Starting a business with others? Best to put the arrangements in writing. “Doesn’t everybody do it this way?” some might ask. Sadly, no.
In 1974, Gene Oskowski and his wife, Wanda, formed Deluxe Disposal Service in partnership with their son, Gene Jr. Wanda’s sons, Ronald, Allen and Robert, later took a stake in the company, which employed a classic family waste business model: Gene Sr. managed the company; the sons collected garbage and maintained the trucks; and Wanda worked in the office. But with no written partnership agreement, it was only a matter of time before things turned sour.
When Gene Sr. died in 1991, Wanda inherited his interest in the company. Her sons took over management, and began making business decisions without consulting her. A few years later, Gene Jr. and Robert sold their interests to Wanda, Ronald and Allen. While the three remaining partners did not know exactly how much of the company each of them owned, Wanda was believed to have the majority interest.
Seeking tax benefits, Ronald and Allen incorporated Deluxe and met with Don Howard, the company’s long-time accountant, who also had prepared personal tax returns for family members. Howard had never provided business advice to the company, and Ronald and Allen did not consult him before deciding to incorporate. Ronald and Allen later testified that Wanda was present at the meeting, which occurred in 1995, but Howard only vaguely recalled her being there. Howard also testified that he had no say in who the shareholders would be and how much of the company they each would own. For her part, Wanda claimed she never discussed the incorporation with Howard and didn’t find out about the incorporation until years later.
In fact, when the partnership was dissolved and the assets rolled into the new corporation, Ronald and Allen became the only shareholders and Wanda ended up with no ownership interest. According to Ronald, Wanda told him and Allen she wanted to retire, and so they agreed to pay her $420 a month plus health benefits as a buy-out.
Wanda denied ever agreeing to retire. Even after learning about the incorporation, she still believed she was a part owner of Deluxe, but never looked into how the reorganization affected her interest. She continued working until a certain morning in 2005 when she found herself locked out of the office with no job anymore. Several months later, Deluxe sold its assets for $4.1 million. Her share: $29,000.
In 2007, Wanda filed suit asserting claims for breach of fiduciary duty, theft, and misrepresentation against Ronald and Allen. She also alleged claims for misrepresentation, professional negligence and conspiracy against Howard. As she saw it, Howard conspired with Ronald and Allen to injure her by failing to explain how incorporation would affect her ownership of Deluxe and by failing to tell her she was not a shareholder in the new corporation.
Howard argued that Wanda provided insufficient evidence on the misrepresentation and conspiracy claims and that her professional negligence claim was barred by a six-year statute of limitations. The trial judge agreed and dismissed her claims against him. After the ruling, her claims against Ronald and Allen were settled. On appeal, the judgment in favor of Howard was affirmed.
The Wisconsin Court of Appeals found that Wanda waited 11 years to file her lawsuit against Howard. Although such a delay might be excusable if Howard had committed fraud and concealment in performing his services, the court found no such circumstances “based on the undisputed facts.”
“Wanda has not established that Howard had any duty to tell her about the incorporation’s effect on her ownership of Deluxe Disposal,” the opinion stated. “The facts do not support an inference that Howard’s silence [on the ownership matter] was motivated by an intent to defraud Wanda.”
[Osowski v. Don Howard and Krause Howard & Co., No. 2010AP2260, Wis.App., Oct. 18, 2011]
Barry Shanoff is a Rockville, Md., attorney and general counsel of the Solid Waste Association of North America.
The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].