A lawyer who discovered the other shareholder in her two-person firm was writing checks to family members on the firm’s trust account can sue on behalf of their professional corporation, the Supreme Court of Virginia said on April 20.
When Charlottesville lawyer Caroline Bragg discovered that John Cattano had written checks to his wife and children, she asked to inspect the corporate records. Cattano terminated her employment and removed her as a director of the firm. Seeking a share of a $234,000 fee to the firm for settlement of a personal injury action, Bragg sued Cattano in a complaint that included shareholder derivative claims.
The high court endorsed a shareholder derivative claim as a tool for lawyers to resolve conflict in small firms organized as professional corporations. Other jurisdictions have recognized solo-shareholder “classes” for purposes of bringing a derivative claim, wrote Justice LeRoy F. Millette Jr. in the court’s majority opinion.
Cattano said Bragg could not represent the P.C. because her personal interests were at odds with the interests of the corporation. But the Supreme Court said the “economic antagonism” and “apparent animosity” between the firm’s only two shareholders did not preclude her derivative suit.
“Charged emotions and economic antagonism are virtually endemic to disputes in closely held corporations,” the high court said, but it refused to apply a “de facto bar” on derivative suits in two-shareholder corporations.
In Cattano v. Bragg (VLW 012-6-071), the court upheld a jury award to Bragg of $81,938, which included a 27-percent-share of the p.i. fee. The court also said, on a first-impression point, that Bragg had rendered a “substantial benefit” to the corporation under Virginia Code § 13.1-672.5(1).
The court affirmed an award to Bragg of $269,813 in fees and $19,416 in costs.
The issue of attorney’s fees was handled in a separate bench trial, and the fee award withstood Cattano’s claim that the trial judge abused his discretion.
Judge Designate William R. Shelton heard the case, because local judges had recused themselves. Shelton explicitly approved rates paid to experts and lead counsel as reasonable, and the Supreme Court noted the litigation stretched from 2008 to 2011.
Bragg faced heavy motions practice from her former law partner, with most motions decided in her favor, according to Richmond lawyer Stephen Baril, who represented Bragg. Generally speaking, a litigant “can’t play hard, then lose, and then expect not to pay for it,” Baril said.
Baril said the case has interest beyond the commonwealth, because “on a national basis, there are not many examples of shareholder-derivative actions in closely held corporations.”
Law practices need “prenups,” just the way some marriages do, to figure out how to break up.
Bragg and Cattano had drafted documents governing their arrangement, but they were never finalized, Baril said.
“When lawyers enter into partnerships or professional corporations, it’s really a ‘best practice’ to put your agreement and understanding into writing,” he said.
Justice Elizabeth McClanahan dissented. She disagreed that Bragg had standing to pursue a derivative action, saying her derivative claims “served no purpose except to provide a mechanism for recovery of attorneys’ fees and costs.”
Charlottesville lawyer Nancy Schlichting, who represented Cattano, did not return a call for comment.