Thursday, May 17, 2012

Business, not Family, Law Applies to Dispute over Corporate Management

Disputes as to Governance of Corporation Owned by Former Spouses
to be Resolved under Business and not Family Law

      The long-running battle between Alva and Patricia Sullivan has been ongoing for over 20 years.  Recently, the Court of Appeals rebuffed her effort to modify the terms of the divorce settlement as to the governance of Sullivan College Systems, Inc. (“SCS”), directing her to proceed, if at all, under business organization law.  Sullivan v. Sullivan, No. 2010-CA-001961-MR, 2012 WL 1447893 (Ky. App. Apr. 27, 2012) (Not to be Published).

      Under the divorce settlement as described by the Court of Appeals, 49.9% of the SCS stock was transferred to Mrs. Sullivan.  There was also an agreement that the corporation would pay an annual 10% dividend (the opinion of the Court of Appeals did not further describe against what this 10% would be measured).  She applied to the Family Court for a modification of the prior (and now decade old) decree, requesting for example, an increase in the dividend rate to 70%.  In support of this argument, she noted that Mr. Sullivan was drawing a substantial salary from the corporation (it is implied, but not expressed, in the opinion that she was not drawing a salary therefrom), that the corporation was accumulating significant earnings from which dividends could but were not being declared and which, consequent to SCS’s classification as an S-Corporation, were saddling her with tax liability on phantom income, and that she was not otherwise not enjoying the full benefits of ownership.  While again the opinion is somewhat ambiguous, it appears that each of Alva and Patricia received, in fiscal year 2009, a dividend of nearly $1 million.

      The Court of Appeals characterized the action as follows:

Patricia’s motion for modification of Decree is basically an action by a minority shareholder dissatisfied with the actions of the majority shareholder.  2012 WL 1447893, *3.

      With respect to Patricia’s objection that she had been denied access to corporate records, she was directed by the Court of Appeals to KRS § 271B.16-010 et seq., the statute permitting a shareholder to access certain information and as well providing a procedure for obtaining access to records when that access has been refused.  As to the balance of her objections with respect to the management of the corporation, the court directed her to those statutes governing the fiduciary obligations of a corporation’s director and officers, noting that:

This Court considers that the alleged intentional actions taken by a director or officer that causes Sullivan University to incur negative tax effects could be found by an appropriate court to be contrary to the best interest of Sullivan University.  Patricia should not ignore statutory remedies available to her.

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