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Rexford Rand Corporation v. Ancel

June 30, 1995

REXFORD RAND CORPORATION,

PLAINTIFF-APPELLEE,

v.

GREGORY ANCEL,

DEFENDANT-APPELLANT.



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division.

No. 93 C 7386--John F. Grady, Judge.

Before FLAUM, RIPPLE and KANNE, Circuit Judges.

FLAUM, Circuit Judge.

ARGUED APRIL 25, 1995

DECIDED JUNE 30, 1995

This diversity case requires us to consider whether a minority shareholder's duty of loyalty to a closely held corporation continues after he has been "frozen out." Rexford Rand Corporation ("Rexford Rand") is a closely held corporation registered in Illinois. *fn1 Gregory Ancel ("Gregory") owns 25 percent of the corporation's stock. Albert Ancel ("Albert"), Gregory's brother, also owns 25 percent, and Selwyn Ancel ("Selwyn"), Albert and Gregory's father, owns the remaining 50 percent. Albert serves as President, Chief Executive Officer, Treasurer, and as a director of Rexford Rand. Selwyn is the Chairman of the Board of Directors.

From the corporation's inception in 1983 until December, 1991, Gregory served as Vice President and Treasurer of Rexford Rand. He also managed a sales group for the company, and his salary from Rexford Rand was his sole source of income. On December 3, 1991, Gregory was fired from his positions as Vice President, Treasurer, and employee. *fn2 The reasons for Gregory's termination are in dispute. Gregory claims that he was "frozen out" by Albert and Selwyn; *fn3 Albert testified that Gregory was fired because of his job performance. Since he was fired, Gregory has received neither salary nor benefits. Rexford Rand has never paid a dividend to its shareholders.

In 1993, Rexford Rand neglected to file its annual report with the state of Illinois. As a result, the corporation was administratively dissolved. See 805 ILCS 5/12.35. *fn4 The corporation's dissolution caused the names "Rexford Rand Corporation" and "Daxcel Corporation" (another trade name used by Rexford Rand) to become available. Gregory discovered that the corporation had been dissolved, but he did not inform Albert or Selwyn. Instead, Gregory reserved the names "Rexford Rand Corporation" and "Daxcel Corporation" and secured a corporate charter in the name of "Rexford Rand Corporation." This action prevented Rexford Rand from re-incorporating under its original name. See 805 ILCS 5/12.45(b)(2). Rexford Rand brought suit claiming that Gregory breached his fiduciary duty as a shareholder in a close corporation by depriving the corporation of the use of its name. Following a bench trial, the district court ordered the return of the original name to the corporation and permanently enjoined Gregory from conducting business under the names "Rexford Rand Corporation" and "Daxcel Corporation." On appeal, Gregory argues that any fiduciary duty he owed to Rexford Rand ended when Albert and Selwyn froze him out in 1991. Because we believe that Gregory continued to owe Rexford Rand a duty of loyalty, we affirm.

As an initial matter, Gregory argues that this case is not properly in federal court because the $50,000 amount in controversy requirement has not been satisfied. See 28 U.S.C. sec. 1332(a). The determination of the amount in controversy is a fact-specific inquiry. Thus, we review the district court's finding that the amount in controversy exceeds $50,000 for clear error. Zumerling v. Devine, 769 F.2d 745, 749 (Fed. Cir. 1985); cf. Johnson v. Trigg, 28 F.3d 639, 645 (7th Cir. 1994); Mars Steel Corp. v. Continental Bank N.A., 880 F.2d 928, 933 (7th Cir. 1989) (en banc) ("appellate courts should use deferential review for fact-intensive disputes, including the application of legal rules to facts").

Rexford Rand seeks equitable relief--the return of its corporate name--rather than damages. In an equitable action, "the amount in controversy is measured by the value of the object of the litigation." Hunt v. Washington State Apple Advertising Commission, 432 U.S. 333, 347 (1977). The object of this suit is the name "Rexford Rand Corporation." Rexford Rand seeks a federal forum, so it bears the burden of establishing jurisdiction. NLFC, Inc. v. Devcom Mid-America, Inc., 45 F.3d 231, 237 (7th Cir. 1995), cert. denied, 63 U.S.L.W. 3842 (U.S. May 30, 1995); Nuclear Engineering Co. v. Scott, 660 F.2d 241, 248 (7th Cir. 1981), cert. denied, 455 U.S. 993 (1982); cf. McNutt v. General Motors Acceptance Corp., 298 U.S. 178, 189 (1936).

Gregory challenges Rexford Rand's assertion that the value of its corporate name exceeds $50,000. If uncontested, the courts will accept the plaintiff's good faith allegation of the amount in controversy unless it "appear[s] to a legal certainty that the claim is really for less than the jurisdictional amount." St. Paul Mercury Indemnity Co. v. Red Cab Co., 303 U.S. 283, 289 (1938); see also NLFC, 45 F.3d at 237. Where, as here, a defendant challenges the plaintiff's allegation of the amount in controversy, the plaintiff must support its assertion with "competent proof." McNutt, 298 U.S. at 189; NLFC, 45 F.3d at 237. Competent proof means " 'proof to a reasonable probability that jurisdiction exists.' " NLFC, 45 F.3d at 237, quoting Gould v. Artisoft, Inc., 1 F.3d 544, 547 (7th Cir. 1993). We believe that Rexford Rand has met this burden.

Rexford Rand, a chemical manufacturing firm, has approximately 30 employees and sells "over 200 products to approximately 6,800 customers in many states." The corporation has annual sales of approximately $1.75 million and has fixed assets of $500,000. Albert testified that the name "Rexford Rand" appears on the corporation's "[b]usiness cards, product literature and labels, containers and packaging, invoices, letterheads, envelopes, advertising, novelties, [and] on the buildings themselves." In addition, Albert stated that Rexford Rand sells primarily to repeat customers and "is dependent upon service to customers who then return to buy more product or additional product." Consequently, Rexford Rand argues that name recognition is very important to its survival and the loss of the Rexford Rand name would substantially impair the value of the business. *fn5 For a company with $1.75 million in annual sales that depends heavily on name recognition, we conclude that at least a "reasonable probability" exists that the value of the corporate name exceeds $50,000. Thus, the district court did not commit clear error by holding that the amount in controversy requirement was satisfied.

Next, we turn to the merits. Under Illinois law, a shareholder in a close corporation owes a duty of loyalty to the corporation and to the other shareholders. Hagshenas v. Gaylord, 557 N.E.2d 316, 323 (Ill. App. 1990), appeal denied, 561 N.E.2d 691 (1990). *fn6 Shareholders must "deal with the utmost good faith, fairly, honestly, and openly with their fellow stockholders." In re Dearborn Process Service, Inc., 149 B.R. 872, 880 (Bankr. N.D. Ill. 1993). This duty is necessary, the Hagshenas court reasoned, because while a closely held corporation embodies the corporate form, it in many ways resembles a partnership. Thus, "the mere fact that a business is run as a corporation rather than a partnership does not shield the business venturers from a fiduciary duty similar to that of true partners." Hagshenas, 557 N.E.2d at 322. *fn7

Generally, imposing a fiduciary duty on shareholders in a close corporation shields minority shareholders from oppressive conduct by the majority. Shareholders in close corporations have often invested a "substantial percentage" of their assets in the corporation, see Donahue v. Rodd Electrotype Co., 328 N.E.2d 505, 514 (Mass. 1975), and their position in the corporation may provide them with their only source of income. Minority shareholders are vulnerable to "freeze-outs" or "squeeze-outs," where the majority, for personal rather than legitimate business reasons, deprives the minority shareholder of his office, employment, and salary. See id. at 513-14; Orchard v. Covelli, 590 F. Supp. 1548, 1557 (W.D. Pa. 1984), aff'd, 802 F.2d 448 (3d Cir. 1986); Orsi v. Sunshine Art Studios, Inc., 874 F. Supp. 471, 475 (D. Mass. 1995). *fn8 Moreover, because no active market exists for the corporation's stock (and prospective purchasers may be wary of buying into a small enterprise where dissension has already occurred), the minority stockholder most likely will not be able to sell his shares for any sum approaching their fair value. Donahue, 328 N.E.2d at 514; Orchard, 590 F. Supp. at 1557. Consequently, an oppressed ...


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