LEWIS V. S.L.& E., INC., 629 F.2d 764 (2nd Cir. 1980) CASE BRIEF

LEWIS V. S.L.& E., INC.

629 F.2d 764 (2nd Cir. 1980)

NATURE OF THE CASE: This is an appeal by Donald E. Lewis (P), a shareholder of S.L.& E, Inc. (D) from a judgment entered against him in the United States District Court after a bench trial of his derivative claim against directors of D and of a claim asserted against him by the other corporations. P charged that his brothers (Alan, Leon and Richard, directors and officers of S.L.& E, Inc., hereinafter Ds) had wasted the assets of D Corp by causing it to lease business premises to Lewis General Rites, Inc (LGT). from 1966 to 1972 at an unreasonably low rental. LGT was permitted to intervene in the action, and filed a complaint seeking specific performance of an agreement by P to sell his SLE's stock to LGT in 1972.

FACTS: P's and Ds' father was the principal shareholder of SLE and LGT. SLE, formed in 1943, owned the land and complex of buildings at 260 East Avenue in Rochester. Prior to 1956 LGT occupied the premises without rent; the rent paid was initially $200 per month, and had increased over the years to $800 per month. On February 28, 1956, SLE granted LGT a 10-year lease on the newly expanded property for a rent of $1200 per month, or $14,400 per year. Under the terms of the lease, SLE was responsible for payment of real estate taxes on the leased property, while all the current expenses were to be borne by the tenant. In 1962, P's and Ds' father transferred his SLE's stock, 90 shares in all to his six children (4 sons and 2 daughters), giving 15 shares to each. At that time, Ds were already shareholders, officers and directors of the company. At that time, all six entered into an agreement with LGT, under which each child who was not a shareholder of LGT on June 1, 1972 would be required to sell his or her D Corp's shares to LGT, within 30 days of that date, at a price equal to the book value of the D Corp's stock as of June 1, 1972. At the time of the expiration of the LGT's lease, February 28, 1966, three Ds, their father and another person were directors of SLE. and LGT. Alan owned 44%, Richard 30%, Leon 19% and father owned 7%. From 1967 to 1972 Richard owned 61% and Leon 39%. When the lease expired in 1966, no new lease was made and LGT continued to pay the old rate. When this suit was commenced there had not been a formal meeting of either the shareholders or directors of D Corp. since 1962. Ds had largely ignored SLE's separate corporate existence and disregarded the fact that SLE had shareholders who were not shareholders of LGT and who could not profit from actions that used SLE solely for the benefit of LGT. Neither P nor his sisters ever owned LGT stock. As the date of sale pursuant to the agreement came closer, P came to the conclusion that SLE's book value is lower than it should be. He sought financial information from Richard, but he refused. P in turn refused to sell his shares and commenced this action. The district court held that P had failed to prove waste by the D directors, and entered judgment in their favor. The court also awarded attorneys' fees to the defendant directors and to D Corp., and granted LGT specific performance of P's agreement to sell his SLE's stock. On appeal, P argued that the district court improperly allocated to him the burden of proving his claim of waste and that since Ds failed to prove that the transactions in question were fair and reasonable, he was entitled to judgment. P also argues that the awards of attorneys' fees were improper. We agree with each of these contentions, and therefore reverse and remand.

ISSUE:

RULE OF LAW:

HOLDING AND DECISION:

LEGAL ANALYSIS:

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