Lash v. Lash Furniture Co. - 130 Vt. 517, 296 A.2d 207 (1972)

Rule:

In Vermont, dealings between a majority stockholder and director and the corporation he controls are not arms-length transactions. They are subject to close scrutiny at the instance of persons having an interested relationship to the operation, such as a stockholder. The relationship of a director-stockholder to his corporation binds him to use the utmost good faith and loyalty for the furtherance and advancement of the interest of that corporation. He is not permitted to make profit for himself in the transaction of the business of the corporation, against its interest.

Facts:

At the time with which this equity action is concerned, three Lash brothers owned all of the voting stock of that Barre store, the Lash Furniture Company of Barre, Inc., in equal shares. Ralph Lash, one of the defendants, was one of the shareholders in the Barre store and operated it. Wallace Lash, another brother, owned a third, but had severed all Vermont connections and moved to New York City. Herman Lash, who was the third shareholder, ran the Burlington operation along with still another brother who does not figure in this litigation. The dispute arose as a consequence of the sale, by Wallace Lash, of his stock holdings in the Barre operation. Ralph Lash was the ultimate purchaser. The transfer was challenged because of a corporate by-law requiring that any stock sold be first offered to the corporation at the proposed price. This offer was, in fact, made, but under circumstances which generated an attack on the transaction by the plaintiff. The corporation, by vote, rejected the opportunity to purchase. Each brother had four voting shares. Wallace, as seller, did not vote. Ralph voted against purchase of the stock by the corporation and Herman voted in favor of accepting the offer. Thus, the transaction was not authorized and was lost to the corporation. This was in April or May, 1967. In June, 1967, Ralph Lash bought Wallace's stock. This gave him effective control of the Barre corporation, since he then held two-thirds of the voting stock. He transferred a voting share to his wife, Betty, and she became a director, succeeding Wallace. Thus, the instant suit was filed to reverse the acquisition of Wallace’s stock. The chancellor, by his judgment order, found that the facts supported a determination that Ralph Lash's fiduciary duty toward Lash Furniture Company of Barre, Inc., barred him from retaining his rights to the purchased shares of stock

Issue:

Did the special master err in finding that Ralph and Betty Lash breached their fiduciary duty?

Answer:

No.

Conclusion:

 The defendants take the position that it was error for the master to refuse to hear evidence relating to the operation of the Burlington corporation, Lash Furniture, Inc. It is urged that it would establish conduct of the plaintiff comparable to that of Ralph Lash being attacked in this suit, and show his knowledge of what was going on in Barre. The difficulty with that claim is that whatever may have been the imperfections in the Burlington operation, it is not a part of this lawsuit. Whatever rights and remedies may be enforceable by and on behalf of the Burlington corporation or its stockholders, is outside the ambit of this litigation, dealing, as it does, with a separate corporate entity. Moreover, the generalized objection to some undisclosed ruling, without specifying its application to particular evidence as offered, must be held to be unavailing on appeal. After Ralph Lash had acquired the additional stock so as to control the Barre corporation, the business was moved from its old location to a building owned by Ralph and Betty Lash. The occupancy, which has continued, was without lease, with rent payable monthly. There was no corporate authority evidenced for this change, nor for the use of corporate funds to make extensive structural and capital improvements in this property. The master also found that the rent charged for use of the building was excessive, in that it was assessed beginning in July when occupancy did not occur until October. The building was rented with heat yet, somehow, a separate charge for heat was made against the Barre corporation. These amounts aggregated to something over $ 45,000. and were reflected in recovery for them allowed by the chancellor against the defendants, Ralph and Betty Lash, in favor of the Lash Furniture Company of Barre, Inc. The master, therefore, properly examined the facts in the light of the defendant Ralph and Betty Lash's fiduciary duty. It is clear that, under the evidence presented, impermissible advantage of the Barre corporation was taken through the terms of the rental arrangements, and with facts in support of that conclusion and of the fiscal recovery allowed.