Fiduciary duty

Thomas v. Fletcher: Becoming Your Corporation’s Landlord

Thomas v. Fletcher, a 2006 case out of the Ohio 3rd District Court of Appeals, is a sordid tale of three feuding corporate shareholders, and one man’s struggle to gain the upper hand against two brothers aligned against him. The case briefly touches on the conflict of interest presented by renting property to your corporation, and retaliatory termination of employment.

John Thomas, James Fletcher, and Patrick Fletcher were the three shareholders of Wingers, Inc., a restaurant and bar in Sidney, Ohio. Each shareholder took turns working management shifts at the bar, and was paid based upon the performance of the corporation.

In 1997, the property Wingers occupied became available for purchase by virtue of an option built into the Wingers lease. Thomas decided to purchase the property, but the Fletchers chose not to participate.

Thomas renewed the lease to Wingers for five years in 1997, and again in 2002. After the second renewal, the parties tried to negotiate a third renewal, but negotiations failed. Thomas was holding out for higher rent, and the Fletchers refused. Instead, the Fletchers decided to terminate Thomas’ employment at Wingers, and stopped paying him his share of profits.

Thomas then brought a lawsuit challenging the termination, and won an award for $82,621.96 plus attorney’s fees.

Minority shareholder termination

The court laid down the rule that majority shareholders cannot terminate a minority shareholder employee without a legitimate business purpose. Although the Fletchers stated that the termination happened because Thomas was unproductive, rude, and disruptive, the court wasn’t convinced, because the Fletchers acknowledge that problems between Thomas and the Fletchers had existed for years, and the business had continued to run well enough leading up to the lease negotiations. The brothers indicated in their depositions that the termination happened because of the failure of lease negotiations, which looks awfully like retaliation.

Patrick Fletcher’s deposition indicated that the termination was part of a “business divorce.” Suffice it to say, there are more proper ways to bring about a business divorce than totally cutting a minority shareholder loose.

Acting as a Landlord

Generally speaking, when dealing with your corporation on your own behalf or on behalf of another who has interests contrary to the corporation, you have a duty of “good faith and fair dealing” with the corporation. A heightened standard of review applies when you’re deriving some personal benefit from your business dealings with the corporation. To the extent that you have a duty to protect the other shareholders of the corporation, you have to deal honestly with the entity. A landlord-tenant relationship is a good example of the type of relationship invoking a duty of good faith and fair dealing.

Part of the Fletchers’ defense involved claiming that Thomas was the first to breach his fiduciary duty of good faith and fair dealing before the termination. He had failed to present facts indicating that the terms of the proposed lease was commercially reasonable, and initially didn’t want to renew the lease at all. The court wasn’t convinced. The court’s test was whether Thomas had presented evidence that he had acted in good faith during the lease negotiation. Since he had consulted third parties about commercial rates, and had presented other evidence of good faith, the burden shifted to the Fletchers to disprove good faith. The court found that they had not met their burden.

Conclusion

When dealing with a minority shareholder or partner in your organization, act with caution if you have a disagreement. Do not cross the line of good faith and fair dealing by shutting the minority member out of the company. Regardless of whatever damage the member is doing to the company, he or she still has the right to access the books, carry out employment contracts, or exercise any rights pursuant to the operating or partnership agreement. As in most aspects of law, civility is the best defense to lawsuit liability.