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Frivolous Counterclaim Against Minority Owners Leads to Attorney Fee Award Against Majority Owners

Lawsuits among closely held shareholders are notoriously acrimonious, and many litigation strategies have been tried to increase the leverage of one side over the other. A trial court has recently rejected one strategy, holding that majority owners generally cannot defend against a minority investor’s lawsuit with a counterclaim alleging that the minority’s lawsuit constitutes a breach of the minority’s fiduciary duty or a waste of corporate assets. A New Jersey trial court judge has deemed such a counterclaim frivolous and has sanctioned the majority owners by ordering them to pay the minority’s attorneys’ fees.

In Baratta v. Deer Haven, LLC, L-3682-09 (N.J. Super. Ct. Law Div. July 12, 2013), the plaintiffs, three limited partners in a Pennsylvania real estate venture, sued the general partners to recoup their entire $1,900,000 investment and alleged that the general partners had usurped partnership opportunities. The general partners filed a counterclaim seeking $1,000,000, asserting that the plaintiffs’ lawsuit constituted corporate waste, a breach of their fiduciary duties, and a breach of the covenant of good faith and fair dealing. After discovery and on cross motions for summary judgment, the court dismissed the entire counterclaim. The plaintiffs then moved for sanctions under New Jersey’s Frivolous Litigation statute (N.J.S.A. 2A:15-59.1) and Rule 1:4-8. Both the statute and court rule provide that a prevailing party may recover reasonable attorneys’ fees and costs from a party who has filed a frivolous pleading or a pleading solely for the purpose of harassment, delay or other improper purpose. The court granted the plaintiffs’ motion and awarded sanctions and attorneys’ fees.

After discovery revealed no support for defendants’ counterclaim, the court found the counterclaim to be nothing more than "an attempt to gain litigation leverage – to force the plaintiffs to expend more money, while also serving as a potential trade-off on settlement talks[.]" According to the trial court, the plaintiffs were simply passive minority investors who owed no fiduciary duty to the defendants, who were the managing partners. The court emphasized that, among owners in closely held businesses, "the fiduciary duty rests on the majority owners." However, had the plaintiffs been directors, officers, or attorneys of the business, they would have owed fiduciary duties to the defendants. The court identified only a few instances in which a counterclaim against a minority investor’s lawsuit could be viable:

  • Where the operative ownership agreements forbid litigation, relegating the investor to an arbitral or other forum;

  • Where the defendants offer the investors a stand-still agreement, pursuant to which the statute of limitations does not run on any cause of action (and all possible remedies of the investor remain viable);

  • Where the minority owner is an attorney for the business and/or a director or officer of the enterprise; and

  • Where the trial court concludes that all claims of the minority investors are without merit.

None of those situations applied to the Baratta case. Thus, the defendants’ attempt to intimidate the plaintiffs with their aggressive litigation strategy ultimately backfired when the counterclaim itself was deemed frivolous and the defendants had to pay the plaintiffs’ attorneys’ fees as a sanction.

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About this Author

Vincent Gentile, Commercial Litigation Lawyer, Drinker Biddle
Partner

Vincent E. Gentile litigates a broad range of civil and commercial matters from trial through appeal. He has represented major corporate clients in complex, multiparty cases and individuals and small businesses in both state and federal courts.

Vince concentrates his practice on financial litigation including defense of accountants and auditors, and on shareholder disputes involving closely held corporations, including shareholder "oppression" cases and appraisal actions. He successfully tried and defended an appeal on one of the early seminal...

609-706-6619
Stephen Long, Litigation lawyer, Drinker Biddle
Partner

Stephen R. Long is a trial lawyer with extensive experience in the litigation, trial, arbitration and mediation of complex commercial cases, employment disputes and the defense of professional negligence claims and asbestos injury product liability cases. He represents national law and accounting firms, Fortune 500 companies and liability, life and health insurers.

Steve has appeared in courts and administrative agencies across the country at trials, preliminary injunction hearings, dispositive motion hearings, appeal arguments and other proceedings. He has counseled corporate clients on employment matters and has handled numerous investigations of allegedly improper conduct in the workplace. Steve has defended accounting firms and individual auditors in securities class actions, “deepened insolvency” litigation and SEC investigations. He has also handled cases for large and small law firms in the defense of malpractice claims arising from transactional work, trust and estate engagements, IP matters and litigation. He recently tried to a successful conclusion a mesothelioma death case on behalf of a major valve manufacturer.

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Karen A. Denys , Drinker Biddle, Construction & Real Estate Attorney
Counsel

Karen A. Denys is counsel in the firm's Commercial Litigation Practice Group. Karen's practice focuses on construction contract drafting and litigation, real estate and land use litigation and general commercial litigation. 

Construction Law. The primary focus of Karen's practice is on construction law. Karen drafts and negotiates all forms of construction, architectural and engineering agreements (including agreements involving the design and construction of environmentally-sound green buildings) and counsels clients in project management and...

609-706-6698
John Mitchell, Environmental Litigation Lawyer, Drinker Biddle
Counsel

John P. Mitchell assists clients with large environmental lawsuits relating to soil and groundwater contamination and natural resource damages. He also handles other complex commercial litigation matters, including consumer fraud act cases, commercial foreclosure/creditors’ rights actions on behalf of large national lending institutions and other clients, actions in lieu of prerogative writs on behalf of developers and owners challenging zoning ordinances and challenging and defending municipal actions concerning development applications, commercial...

609-716-6586