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Brown v. Brown

July 7, 1999

CARLTON C. BROWN, SR., PLAINTIFF-RESPONDENT,
v.
ELEANORE BROWN, DEFENDANT/THIRD PARTY PLAINTIFF-APPELLANT,
v.
CARLTON C. BROWN, SR., BROWN ROOFING COMPANY, INC., BROWN & GUARINO, INC., TERRI L. BROWN AND CARLTON C. BROWN, JR., THIRD PARTY DEFENDANTS-RESPONDENTS.



Before Judges Landau, Braithwaite and Wecker.

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

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted December 2, 1998

On appeal from the Superior Court of New Jersey, Chancery Division/Family Part, Cumberland County.

The issue presented is whether a former fifty-percent shareholder in a closely-held corporation, who has transferred all of her shares to the other fifty-percent shareholder as part of a divorce settlement, can continue what appears to be a shareholders' derivative action against a third-party, when the action arises out of events that occurred during the shareholder's ownership.

The Law Division Judge in this case granted the third party's motion for judgment on the ground that the former shareholder no longer had standing to maintain the action, because she no longer owned her shares. We disagree, and therefore reverse.

The background is as follows. Brown Roofing Company, Inc., was owned in equal parts by Carlton C. Brown, Sr. and Eleanore Brown, a husband and wife. At a time when Mr. Brown sought to retire out of state and Mrs. Brown, who had worked only sporadically in the business, was ill, their adult daughter, Terri Brown, became the chief operating officer of the company. *fn1

During the pendency of the divorce action brought by Mr. Brown against Mrs. Brown, Mrs. Brown filed a third party complaint in the nature of a shareholder's derivative action against Terri Brown and her new business, Brown and Guarino. The gist of the third party complaint was that Terri Brown diverted corporate opportunities (such as the acquisition of real property), as well as customers, from Brown Roofing to her own business, Brown and Guarino, thereby depriving Brown Roofing of assets and profits that were rightfully its own. *fn2 The complaint also alleges that Terri Brown was part owner of real property for which she charged the corporation excessive rent.

During the course of a trial that was scheduled to include all of the pending claims, Mr. and Mrs. Brown settled their divorce action. *fn3 That settlement included the transfer of Mrs. Brown's shares in Brown Roofing to Mr. Brown; alimony payable to Mrs. Brown; and distribution of other marital property. Mrs. Brown's shares, plus her interest in certain real property which she transferred as part of the settlement, together had a stipulated value of $470,000. The settlement that was placed on the record and incorporated in the judgment of divorce recognized Mrs. Brown's "right" to continue her third party complaint. Mr. Brown, on behalf of Brown Roofing, assigned the corporation's claims against the third party defendants to Mrs. Brown. *fn4

Some two years after the divorce settlement, on the continued trial date of plaintiff's case against Terri Brown and Brown and Guarino, those defendants brought a motion for judgment on the ground that plaintiff's right to pursue the corporation's derivative suit terminated with her transfer of shares to Mr. Brown. The motion judge heard extensive oral argument and gave each side the opportunity to submit written argument before granting the motion for reasons set forth in a letter opinion.

The essence of the judge's decision was, first, that Eleanore's claims constituted a shareholder derivative action and not a private or direct action of her own. See Strassenburgh v. Straubmuller, 146 N.J. 527, 548-53 (1996) (a claim for breach of fiduciary duty on the part of a director is generally viewed as derivative unless plaintiff suffered an injury distinct from that suffered by other shareholders or the corporation as a whole); Pepe v. GMAC, 254 N.J. Super. 662 (App. Div.), certif. denied, 130 N.J. 11 (1992). The judge then concluded that plaintiff did not meet the requirements of the statute and court rule governing a derivative action, because she had transferred her shares in the corporation.

N.J.S.A. 14A:3-6(1) provides in pertinent part:

(1) No action shall be brought in this State by a shareholder in the right of a domestic or foreign corporation unless the plaintiff was a holder of shares or of voting trust certificates therefor at the time of the transaction of which he complains, or his shares or voting trust certificates thereafter devolved upon him ...


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