You might think a family-run business would not facecivil litigationfrom shareholders the same way as larger, more impersonal corporations. But oftentimes the opposite is true. Serious disagreements among family members who co-own a business can easily spill over into court.
Nephew's Estate Fights with Uncle Over Alleged Corporate Embezzlement
An ongoing case in upstate New York illustrates what can go wrong when family members disagree about how to manage their business. This case involves a relatively small company that initially had three shareholders: the company's president, his sister-in-law, and his nephew. The three shareholders owned equal percentages of the business and together formed the company's board of directors. The president also named his brother as part-time chief financial officer. The two brothers and a part-time staffer were the company's only paid employees.
At some point in 2014, the sister-in-law and the nephew came to believe the two brothers were misappropriating company assets for themselves. More precisely, they alleged the president paid himself $28,000 per week in salary without approval from the other two directors. The president's brother, as chief financial officer, likewise did not inform his wife or son about these payments.
The nephew died in late 2014. The executor of his estate and the sister-in-law, using their majority ownership, removed the president from the board and terminated his employment. Shortly thereafter, the now ex-president filed suit in Schenectady County Supreme Court alleging breach of contract.
A few months after that, the sister-in-law died, leaving her one-third interest to the ex-president's brother. Now controlling a majority of shares, the two brothers moved to reinstate the one brother as president and “settle” his lawsuit against the company. The executor of the nephew's estate responded by filing a second lawsuit in Albany County Supreme Court, seeking an injunction to prevent the payment of “back pay” made to the president as part of the first lawsuit's settlement. The estate also seeks payments of shareholder dividends which were allegedly authorized by the directors but never paid.
While the Supreme Court denied the estate's motion for a preliminary injunction, it also rejected the brothers' motion to dismiss the case outright. The court said the earlier settlement did not bar the present lawsuit, as the Schenectady court never made any findings of fact regarding the brothers' conduct. Likewise, the settlement may be void under New York law as a case of “improper self-dealing” between the company and the brothers. The court noted there was a “fair (but not overwhelming)” chance the estate could prove its claims against the brothers, but additional proceedings are necessary.