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Small Business Break-Ups – The High Cost of Litigating a Forced Separation

A recent Virginia Supreme Court Case, Cattano v. Bragg, illustrates two points we have made time and time again: 1) Make sure your small business is prepared for an eventual “divorce” between the shareholders; and 2) Litigation is very, very expensive.

In this blog post we will review the Supreme Court’s decision and provide some tips for your small business so that you can avoid the calamity that occurred in this case, which included an attorneys’ fee award of over $260,000 for the prevailing party.

The small business in this case was, ironically, a law firm. The two partners, who were also directors of the firm, owned an unequal share of the company: 73% to 27%. The law firm obtained a substantial fee, $234,000, in a personal injury case. Shortly thereafter, the minority shareholder became upset at certain bookkeeping practices–specifically the distribution of the $234,000 fee–and requested that all the corporate records be made available for inspection. Instead of turning over the records, the majority shareholder: a) terminated the employment of the minority shareholder; and b) held a meeting of the shareholders at which he voted to remove the minority shareholder as a director of the firm. Obviously, the minority shareholder disagreed with the actions taken and litigation ensued.

After the lawsuit was filed, the Circuit Court judge appointed a receiver to “perform a complete accounting of books and records of the Firm, including but not limited to the disposition of all payments.” At trial, the jury determined that the law firm was entitled to the return of the $234,000 and that the minority shareholder was entitled to 27% of the $234,000 settlement. The trial judge then determined that because the lawsuit had “had yielded a substantial benefit to the corporation,” the minority shareholder was entitled to her attorneys’ fees and costs. Consequently, the trial judge awarded the minority shareholder attorney’s fees in the amount of $269,813, plus costs and expenses of $19,415.71!

The Virginia Supreme Court upheld the trial judge, and affirmed the court’s decision. With respect to the large award of attorneys’ fees, the Supreme Court found that the trial court did not abuse its discretion, citing the “complicated proceedings,” and finding that “the circuit court explicitly evaluated the rates paid to experts and lead counsel in this case and found them to be reasonable ‘in this particular case.'”

Lessons Learned?

Obviously, this case had serious ramifications for the company and the two shareholders. The majority shareholder suffered a serious financial blow by losing the case; repaying money to the company; losing the attorneys’ fees and costs he paid to his attorney; losing time he could have used to generate new business and new revenue; and losing the attorneys’ fees and costs he had to pay to the minority shareholder. Even the winning minority shareholder lost time she could have used to generate new business and new revenue, and will not be made truly “whole.”

Sometimes you cannot avoid litigation and an eventual trial verdict. However, with an eye on the tremendous expense litigation can bring, keep these suggestions in mind for your small business:

jt photo 150x150 Does Virginia law require an HOA to transition automatically to homeowner control of the Board of Directors?

Tarley Robinson, PLC, Attorneys and Counsellors at Law

Williamsburg, Virginia

 

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John Tarley

John is the firm's managing partner and chairs the firm's small business, zoning, and litigation practice areas.

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Filed under: Business Planning, John Tarley, State & Federal Litigation by John Tarley

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