Gallagher v. Lambert, 746 N.E.2d 562 (N.Y. 1989)

A stock buy-back agreement in a close corporation, which mandates repurchase of shares at book value upon termination of employment before a specified date, is enforceable even if the employee is terminated to trigger the lower buy-back price, provided the agreement is clear and unambiguous.

Summary

Gallagher, a minority shareholder and employee of Eastdil Realty, was fired before a specific date, triggering a stock buy-back agreement at book value. He sued, claiming a breach of fiduciary duty, arguing the firing was in bad faith to avoid a higher buy-back price tied to company earnings after that date. The New York Court of Appeals held that the buy-back agreement was enforceable. The court reasoned that parties in close corporations can contractually agree to stock repurchase terms, and these agreements define the scope of fiduciary duty. Absent fraud or illegality, courts should not interfere with such agreements based on claims of unfairness, as doing so would undermine the certainty and predictability these agreements are designed to provide.

Facts

Gallagher was employed by Eastdil Realty and later became an officer, director, and executive of a subsidiary.
In 1981, Eastdil offered executive employees the opportunity to purchase stock subject to a mandatory buy-back provision.
The buy-back provision stipulated that upon termination before January 31, 1985, the stock would be repurchased at book value; after that date, the price would be based on company earnings.
Gallagher accepted the offer, purchased 8.5% of Eastdil’s stock, and helped draft the buy-back agreement.
On January 10, 1985, Eastdil fired Gallagher.
Gallagher claimed entitlement to the higher buy-back price, arguing his termination was timed to avoid it.

Procedural History

Gallagher sued Eastdil, asserting multiple causes of action, including breach of fiduciary duty.
The trial court denied Eastdil’s motion for summary judgment, finding factual issues regarding Eastdil’s motive in firing Gallagher.
The Appellate Division reversed, dismissed the claims based on breach of fiduciary duty, and ordered payment at book value.
The Appellate Division granted leave to appeal to the New York Court of Appeals and certified the question of whether its order was properly made.

Issue(s)

Whether a close corporation breaches a fiduciary duty to a minority shareholder/employee when it terminates their employment to trigger a stock buy-back agreement at a lower price, where the agreement is clear and unambiguous.

Holding

No, because the parties negotiated a clear buy-back provision, and absent evidence of fraud or illegality, courts should enforce the agreement as written to maintain certainty and predictability in such transactions.

Court’s Reasoning

The court emphasized the importance of upholding contractual agreements, especially in close corporations where buy-back provisions are designed to maintain control of the company within the remaining owners-employees.
It distinguished the duty owed to a shareholder from the duty owed to an employee, noting that the plaintiff’s claim was based on his status as a shareholder but was inextricably linked to his employment status due to the buy-back agreement’s terms.
The court reasoned that allowing the claim to proceed would undermine the purpose of the buy-back agreement, which is to provide a certain formula for valuing stock and avoiding costly litigation.
The court stated that “[t]hese agreements define the scope of the relevant fiduciary duty and supply certainty of obligation to each side. They should not be undone simply upon an allegation of unfairness. This would destroy their very purpose, which is to provide a certain formula by which to value stock in the future”.
The court distinguished this case from situations involving fraud or illegality, where intervention might be warranted. Here, the buy-back provision was clear, negotiated, and agreed upon by both parties.
The court emphasized that the employer had the right to terminate the employee at will, and the buy-back agreement was a mutually agreed-upon mechanism for handling stock ownership upon termination.
The court rejected the dissenting opinion’s characterizations, asserting that its decision rested on fundamental contractual principles applied to the stock repurchase agreement.