NJ: Underlying corporate litigation
Facts: Defendants, minority shareholders, are suing attorney for legal malpractice and breach of fiduciary duty. Plaintiff Schulman founded Van Mar, Inc., a ladies intimate apparel company. The shareholders of the Van Mar where Schulman (14%), his younger son, Plaintiff Darren (33 1/3%), Shulman’s estranged wife, his older son Scott, and his daughter Vanessa owned the remaining fifty-two and two-thirds of the stock. In June Darren sued Scott, Marilyn, Vanessa and Elite for breach of fiduciary duties for removing Schulman and Darren from the board of directors (first action). Thereafter, Marilyn filed for divorce from Schulman and Vanessa sued them for violating an oral agreement to convey to her their respective shares on Van Mar stock (gift action). Marilyn, Scott, and Vanessa later started another corporate entity called 518 apparel and improperly transferred Van Mar’s assets and employees to this successor corporation. In October 2006, plaintiff filed a third complaint, which is the subject of this appeal. Plaintiff claim that defendants were hired to represent Van Mar and allegedly assisted Scott, Marilyn, and Vanessa through the litigation in a matter that was in their own self-interest and inconsistent with the best interests of Van Mar. On February 28, 2007, plaintiff, Scott, Vanessa and Marilyn entered into a global settlement that ended the divorce litigation, Vanessa’s gift action, and plaintiffs’ first and second action. All the individual parties were present and represented by counsel, but Van Mar wasn’t. Plaintiff specifically preserved their claims against defendants who did not participate in the settlement. Defendants moved to dismiss alleging that plaintiffs’ voluntary acceptance of and agreement to the terms of the global settlement precluded any further prosecution of the claims contained in their complaint against these defendants. Superior Court dismissed the complaint, and minority shareholders appealed. In June 2005, Plaintiff Darren filed an action individually and on behalf of Van Mar suing some of the other shareholders for breach of fiduciary duties.
1. Whether defendants’ early settlement precluded claims for breach of contract and fraud?
2. Whether defendants abandoned legal malpractice claims?
3. Whether defendants’ breach of fiduciary duty claims were abandoned?
4. Whether defendants’ could pursue derivative legal malpractice and derivative legal malpractice claims?
1. No. Plaintiffs could pursue claims for breach of contract and fraud because action against defendants was a different cause of action than the underlying litigation between shareholders.
2. Yes. Plaintiffs individual legal malpractice claims were deemed abandoned because in their reply brief on appeal from dismissal of their complaint, plaintiffs noted that it was unnecessary to resolve the issue of whether defendants owed them a duty because their malpractice claims were derivative on behalf of Van Mar.
3. Yes. Plaintiff’s individual claims for breach of fiduciary duty were deemed abandoned since the claims were derivative claims.
4. Yes. Plaintiffs could pursue derivative legal malpractice and breach of fiduciary duty claims because plaintiffs’ claims against attorneys were independent of claims that had been settled in underlying litigation.
Lesson: If plaintiffs enter into a settlement agreement in their individual capacity, that doesn’t waive their rights to sue derivatively on behalf of a corporation.
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