety of lesser tasks, including driving.

At the end of 1981, because of the company's growth, Grato moved to a new location in Port Newark, where it used a trailer that it had bought as an office. On June 14, 1983, the family entered into a shareholders' agreement providing for a division of the shares of Grato in the following manner: William, twenty-five percent; Louis, twenty-five percent; Steven, twenty percent; Thomas, fifteen percent and Lois, fifteen percent. The agreement placed a limitation on the transfer of stock on a voluntary or involuntary basis, and set terms and conditions for valuing the stock upon transfer. *fn2

In November 1984, Lois and Louis, Sr. separated; this separation led to difficulties in the company. Also leading to tension in the relationship between Grato's owners was the hiring of Berney Kleinhandler in early 1985. Kleinhandler had his own trucking company located in the yard next to Grato's, and his business was mostly with liquor accounts. Business increased as a result of the hiring of Kleinhandler--Grato went from grossing around $700,000 a year to almost $2,000,000 a year--and the company physically expanded. However, Lois developed an intense dislike of Kleinhandler. This in turn led to arguments between William and Lois over Kleinhandler's role in the company.

In June 1985, the family members formed a partnership, G & S Industries (G & S), for the purpose of the purchase, ownership and maintenance of a trailer. Holding in G & S was divided as follows: William, twenty-five percent; Louis, twenty-five percent; Stephen, twenty percent; Thomas, fifteen percent and Lois, fifteen percent. The family's trucking business was operated out of the trailer and Grato paid monthly rent to G & S for its use.

In October 1985, one of Grato's trucks was involved in a serious accident in New York. As a result, an action was filed against several parties, including Grato (hereinafter referred to as the Matthews action). Because Grato only had a one million dollar insurance policy, concern over the lawsuit among the family was "tremendous." Grato's insurance company informed them that because of the seriousness of the injuries to Mr. Matthews, a verdict could be in the area of 10 to 12 million dollars and that the "overwhelming" percentage of liability would be attributed to Grato and its driver.

In November 1985, and to provide protection from a judgment in the Matthews action, the family members formed a new corporation, Eastern Motor Freight, at an initial capitalization of $10,000. Holding in Eastern was divided as follows: William, thirty percent; Louis, twenty-five percent; Stephen, twenty percent; Thomas, fifteen percent; and Lois, ten percent. Eastern operated out of the same address as Grato, with the same employees and the same customers. It is not clear whether any trucking business continued in the name of Grato from the time Eastern was established, or whether all business from that point on was conducted in the name of Eastern.

Because of the continuing disputes between Lois and William, in February 1987, a family meeting was held at which William stated that either he or Lois had to leave the workplace because of the conflicts between the two. All the brothers apparently sided with William. Soon after, Lois agreed to stay at home in return for her full salary, medical and pension benefits and credit cards. But when the sons cut off her credit cards, Lois returned to work at Eastern in July. Her return was brief; on July 8, 1987 after a shareholders' meeting, defendants, as majority shareholders, terminated her employment. They also terminated Thomas' employment as a result of attendance and work performance problems.

These activities on the part of defendants led to the filing of a Law Division action by plaintiffs on July 15, 1987 claiming wrongful termination. A subsequent Chancery Division complaint was filed in September 1987 alleging the terminations constituted oppressive and unfair action. *fn3 Plaintiffs sought restoration to their former positions at Grato/Eastern. Consistent with the claims of oppression and unfairness, they alternatively sought various relief available pursuant to N.J.S.A. 14A:12-7(1)(c), including the appointment of a custodian. The complaints were later consolidated under the Chancery docket in December 1987 and the request for the appointment of a custodian was denied, as was the request for reemployment. Discovery was stayed, pending exchange of financial information "with the object of attempting to arrive at a value of the corporations and the plaintiffs' respective interests in same."

Thereafter, defendants filed an application to purchase plaintiffs' interest in the corporation pursuant to N.J.S.A. 14A:12-8. By order filed February 5, 1988, that application was granted and provided for a written offer within 10 days.

The statutory buy-out procedure was then begun. On February 11, 1988 defendants proposed a buy-out of Lois' interest for $88,950 and Thomas' interest for $94,250. The basis of the offer was an appraisal that valued Grato at $525,000, Eastern at $105,000 and G & S at $5,000. The offer was rejected on March 2, 1988. Plaintiffs took the position that "according to [their] appraisal expert," the value of the corporations was two and a half million dollars, making Thomas' interest worth $375,000 and Lois' "substantially more." Given the vast divergence in the respective values of the business, the next step in the statutory buy-out procedure would have been a hearing and determination by the trial judge. See N.J.S.A. 14A:12- 7(8)(c).

That never occurred. On June 29, 1988, a 7.5 million dollar judgment was filed in the Matthews litigation; Grato and the driver Rodino, were determined to be 80% responsible. The judgment was ultimately affirmed March 23, 1989. It has, we are told, been fully paid by other partially culpable parties who have cross-claims for indemnity against Grato. To what extent these claims are active or viable, we have not been told. We note, however, no party has attempted to disagree with the trial judge's observation in his oral decision on damages on June 18, 1992 that "[a]t this stage and after all that has happened, it seems highly unlikely that the Matthews' creditors are likely to attack IMF [International Motor Freight] *fn4 as some kind of shell for Grato. It's now just about four years since that judgment was recovered. If the plaintiffs in that case haven't made that move by now; it seems unlikely that they will in the future. Certainly, it it [sic] is apparently or it seems clear that William, Louis and Stephen also think it's unlikely, otherwise it seems highly doubtful to me that they would have invested this kind of money and time and made these kinds of commitments for IMF." *fn5

In any event, immediately following the Matthews judgment, defendants withdrew their buy-out offer and commenced a course of conduct upon which the allegations of oppression and unfairness must focus.

Earlier, in April 1987 and during the on-going disputes between Lois and William and during the pendency of the Matthews litigation, Louis had, on his own and unbeknownst to anyone else, formed another corporation, International Motor Freight (IMF). He did so for "security." As he explained "I seen what was going on at the time.... Meaning the relationship. The judgment.... And the accusations made by [plaintiffs' attorney] and [plaintiffs]." He did nothing with the corporation, however, until June 1988 when he advised William and Stephen and together they activated the business. He did so at that time because "[i]t was the right time.... I did not like how [Grato/Eastern] was run. I didn't like the two partners that were in it. I did not want to continue going into business with them ... by me going out and forming that company, I did not have to recognize Thomas Grato or Lois Grato as a partner...." As activated, IMF simply continued the business of Grato/Eastern almost simultaneous with their dissolution.

The trial judge's findings and conclusions in his oral decision of February 11, 1991 in this respect, are critical and are entirely supported by the evidence. We set them forth at length:

Now, essentially simultaneously with the beginnings of International's operation, in or around August, 1988, and extending into January, 1989, most of the assets that had been held by Grato and Eastern were disposed of. They were sold. Many of the sales were to International, although there were a number to other entities.

International's operations were taking place in the same office, the same trailer where Grato and Eastern had operated. In those same quarters there were now three corporations functioning, Grato, Eastern and International, although operations were gradually being phased entirely into International. Thus, for example, Lisa Guzman, an office worker, said that part of her job was to transfer all computer records from the Grato corporation to International. She established new accounts and new records for all customers who had been Grato customers who were now set up as International customers. She was doing most of her work for International, but in fact, she was being paid by Grato. She did billing for both corporations. If she had telephone calls to make to collect accounts receivable, she made those calls for either or both corporations, whichever was appropriate.

Now, while this ongoing operation with three corporations was continuing, and the assets of Grato and Eastern were being sold, William, Louis and Stephen caused a Meeting Notice dated October 13, 1988 to be served on Lois and Thomas. The notice was a call for a stockholders' meeting of the shareholders of Grato and Eastern to take place on October 27, 1988. The notice said that the subject of the meeting would be to propose dissolution of Grato and Eastern. That meeting did take place on October 27, 1988, and Louis, William and Stephen voted their shares in favor of dissolving both corporations, and that vote carried.

Now, that was on October 27, 1988, but as I noted, in fact, that dissolution was already in motion. The sale of the assets that I described (the assets consisting primarily of trucks) had been going on for about two months since in or ...

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