Rifkin v. Steele Platt
1991 Colo. App. LEXIS 184, 15 Brief Times Rptr. 843, 824 P.2d 32 (1991)
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Rule of Law:
Under the equitable doctrine established in Bangor Punta, a corporation cannot sue former shareholders for wrongs that occurred prior to the acquisition of stock by new shareholders if the purchase price paid by the new shareholders already reflected the harm from those prior wrongdoings.
Facts:
- Steele Platt and Fas-Wok, Inc. were the controlling shareholders of The Boiler Room, Inc., a corporation that owns a restaurant.
- As an officer and director, Platt allegedly used corporate funds for his personal benefit and commingled assets of his various corporations with those of The Boiler Room, Inc.
- Platt and Fas-Wok, Inc. entered into a Stock Purchase Agreement to sell their controlling shares to a group of new buyers: Robert C. Rifkin, Gerald N. Kemis, and Gary G. Kortz.
- The sale was finalized, and the new buyers took control of the corporation.
- After the closing, the new buyers discovered alleged inaccuracies in financial representations made by Platt, including the misappropriation of funds and misrepresentation of corporate assets.
Procedural Posture:
- The Boiler Room, Inc. and its new shareholders (Rifkin, Kemis, and Kortz) sued the former controlling shareholders (Platt and Fas-Wok, Inc.) in a Colorado trial court.
- Plaintiffs asserted claims including breach of contract and breach of fiduciary duty.
- Sellers filed a counterclaim seeking rescission of the Stock Purchase Agreement.
- After a bench trial, the trial court entered judgment for the buyers on the breach of contract claim and for The Boiler Room, Inc. on the breach of fiduciary duty claim.
- The sellers (appellants) appealed the judgment on the breach of fiduciary duty claim to the Colorado Court of Appeals, and the buyers/corporation (appellees) filed a cross-appeal regarding the amount of damages.
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Issue:
Does the Bangor Punta equitable doctrine prevent a corporation, under the control of new shareholders, from suing a former controlling shareholder for a breach of fiduciary duty that occurred before the stock sale, if the purchase price paid for the stock did not reflect the alleged wrongdoing?
Opinions:
Majority - Judge Plank
No. The Bangor Punta equitable doctrine does not bar a corporation from suing a former shareholder for pre-sale misconduct if the stock purchase price did not reflect the harm caused by that misconduct. The core purpose of the doctrine is to prevent the new shareholders from receiving a windfall—recovering for damages for which they were already compensated through a reduced purchase price. Here, the trial court did not make a factual finding as to whether the price the buyers paid for the shares of The Boiler Room, Inc. reflected Platt's alleged wrongdoings. Because this finding is critical to applying the Bangor Punta rule, the case must be remanded for the trial court to determine if the price was discounted. If the price did not reflect the wrongdoing, the corporation's claim for breach of fiduciary duty can proceed; if it did, the claim must be dismissed.
Analysis:
This case serves as a critical application and clarification of the Bangor Punta equitable doctrine, which limits shareholder derivative suits for pre-purchase injuries. The decision establishes that the doctrine is not an absolute bar but is contingent on a factual finding regarding the economic reality of the stock transaction. It emphasizes that the central goal is to prevent unjust enrichment or a 'windfall' to new shareholders. For future cases, this holding requires courts to scrutinize the stock purchase price to determine if it already accounted for alleged corporate harm before barring a claim for breach of fiduciary duty against former directors or shareholders.
