Levy v. American Beverage Corporation

Appellate Division of the Supreme Court of New York, First Department · 1942 · Corporations

265 A.D. 208 (1942)

Updated August 22, 2026

CorporationsControlling shareholdersSale of controlFiduciary dutiescontrolling shareholderminority shareholdersfiduciary dutynotice

Facts

McCullough, through family ownership of The McCullough Corporation, controlled 53% of the voting stock of American Beverage Corporation and managed its affairs. He sold that controlling block for $250,000 to purchasers associated with Clark and Feinberg after negotiations that included discussions of a possible larger merger, and he ceased control on January 14, 1939. After the sale, Feinberg caused American Beverage to assume Prendergast-Davies Co. Ltd.'s liabilities and used American Beverage funds in ways that harmed the corporation. The trial court found McCullough should have investigated the purchasers and held him liable on the theory that, as a controlling shareholder, he owed fiduciary duties to the corporation and minority shareholders in the sale.

Issue

Whether former owners of a controlling block of stock are liable for corporate losses caused by the purchasers after a sale of control on the theory that controlling shareholders are fiduciaries required to investigate the purchasers' moral and financial responsibility and the source of their purchase funds. Also, whether receipt of a price above market for the controlling block required the sellers to account for a profit to the corporation.

Rule

A stockholder, even one selling a majority or controlling block, is not by that fact alone a trustee or fiduciary for other stockholders in selling his stock. Liability for a sale of control requires at least knowledge or notice of an intended wrongful injury, such as looting or wanton and fraudulent destruction of minority rights; mere failure to investigate the buyer's character or finances is not actionable absent actual notice. A premium for control obtained in an honest sale is not improper merely because it exceeds the market price of small lots of stock.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Chicago, Nora Benton owned 58% of the voting stock of Lakefront Packaging, Inc., a profitable manufacturer. She sold her block to Daniel Krell for a premium after he described plans to combine the company with several regional distributors; six weeks later, Krell caused Lakefront Packaging to guarantee his personal debts and drained its cash. There is no evidence Benton knew of any plan to misuse corporate assets before the sale.

If minority shareholders sue Benton derivatively for the post-sale losses, what is the strongest argument for Benton under the governing rule?

Explanation. The majority rule is that a controlling shareholder selling stock is not, merely by virtue of ownership, a fiduciary required to investigate the buyer. Liability for later looting requires knowledge or notice of an intended wrongful injury, such as looting or wanton and fraudulent destruction of minority rights. A control premium alone does not create liability.