When Majority Rule Becomes Majority Abuse: Breach of Fiduciary Duty in Close Corporations

In the world of closely held corporations, trust is often the glue that holds a venture together. Partners typically rely on each other not only for capital and expertise but for honest stewardship of the business. When that trust is violated, the legal consequences can be severe—as demonstrated in Lehan v. Montgomery, a 2025 decision from the Suffolk County Commercial Division. While the case involves claims ranging from dissolution to breach of contract, the heart of the decision—and its sharpest rebuke—is the court’s finding that the majority owner committed a blatant breach of fiduciary duty against the minority shareholder.

Fiduciary Duty in Closely Held Corporations: The Legal Standard

Under New York law, majority shareholders in a closely held corporation owe a "heightened" fiduciary duty to minority shareholders. (In a close corporation, shareholders - whether majority or minority - owe each other a duty to act in good faith, a breach of which is a claim implicating "regular" fiduciary duty. The cases often mix these up, leaving a mess for a good litigator to clean up.) In a nutshell, this means that majority shareholders may not engage in acts of oppression, which in turn simply means to not defeat the minorities expectations. The Court of Appeals has long recognized that majority owners must “treat all shareholders, majority and minority, fairly,” and that "oppression should be deemed to arise when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the [minority's] decision to join the venture." In this case, the majority owner held 78%, compared to the minority owner's 22%.

How the Majority Breached His Fiduciary Duty

1. Diverting Corporate Funds for Personal Use

One of the most damning findings was that the majority shareholder diverted more than $1,064,625 from the company’s bank account, treating corporate funds as if they were his personal property. Examples included paying personal expenses, issuing a $150,000 check to his wife one week after receiving an investment from the minority of $220,000, and using company funds to pay personal criminal fines and sales tax arrears for a separate entity.

2. Concealing Financial Information and Blocking Access to Records

The majority also refused to allow access to books and records, claimed the business was struggling financially while personally siphoning funds, and invoking the Fifth Amendment when asked about tax returns and payroll issues, limiting transparency further and warranting an adverse inference from the court.

3. Secretly Selling the Business and Pocketing the Proceeds

Perhaps the most egregious breach occurred when the majority entered into a contract to sell the business for $800,000, unilaterally slashed the price to $400,000, and did not inform the buyers that the minority shareholder was a co-owner. He also kept all sale proceeds, distributing none of the required 22% share to the minority holder.

The court noted that if Montgomery had acted with integrity—by obtaining consent, providing an accounting, and distributing proceeds—he would have satisfied his duties. Instead, he acted as if the corporation was “a personal venture to be exploited.”

The Court’s Conclusion: A Clear-Cut Breach

$501,516 plus interest, representing the minority shareholder's share of the 2022 sale proceeds, unpaid salary, and misappropriated funds. The case offers a stark reminder of the legal obligations inherent in closely held corporations:

For majority owners:

• Corporate assets are not personal assets

• Transparency isn’t optional—it’s mandatory

• Self‑dealing can lead to massive liability

For minority owners:

• Courts will protect your ownership rights if they are abused

• Keeping written agreements and tracking corporate conduct is crucial

• Fiduciary duty claims can provide meaningful remedies