Giannotti v. Hamway

387 S.E. 2d 725 (1990)

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Nature of the Case

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Facts

Ps, minority stockholders, filed a suit against Ds, directors, and officers, of Libbie Rehabilitation Center, Inc., a Virginia close corporation. Libbie develops and operates nursing homes. Ps alleged that Ds engaged in numerous acts which were legally oppressive and that the assets of the corporation had been misapplied, divested and wasted. Ps alleged that Ds had refused to declare dividends on the common stock and engaged in borrowing and lending corporate funds in a wrongful manner. Ps also alleged that the directors have no experience nor any special skills, education, or expertise to allow them to operate or control nursing homes, that they worked part-time and paid themselves excessive salaries. Ps asked the court, pursuant to Code §§ 13.1-94 and -95, to appoint a receiver pending the suit, to require the defendants to restore to the corporation such funds as had been misspent or lost by their mismanagement and breach of fiduciary duty and to order the liquidation of the assets and business of the corporation. Evidence showed that from June 1975 through September 30, 1985, Ds' compensation totaled $2,799,006 while during the same period, Ps received $50,000 of $132,000 in common stock dividends. After-tax profits during the period amounted to $1,042,350, which meant that for every dollar of profit earned, Ds received $ 2.67 in compensation. This did not take into account an additional $1.4 million attributable to unnecessary loan and interest costs incurred in order to enable those payments to be made to Ds. The ratio of compensation to profits was 4 to 1. Ds established that total corporate assets increased from $1.7 million to $6.4 million during the period; total operating revenues increased from $1.5 million to $6.8 million; retained earnings increased from about $182,000 to approximately $922,000; common stockholders' equity rose from about $602,000 to near $1.3 million; and net income after taxes increased from $89,473 to $191,407. Ds presented evidence to show that their compensation was reasonable, proper, and appropriate, given their personal, individual attention to corporate affairs and the resulting success of their efforts. The chancellor found in favor of Ps and ordered dissolution. The chancellor did not order restoration of the misspent assets. The court specifically found that Ds were oppressive to Ps. Ds appealed.