Lawton v. Nyman
| Decision Date | 15 February 2005 |
| Docket Number | No. 98-288-T.,No. 02-290-T.,98-288-T.,02-290-T. |
| Citation | 357 F.Supp.2d 428 |
| Parties | Judith LAWTON, Thomas Lawton, Marsha E. Daras, Stephen H. Lawton, Nancy J. Cronin, David T. Lawton, T. Michael Lawton, Joanna J. Lawton, and Suzanne M. Lawton, Plaintiffs, v. Robert NYMAN, Kenneth Nyman, and Keith Johnson, Defendants, and Jeffrey Nyman, Plaintiff, v. Robert Nyman, Kenneth Nyman, and Keith Johnson, Defendants. |
| Court | U.S. District Court — District of Rhode Island |
Joseph V. Cavanagh, Jr., Karen Ann Pelczarski, Staci L. Kolb, Blish & Cavanagh, Providence, RI, for plaintiffs.
Robert C. Corrente, William R. Grimm, Brent R. Canning, Joseph D. Whelan, Hinckley, Allen & Snyder, Providence, RI, for defendants Robert Nyman, Keith Johnson, Kenneth Nyman and Nyman Manufacturing Co., Inc.
William S. Eggeling, Joanne McPhee, Ropes & Gray, Providence, RI, for defendant Nyman Manufacturing Co., Inc.
Paul V. Curcio, James R. Oswald, Adler, Pollock & Sheehan, Providence, RI, for movant Adler Pollock & Sheehan, Inc.
Richard Donovan, Boston, MA, pro se.
The plaintiffs in this case were minority shareholders in Nyman Manufacturing Company ("Nyman"), a closely held family corporation. They claim that they were misled into agreeing to the redemption of their stock for less than its true value because the defendant directors and officers breached their fiduciary duty by failing to disclose that the corporation soon might be sold for an amount that would have greatly increased the value of their shares. After a lengthy bench trial, this Court found that the defendants had, in fact, breached their fiduciary duty and entered judgment for the plaintiffs. See Lawton v. Nyman, C.A. No. 98-288-T, 2002 WL 221621 (D.R.I. January 17, 2002) ("Lawton I"). This Court also made similar findings in a related case brought against these defendants by another Nyman shareholder. See Kiepler v. Nyman, C.A. No. 98-272-T, 2002 WL 221622 (D.R.I. January 17, 2002).
The decision in Kiepler has become final, but Lawton I was appealed and has been remanded for further proceedings on the issue of damages. Lawton v. Nyman, 327 F.3d 30 (1st Cir.2003).
Most of the relevant background facts are recited in Lawton I and Kiepler. For present purposes, they may be summarized as follows. Nyman Manufacturing Company ("Nyman") was a closely held family corporation that manufactured paper and plastic dinnerware. Nyman's Articles of Incorporation authorized the issuance of up to 13,500 shares of Class A non-voting stock and 1,500 shares of Class B voting stock. The company was managed by Robert C. Nyman and his brother, Kenneth J. Nyman.
In the late 1980s, Robert and Kenneth owned all of the Class B stock and nearly half of the Class A stock then issued and outstanding. The other outstanding Class A shares were owned by their children; their sisters, Judith A. Lawton and Beverly Kiepler; Judith's husband and children; a testamentary trust established by their father, Walfred Nyman; and the estate of Magda Burt, Walfred's sister. Judith, her husband, Thomas, seven of their eight children, and Robert's son, Jeffrey, are plaintiffs in these two consolidated cases.
In August 1994, Nyman was on the verge of bankruptcy and the Nyman brothers hired Keith Johnson, an able and experienced manager, to try to turn the company around. After Johnson's arrival, business began improving and in April 1995, Johnson was granted options to purchase 1,000 shares of Nyman's Class A shares.
Shortly thereafter, the company embarked on a program to repurchase the outstanding Class A shares not owned by Robert or Kenneth. As shares were redeemed, Johnson and the Nyman brothers were awarded options to purchase them.
On May 10, 1996, the plaintiffs agreed to sell their 952 shares of Class A stock back to the company for $200 per share. At that time, Robert owned 375 of the 750 Class B shares and 1,142 of the 8,385 Class A shares issued and outstanding and Kenneth owned 375 Class B shares and 1,232 Class A shares. In addition, Robert, Kenneth, and Keith held options to purchase 1,128, 564, and 1,564 Class A shares, respectively.
Less than a month later, the defendants voted themselves options to purchase the 952 shares redeemed from the plaintiffs together with 140 Class A shares redeemed from other children of Robert and Kenneth who are not parties to these cases. Robert was awarded options to purchase 432 shares for $220 per share; Kenneth was awarded options to purchase 330 shares for $220 per share; and Keith was awarded options to purchase 330 shares for $200 per share.
At the same time, the defendants purchased the 4,115 shares of Class A stock and the 750 shares of Class B stock remaining in the corporation's treasury for $200 per share. Robert purchased 1,675 Class A shares and 375 Class B shares Kenneth purchased 1,250 Class A shares and 375 Class B shares; and Keith purchased 1,190 Class A shares. The defendants "paid" for the treasury shares with unsecured promissory notes totaling $973,000.
The options and the treasury shares increased the percentage of shares owned or controlled by the defendants and correspondingly diluted the ownership interests of all other shareholders.
On June 25, 1997, Van Leer Corporation ("Van Leer"), one of Nyman's competitors, signed a letter of intent (the "Letter of Intent") offering to purchase all of Nyman's outstanding stock for, roughly, $30 million. The subsequent purchase agreement (the "Purchase Agreement") provided that $1,822.96 would be paid for each Class A share or option to purchase a Class A share and 1.3 times that amount, or $2,369.85, would be paid for each Class B share. Thus, the aggregate price for all of Nyman's stock and options was fixed at $28,164,735 (the "Purchase Price"). The Purchase Agreement also permitted the defendants to buy insurance policies on their lives owned by the corporation for amounts equal to the cash value of those policies and to discharge the promissory notes that the defendants had given to purchase treasury stock by surrendering some of their Class A shares for credit of $1,822.96 per share. The agreement said nothing about whether, before being paid or receiving credit for their options, the defendants would be required to pay the exercise prices.
The closing took place on September 29, 1997. At that time, $980,383 was deducted from the Purchase Price to cover unspecified closing costs and $1,423,331 was deducted to establish an environmental escrow fund that would cover Nyman's potential liability for the cleanup of a hazardous waste site.1 At the closing, the defendants also surrendered some of their Class A shares as payment for the balances due on their promissory notes.
In Lawton I, this Court found that the defendants breached their fiduciary duty to the plaintiffs by failing to disclose that, when the plaintiffs' shares were redeemed, the defendants had a realistic expectation that the company soon might be sold for much more than $200 per share. 2002 WL 221621 at **15-16. This Court awarded damages in an amount equal to the difference between what it found to be the value of the plaintiffs' shares at the time of redemption and the amounts that the plaintiffs received for those shares. In calculating the value of the plaintiffs' shares, this Court took into account both the net price that Van Leer later paid for Class A shares and the fact that the value of the plaintiffs' shares had been diluted by the defendants' purchase of treasury shares, which was another breach of their fiduciary duty. Id. at 17*. See Kiepler, 2002 WL 221622 at *13.
The price paid by Van Leer was used for two reasons. First, this Court determined that the best measure of Nyman's value at the time of redemption was its "strategic value"2 to a buyer like Van Leer and that the best evidence of "strategic value" was the price that Van Leer agreed to pay approximately thirteen months later.3 Second, this Court found that, if the possibility that Nyman might be sold had been disclosed, the plaintiffs would not have agreed to the redemption of their shares and they still would have owned the shares when Van Leer purchased the company. Id. at *16.
This Court also found that the amount recoverable by the plaintiffs would have been the same under a disgorgement theory because the unjust profit realized by the defendants was identical to the amount of the plaintiffs' loss. Id. at *17.
The Court of Appeals affirmed this Court's findings that the defendants breached their fiduciary duty by failing to disclose that Nyman soon might be sold for much more than the $200 per share paid to the plaintiffs and that the plaintiffs were entitled to recover for that breach. Lawton v. Nyman, 327 F.3d at 41-42, 51. However, the Court of Appeals disagreed with the manner in which this Court calculated the amount to be awarded.
The Court of Appeals agreed that, in cases like this, "[t]he usual rule is to measure the plaintiffs' loss by the difference in price between what they received for their stock and its fair value at the time of sale." Id. at 42. It also stated that, alternatively, "[i]n appropriate cases," defendants might be required "to pay over their wrongful profits in order to avoid unjust enrichment of a wrongdoer." Id. at 42.
Nevertheless, with respect to the amount of the plaintiffs' loss, the Court of Appeals held that the record was insufficient to support the finding that the plaintiffs would have "retained their stock over the next sixteen months if the requisite disclosures had been made." Id. at 43. Specifically, it cited the absence of any express testimony by the plaintiffs to that effect and the fact that the plaintiffs did not seek any additional information regarding Nyman's financial condition or any outside advice regarding the advisability of selling their stock. Id. at 43-44.
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