Patton v. Nicholas
1955 Tex. LEXIS 527, 154 Tex. 385, 279 S.W.2d 848 (1955)
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Rule of Law:
In cases of malicious dividend suppression by a majority shareholder in a solvent corporation, courts of equity may issue a mandatory injunction compelling the payment of reasonable dividends and retain jurisdiction to monitor compliance, reserving liquidation as a final remedy for non-compliance, rather than ordering immediate dissolution.
Facts:
- T.W. Patton owned 60% of a business, with J.W. Nicholas and Robert R. Parks each owning 20%.
- In August 1945, the parties entered into a settlement agreement to incorporate the business as Machinery Sales & Supply Company, with Patton as president and Nicholas and Parks as officers and directors for one year.
- Shortly after incorporation in late 1945, Patton engaged in hostile and offensive behavior toward Nicholas and Parks, publicly criticizing them in front of subordinate employees.
- As a result of Patton's hostility, Nicholas and Parks resigned from their officer positions in December 1945.
- At the end of their one-year terms as directors in 1946, Nicholas and Parks were not re-elected and were subsequently replaced by Patton's nominees, including family members.
- From the corporation's founding in 1945 until the lawsuit was filed, no dividends were ever declared, despite the corporation being consistently profitable and accumulating a surplus of approximately $130,000.
- Patton made oral declarations that he would ensure no dividends were paid as long as Nicholas and Parks remained stockholders and expressed strong personal ill will toward them.
Procedural Posture:
- J.W. Nicholas and Robert R. Parks sued T.W. Patton and Machinery Sales & Supply Company in a Texas trial court, seeking the appointment of a receiver for liquidation and money damages.
- A jury found that Patton acted maliciously to suppress dividends and harm the value of the respondents' stock, awarding both actual and exemplary damages.
- The trial court entered a judgment appointing a receiver to liquidate the corporation but denied the respondents' claim for money damages.
- Both parties appealed to the El Paso Court of Civil Appeals, an intermediate appellate court.
- The Court of Civil Appeals affirmed the trial court's judgment in its entirety.
- Patton, as petitioner, and Nicholas and Parks, as respondents, both filed applications for review with the Supreme Court of Texas.
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Issue:
Does a majority shareholder's malicious and oppressive conduct, specifically the suppression of dividends in a solvent corporation for the purpose of harming minority shareholders, justify the drastic remedy of appointing a receiver for liquidation?
Opinions:
Majority - Mr. Justice Garwood
No. While malicious suppression of dividends is a wrong akin to a breach of trust, the remedy of liquidating a solvent, profitable corporation is an extreme measure that should be a last resort. The court found that Patton maliciously used his control of the board of directors to prevent the declaration of dividends for the sole purpose of harming the minority shareholders, Nicholas and Parks. However, liquidating a prosperous business is a 'wasteful destruction' and not the appropriate initial remedy. Wisdom counsels 'tailoring the remedy to fit the particular case.' The proper remedy is for the court, using its equity powers, to issue a mandatory injunction compelling the corporation to declare and pay reasonable dividends, both for past accumulations and future profits. To ensure compliance, the trial court should retain jurisdiction for up to five years, with the express power to appoint a receiver for liquidation if the injunction is violated or if Patton or the corporation continues to act in bad faith toward the minority shareholders. The court also held that the minority shareholders were not entitled to money damages for the nonpayment of dividends, as receiving those dividends through the injunction (or their share of assets in a future liquidation) would make them whole, and an additional damage award would constitute unjust enrichment.
Analysis:
This decision establishes a significant precedent in Texas corporate law by favoring tailored, less drastic equitable remedies over the 'corporate death penalty' of liquidation for shareholder oppression in solvent companies. It introduces a remedial framework where courts act proactively, using mandatory injunctions and retaining supervisory jurisdiction, to correct oppressive conduct while preserving the underlying business. This approach balances the protection of minority shareholder rights against the public policy of avoiding the economic waste of dissolving a viable enterprise, providing a blueprint for resolving internal disputes in closely-held corporations without resorting to immediate dissolution.
