Breach of Fiduciary Duty by Corporate Insiders Requires Remedy, Even if Damages Unclear

When corporate insiders transferred to a new corporation corporate assets claimed to be worthless, the shareholders had a right to a remedy, even if the damages were unclear.

In Meister v. Mensinger (2014) 230 Cal. App. 4th 381, Sesame Technologies, Inc., was a software company that struggled financially throughout most of its existence. From 2000 to 2002, members of the Meister family invested over $2.1 million in Sesame Technologies, Inc., for which they received preferred stock giving them a 38% ownership interest but no voting rights or role in managing the company. Subsequently, the Meisters balked at investing more money.

In February 2003, its CFO, Mensinger, loaned Sesame $125,000 in exchange for a promissory note secured by Sesame’s assets. After paying off the bank loan, Mensinger became Sesame’s senior secured creditor, and in April 2004, Mensinger declared his note in default.

In mid-2004, Sesame’s CFO, Mensinger, and its CEO, Koppel, determined Sesame either had to file for bankruptcy or sell its assets to a new company, ExtraView Corporation, created by Mensinger. They opted for the latter. Initially, Mensinger and Koppel owned ExtraView 50/50, but Koppel later sold his shares to Mensinger, who became ExtraView’s sole owner. Koppel and Mensinger were the officers of ExtraView.

The next month, the IRS placed a lien on the assets of Sesame Technologies.

Following that, Koppel, who had been the sole director, appointed Mensinger to Sesame’s board, and as directors, they approved a sale of Sesame’s assets to ExtraView for $1.5 million in the form of assumption of liabilities. The board further resolved that once the sale was complete, Sesame would dissolve.

A majority of Sesame’s employee shareholders with voting rights approved the sale. At the time of the vote, Koppel controlled over 60% of Sesame’s voting shares through his own shares and a proxy.

The Meisters were not advised about the sale until after it had been approved and Sesame’s assets had been transferred.

Sesame then filed for Chapter 7 bankruptcy as a no-asset case.

The Meisters sued Mensinger and Koppel for breach of fiduciary duty and related causes of action. The trial court found that Mensinger and Koppel had breached their fiduciary duty to the Meisters but the court was not persuaded as to the amount of damages. The court found that the Meisters had failed to prove damages, and therefore it awarded no damages. The court of appeal reversed, holding that the trial court erred in failing to fashion a remedy for the Meisters.

It seemed clear that Sesame had some value, at least to Mensinger and Koppel. Since 2000, the Meisters invested over $2.1 million in Sesame, and the assets gained by Mensinger and Koppel had been developed, at least in part, through the Meisters’ investments. By obtaining these assets, ExtraView could essentially hit the ground running with Sesame’s intellectual property, customers, brand, employees, among other things. Mensinger and Koppel’s efforts to keep these assets under their control, rather than dissolve Sesame outright, evidenced their conviction that it could become a profitable enterprise, once it was shed of its liabilities, including the liability, real or perceived, of the Meisters’ ownership interest.

The court remanded for retrial on the issue of damages only.

Comment

If the Meisters had been offered the opportunity to invest in the new company, it seems likely that they would have rejected it. But if they had been given the opportunity to participate in the new enterprise, the court might have found no breach of fiduciary duty.

Contact the offices of Richard Burt, Attorney and Counselor at law with questions pertaining to breaches of fiduciary duty.

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