Heavilon: The duality of man: ‘Owner/employee’ interest in small biz

Small business owners often wear multiple hats for their companies. In many cases, “Mike” the owner is often “Mike” the employee, with little distinction between those two roles. However, when a dispute arises and “Mike” is squeezed out of the company, how do courts distinguish between Mike’s rights as an owner versus Mike’s rights as an employee? Although the wrongful termination of his employment may form the basis for a breach of fiduciary duty claim, his ability to recover lost wages remains unclear due to Indiana’s strong presumption of “at-will” employment. Does Mike suddenly become two people, with distinct rights owed to each version of him, or can courts recognize the unique situation of Mike the “owner/employee?” The answer remains unclear.

Wrongful termination as a breach of fiduciary duty: The unwritten exception to ‘at-will’ employment?

Indiana operates under a presumption of “at-will” employment, where the employment is terminable at any time, with or without cause, by either party. Orr v. Westminster Village North, Inc., 689 N.E.2d 712, 717 (Ind. 1997). This presumption is “strong,” and Indiana courts have declined to adopt “broad and ill-defined exceptions” to the employment at-will doctrine. Id.

Although a typical at-will employee may have no recourse for wrongful termination of his or her employment, that is not always the case for an owner/employee, who is owed fiduciary duties by his or her fellow owners.

Fiduciary duties in closely held corporations and limited liability companies are paramount to the company’s survival. Judge Benjamin Cardozo emphasized this importance long ago, noting that co-owners in a small company owe each other a duty of “[n]ot honesty alone, but the punctilio of an honor the most sensitive.” Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Accordingly, co-owners “must deal fairly, honestly, and openly with [the] corporation and fellow stockholders” and “must not be distracted from the performance of [] official duties by personal interests.” Hartung v. Architects Hartung/Old/Burke, Inc., 301 N.E.2d 240, 243 (Ind. Ct. App. 1973).

Accordingly, the wrongful termination of a minority owner’s employment may constitute a circumstance in which the duty to treat a fellow owner “fairly, honestly, and openly” has been breached. See W & W Equip. Co., Inc. v. Mink, 568 N.E.2d 564 (Ind. Ct. App. 1991). In fact, the rule “[t]hat a controlling shareholder cannot, consistent with his fiduciary duty, effectively deprive a minority shareholder of his interest as a shareholder by terminating the latter’s employment or salary has been widely accepted.” Hollis v. Hill, 232 F.3d 406, 470 (5th Cir. 2000) (emphasis added); W & W, 568 N.E.2d at 574 (“the denial of employment to a minority shareholder in a close corporation is especially pernicious in some instances.”) (quotations omitted); Haley v. Forcelle, 669 N.W.2d 48, 57 (Minn. Ct. App. 2003). Although never specifically identified as an exception to the at-will employment doctrine, cases like W & W and Hollis indicate that a breach of fiduciary duty may proceed despite that doctrine’s “strong” presumption.

Although stylized as a “breach of fiduciary duty” claim in equity, rather than a wrongful termination claim at law, the claim accomplishes the same goal: to protect the owner/employee’s investment by guaranteeing that the owner may only be terminated “for cause” rather than at the majority’s discretion.

What’s the damage?

While wrongful termination may form the basis of a claim for breach of fiduciary duty, the calculation of damages for that breach remains unclear.

Damages for breach of fiduciary duty claims, especially those involving close corporations, are often difficult to ascertain. Accordingly, Indiana has “recognized the need for more flexible remedies in the case of close corporations.” G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 244 (Ind. 2001). “Unlike shareholders in a publicly traded corporation, the oppressed minority in a close corporation does not have the option of voting with its feet by selling its shares in a public market for a presumptively fair price.” Id.

When an owner/employee joins a company primarily for the purpose of securing or maintaining employment, that owner/employee loses his or her primary return on investment when that employment is wrongfully terminated. Hollis, 232 F.3d at 471 (finding breach of fiduciary duty for wrongful termination of employment where “[t]he value of [the minority owner’s] investment was tied directly to his employment.”). Preventing an owner from earning wages via that owner’s employment could therefore be equated to wrongfully withholding dividends or other distributions made to company owners. See Id. That owner/employee’s lost wages following the wrongful termination of his or her employment would seem like a reasonable way to calculate damages. This is especially true considering the wide latitude afforded to Indiana courts to determine remedies for aggrieved owners of closely held companies. G & N Aircraft, 743 N.E.2d at 244.

However, the specter of at-will employment looms large over such a claim. Although a breach of fiduciary duty claim may prevent the wrongful termination of a minority owner, could it also serve to guarantee that owner future lost wages? And for how long would that owner/employee be entitled to those wages? The greater the uncertainty surrounding those questions, the more a breach of fiduciary duty claim appears as a “broad” or “ill-defined” exception to the at-will employment doctrine warned against in Orr. 689 N.E.2d at 717-18. Tying a claim for lost wages to some certain future date in which the owner/employee could have reasonably expected employment could resolve some of the uncertainty of damages, but courts may still hesitate to offer what amounts to guaranteed future employment for what would otherwise be “at-will” employment. A simpler route would be to award the owner/employee the value of his or her interest at the time of the wrongful termination, a common damages amount for breach of fiduciary duty claims. See W & W, 568 N.E.2d at 577-78.

However, does simply awarding an owner/employee the value of his or her interest adequately take into account the loss sustained by the owner/employee whose value in the company is more closely tied to wages than enterprise value? That question was presented to the Minnesota Court of Appeals in Haley v. Forcelle, 669 N.W.2d 48 (Minn. Ct. App. 2003). In that case, a minority shareholder sought an injunction to prevent the termination of his employment by the company’s majority shareholder. Id. at 54. The trial court granted the injunction, and the Minnesota Court of Appeals affirmed. See generally Id. Although the majority shareholder argued that the injunction preventing him from terminating the minority shareholder’s employment constituted an “interference with [his] right to manage the operations and affairs” of the company, that harm was outweighed by the harm to the minority shareholder/employee, who almost entirely depended upon wages as his interest in the company. Id. at 57-58 (“when Jack was terminated, not only did he lose his sole source of income for his family, he also lost the ability to manage and watch over the company that he helped to found and partially owned.”).

While Haley only concerned an injunction and did not address damages related to future employment, it still shows that an owner/employee’s future employment may still be considered a protectible interest. If a court may prevent the termination of an owner/employee’s employment, what is preventing the court from also awarding damages for the expected future employment? Once again, the “need for more flexible remedies in the case of close corporations” may allow for such a recovery. Until courts clearly define the line between “ownership” rights and “employment” rights, however, that issue remains blurred.

Conclusion

Although never specifically identified as an exception to the “at-will employment doctrine,” a minority owner/employee of a closely held company may still have protection for the wrongful termination of his or her employment under a breach of fiduciary duty theory. This is especially true where the owner/employee only receives income from the company in the form of wages for that employment. However, like most damages calculations, the amount recoverable for such a claim remains unclear. Until courts address head-on the line between “Mike” the owner and “Mike” the employee, “Mike” the owner/employee will continue to wear multiple hats, both for his small company and under the law.•

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Michael Heavilon is an associate at Lewis Wagner LLP. Opinions expressed are those of the author.

Editor’s note: This article has been corrected.