Villar v. Kernan

695 A.2d 1221 (1997)

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Nature of the Case

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Facts

Villar (P) and Kernan (D) agreed to go into the brick oven pizza business and started Ricetta’s. P received, 49 percent of the shares, and D received 51 percent. According to D, the parties agreed that 'there would never be salaries. Eventually, Stephan, the manager of the restaurant, became a two percent shareholder obtaining one percent from both P and D. P and Stephan attempted to buy D out, but the buyout was unsuccessful. In March 1994, D entered into a 'consulting agreement' with Ricetta's. D got automatic payments of $2,000 per week. The agreement was ratified at a shareholders' and board of directors' meeting at which P was not present. D's compensation could be increased but not decreased by a majority vote of the board of directors, and his services could be terminated only for criminal violation involving dishonesty, fraud, breach of trust, or for willful engagement in misconduct in the performance of his duties. In May 1995, P filed a complaint for breach of an oral contract. The court concluded that there was an oral agreement between P and D that prohibited D from receiving a salary from Ricetta's. It held that unless the relevant state statute precluded enforcement, the agreement was enforceable in equity despite the statute of frauds. When it examined the statute, it found not controlling precedent. The court certified two questions on whether state law precluded enforcement of an oral contract between close corporation shareholders with respect to salary.