#MeToo and Business Divorce: The Flip Side

Farrell Fritz, P.C.
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Two years ago, Peter Mahler wrote about a dissolution lawsuit by a female minority shareholder alleging that her male co-shareholders condoned a pattern of sexually offensive and demeaning conduct by a senior co-worker, which ultimately forced her to leave the business.

In Matter of Straka v Arcara Zucarelli Lenda & Assoc. CPAs P.C., 62 Misc 3d 1064 [Sup Ct, Erie County 2019], the court ruled that “disrespectful and unfairly disproportionate treatment of a female shareholder by the male majority in a closely held corporation constitutes oppression” and grounds to dissolve a corporation under Section 1104-a of the Business Corporation Law.

In a bizarre plot worthy of a Hollywood scriptwriter’s imagination, a court last month issued a decision in a case with a reverse fact pattern: a claim by an elderly male shareholder, Felix Glaubach (“Glaubach”), alleging that he was victimized by false allegations of sexual harassment concocted in an extortionate scheme by the company’s chief executive officer and the officer’s wife. Different branches of the same sprawling litigation have been featured on this blog twice.

Prior Chapters in the Glaubach Litigation

In our first article, Matthew Donovan wrote about an action filed in Delaware Chancery Court by Personal Touch Holdings Corp. (“Personal Touch”), a Delaware-incorporated provider of home healthcare services, against Glaubach alleging that he misappropriated a corporate opportunity to acquire a building he then sought to lease to the business for personal profit, engaged in a pattern of sexual misconduct with employees, and capped things off with a strange letter-writing campaign harassing his co-board members and their spouses. In a lengthy post-trial decision, Chancellor Bouchard ruled that Glaubach breached his fiduciary duties to the business and acted in bad faith, awarding Personal Touch money damages against Glaubach for close to $3 million.

In the second article, Peter Mahler wrote about a shareholder derivative action Glaubach commenced in Queens County Supreme Court against various board members and officers that they took “unauthorized compensation hidden as reimbursement of educational expenses” that they did not actually incur. In Glaubach v Slifkin, 171 AD3d 1019 [2d Dept 2019], the Court ruled that Glaubach failed to sufficiently plead pre-suit demand or demand futility, affirming dismissal of four of Glaubach’s claims under Delaware law.

The Allegedly False Sexual Harassment Charges

After his derivative claims were dismissed, Glaubach continued to litigate his remaining claims, alleging in his amended complaint a “drama worthy of a Shakespearean tragedy.” Through “treachery, deceit, backstabbing and self-dealing,” Glaubach alleged, Personal Touch’s board members and officers sought to “destroy Glaubach’s role in Personal Touch, to embarrass him, to denigrate him, to make him irrelevant and ultimately to steal” his interest in the business.

Glaubach’s tenth cause of action, in particular, alleged a battle with the company’s CEO, Defendant David Slifkin (“Slifkin”), and Slifkin’s wife, Defendant Trudy Balk (“Balk”). In 2013, Glaubach allegedly purported to unilaterally fire Balk from her role as the Vice President of Operations. When Glaubach objected to a severance package the board offered Balk, Slifkin and Balk allegedly retaliated and “solicited employees to make sexual harassment complaints against Glaubach.”

Glaubach alleged that the sexual harassment complaints against him would not have been made “but for the escalating issues between Glaubach and Balk.” Glaubach alleged that “the real motive behind the sexual harassment allegations was to extort Glaubach,” which was “revealed when Slifkin made it known that if Glaubach would stop objecting to the severance package proposed for Balk, the sexual harassment allegations would go away.” Based upon these allegations, Glaubach alleged breach of fiduciary duty and waste against Slifkin and Balk.

The Summary Judgment Decision

Slifkin and Balk moved for summary judgment. In the resulting order, Queens County Commercial Division Justice Marguerite A. Grays held, in effect, that Balk’s severance package was approved by an independent committee created by a unanimous decision of the entire board, including Glaubach, and therefore, protected by the business judgment rule.

In addition, the Court held that there was no causal connection as a matter of law between the alleged sexual harassment claims against Glaubach and the severance package because the independent committee approved the severance package before the harassment allegations were made, and in any event, “the company’s assets were not wasted by the investigation” because the investigation was required under federal law.

The Appellate Decision

On appeal, in Glaubach v Slifkin, 198 AD3d 618 [2d Dept 2021], the Court affirmed, ruling that “Supreme Court properly granted that branch of the motion of Slifkin and Balk which was for summary judgment dismissing the tenth cause of action in the amended complaint.” The Court held:

In order to establish a breach of fiduciary duty, a plaintiff must prove the existence of a fiduciary relationship, misconduct by the defendant, and damages that were directly caused by the defendant’s misconduct. . . . Slifkin and Balk met their prima facie burden of demonstrating that there was no breach of fiduciary duty by them [because] the severance package was agreed to by a special committee of the corporation’s board of directors. While employees of the corporation made allegations of sexual harassment against the plaintiff following the package’s approval, Slifkin and Balk demonstrated that none of those individuals made allegations of sexual harassment in order to stop the plaintiff from objecting to the severance package offered to Balk. In opposition, the plaintiff failed to raise a triable issue of fact.

(citations omitted).

Postscript

It appears the end may be approaching for the Glaubach litigation. The same day the appeals court affirmed dismissal of Glaubach’s remaining claim against Slifkin and Balk, it issued two companion decisions.

In the first, the Court affirmed Justice Grays’ denial of Glaubach’s motion for permission to allege two new causes of action for tortious interference with contract and defamation.

In the second, the Court issued a rare decision reversing the denial of a sanctions motion against Glaubach for sending “approximately 75 letters to various defendants, as well as those defendants’ family members, clergy, and attorneys” making “disturbing references” to “plagues, repentance, imprisonment, and punishment by the Internal Revenue Service for tax fraud.” The Court found that Glaubach’s conduct was “calculated to harass the defendants,” and therefore, frivolous.

After the Court issued its trio of orders, a handful of parties announced they settled with Glaubach.

Although Glaubach was unable to successfully allege a claim for breach of fiduciary duty against the alleged protagonist of a purported scheme to falsely #MeToo him, the Glaubach Court did not close the door to the possibility of such a claim on the right set of facts.

And it seems likely one could successfully allege the inverse of such a claim: a breach of fiduciary duty / faithless servant claim brought directly or derivatively by or on behalf of a closely-held business against a shareholder, officer, or director for engaging in fact in workplace sexual harassment or misconduct. With the recent newfound public awareness of these important issues, it seems almost inevitable that we’ll be blogging sooner than later about just such a claim.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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