Defining Race: Muting All That is Not Immutable

by Jade Shaffer, Senior Associate

INTRODUCTION

In the midst of a racially tense society, courts have been struggling to decide what exactly “race” is and what constitutes “discrimination based on race” in the employment context. Two statutory provisions exist under which employees can bring racial discrimination claims against their employers. Title VII of the Civil Rights Act of 1964 prohibits an employer from discriminating against an employee or applicant because of race, color, religion, sex, or national origin,[1] whereas § 1981 exclusively prohibits discrimination based on race.[2] Significantly, neither Title VII nor § 1981 provides a definition of “race,” forcing courts to rely on other sources—such  as dictionaries and encyclopedias, the literature of anthropologists and biologists, and the legislative history of Title VII and § 1981—to fashion a definition.

 

DEFINING “RACE”

Ethnicity as a Proxy 

In a 1987 Supreme Court case, St. Francis College v. Al-Khazraji, an associate professor at St. Francis College brought an action under § 1981 alleging that he was denied tenure based on his “Arabian race.”[3] The employer argued that at the time the suit was brought, a variety of ethnic groups, including Arabs, were considered to be within the Caucasian race. Further, all individuals that might be deemed Caucasians in 1987 were thought to be of the same race in the 19th century when § 1981 became law.[4] The Court explained in a footnote that this reasoning was based on a common understanding that there are three major human races—Caucasian, Mongoloid, and Negroid; however the Court went on to say that many biologists and anthropologists had criticized these racial classifications as arbitrary and that some scientists had concluded that racial classifications are more sociopolitical than biological in nature.[5]

The Court rejected the employer’s argument, stating that the understanding of “race” in the 19th century was different from the contemporary understanding of “race.”[6] Citing to 19th-century dictionaries defining “race” as “descendants of a common ancestor” or “people from the same stock” and encyclopedias describing race in terms of ethnic groups, the Court concluded that although the sources were somewhat diverse, “they do not support the claim that for the purposes of § 1981, Arabs, Englishmen, Germans, and certain other ethnic groups are to be considered a single race.”[7] It was not until the 20th century that sources began to identify three races.[8] Additionally, the Court went on to state that the legislative history of § 1981 reflected the understanding of “race” as it existed in the 19th century.[9] Consequently, the Court held that “at a minimum, §1981 reaches discrimination directed against an individual because he or she is genetically part of an ethnically and physiognomically distinctive sub-grouping of homo sapiens,” although they noted that a “distinctive physiognomy is not essential to qualify for § 1981 protection.”[10] Thus, the Court explained, if the employee could prove on remand that he had been subjected to intentional discrimination based his Arab ancestry, he would have established a case under § 1981.[11]

Culture and Style as a Proxy

The United States Court of Appeals for the Eleventh Circuit revisited the definition of race last year in EEOC v. Catastrophe Management Solutions.[12] In this case, the EEOC filed suit under Title VII on behalf of a black job applicant whose offer of employment was rescinded by Catastrophe Management Solutions under its race-neutral grooming policy when the employee refused to cut off her dreadlocks.[13] The district court dismissed the complaint stating that Title VII prohibits discrimination of immutable characteristics and “[a] hairstyle, even one more closely associated with a particular ethnic group, is a mutable characteristic.”[14] On appeal, the EEOC asserted four arguments in support of its claim: first, that race “is a social construct and has no biological definition”; second, “the concept of race is not limited to or defined by immutable physical characteristics”; third, according to the EEOC Compliance Manual, the “’concept of race encompasses cultural characteristics related to race or ethnicity,’ including ‘grooming practices”’; and fourth, “although some non-black persons ‘have a hair texture that would allow the hair to lock, dreadlocks are nonetheless a racial characteristic, just as skin color is a racial characteristic.’” [15]

The court stated that the primary consideration in the case was what “race” encompasses under Title VII “because the EEOC maintains that ‘if [] individual expression is tied to a protected trait, such as race, discrimination based on such expression is a violation of the law.’”[16] Noting the absence of a definition of “race” in Title VII, the court stated that words are defined by looking to their ordinary, contemporary, common meaning, and “one of the ways to figure out that meaning is by looking at dictionary definitions around the time of [the statute’s] enactment.”[17]

Similar to the definitions cited in St. Francis, the commonality among the 1960s sources led the court to conclude that “race” referred to “common physical characteristics shared by a group of people and transmitted by their ancestors over time.”[18] And, although the dictionaries did not use the word “immutable” to describe those characteristics, the court concluded that it was not a “linguistic stretch” to think that such characteristics “are a matter of birth, and not culture.”[19] Additionally, the court cited prior jurisprudence to support the proposition that Title VII protects discrimination based on immutable characteristics.[20] Despite recognizing that the distinction between immutable and mutable characteristics can be a fine and difficult line to draw, the court held that nonetheless, courts have drawn this line.[21] The court further held that the EEOC’s complaint did not state a plausible claim of intentional discrimination based on race because a hairstyle is not an immutable characteristic.[22]

COULD NATIONAL ORIGIN SAVE THE DAY?

In a concurring opinion in St. Francis, Justice Brennan attempted to point out that the line between discrimination based on “race”—that is, discrimination based on “ancestry or ethnic characteristics”—and discrimination based on national origin—that is, discrimination based on “place or nation of . . . origin is not a bright one.”[23] Brennan noted that although discrimination based on ancestry is not necessarily the same as discrimination based on national origin, the two are often identical as a factual matter.[24] Specifically, in the Title VII context, the regulations defining national origin discrimination state that such discrimination “include[s], but [is] not limited to, the denial of equal employment opportunity because of an individual’s, or his or her ancestor’s place of origin; or because an individual has the physical, cultural, or linguistic characteristics of a national origin group.”[25]

Although the Eleventh Circuit conceded that dreadlocks are most commonly associated with the African-American race, it rejected that the association of that hairstyle with the African-American race as an “immutable trait” so as to constitute racial discrimination.[26] However, with the “fine line” between racial discrimination and national-origin discrimination, and the definition of national-origin discrimination that prohibits discrimination “because an individual has the physical or cultural characteristics of a national origin group,”[27] perhaps the EEOC might have been more successful arguing that dreadlocks are a cultural characteristic of African ancestry under a theory of national origin discrimination.

CONCLUSION

In the absence of a statutory definition of “race,” courts have struggled in deciding what constitutes racial discrimination. Although the Supreme Court has rejected contemporary understandings of the word, St. Francis seemed to take a more expansive approach to the historical understanding of race by classifying discrimination based on Arab ancestry as racial discrimination. However, in Castrophe the Eleventh Circuit set a narrow limitation on what constitutes racial discrimination, holding that Title VII protects only against immutable traits and not cultural associations, despite the fact that immutability is not a requirement for any other Title VII protected classes. Ultimately, because the line between racial and national-origin discrimination is a fine one, national-origin discrimination could serve as a net to catch Title VII claims that no longer fit under the umbrella of racial discrimination if the Eleventh Circuit’s decision in Catastrophe becomes the national standard.

 

[1] 42 U.S.C. § 2000e-2 (2012).

[2] Id. § 1981.

[3] St. Francis College v. Al-Khazraji, 481 U.S. 604 (1987).

[4] Id. at 609.

[5] Id. at n.4.

[6] Id.

[7] Id. at 612.

[8] Id.

[9] Id.

[10] Id.

[11] Id. at 6.

[12] EEOC v. Catastrophe Mgmt. Sols., No. 14-13482, 2016 WL 7210059 (11th Cir. Dec. 13, 2016).

[13] Id. at *1.

[14] Id. at *3 (citing EEOC v. Catastrophe Mgmt. Solns., 11 F. Supp. 3d 1139, 1143 (S.D. Ala. 2014) (order granting motion to dismiss)).

[15] Id. at *2.

[16] Id. at *6.

[17] Id.

[18] Id. at *7.

[19] Id.

[20] Id. at *8–9 (first citing Willingham v. Macon Tel. Publ’g Co., 507 F.2d 1084 (5th Cir. 1975) (holding that an employer’s refusal to hire a male applicant with long hair under its neutral grooming policy was not a violation of Title VII’s prohibition on sex discrimination because length of hair is not an immutable trait); and then citing Garcia v. Gloor, 618 F.2d 264 (5th Cir. 1980) (applying the immutable characteristic limitation to national origin and holding that the firing of a Mexican-American employee for speaking Spanish to a co-worker on the job in violation of his employer’s English-only policy did not violate Title VII’s prohibition on discrimination because of nation origin)).

[21] Id. at *9.

[22] Id.

[23] St. Francis College v. Al-Khazraji, 481 U.S. 604, 614 (1987) (Brennan, J., concurring).

[24] Id.

[25] Id.

[26] Id. at 614 (citing 29 C.F.R. §1606.1 (1986)).

[27] Id. at 614.

A Question of Nullities, Relative and Absolute

By Henry S. Rauschenberger, Articles Editor for the Louisiana Law Review

Introduction

Louisiana Civil Code article 2329 provides the legal framework for spouses who wish to, by matrimonial agreement before or during their marriage, modify or terminate their matrimonial regime.[1] Spouses may freely enter into such agreements before their marriage with very few restrictions as to content[2] or form.[3] During the marriage, however, spouses who wish to modify or terminate their matrimonial regime must not only follow the form requirement common to all matrimonial regimes,[4] they must also seek approval of the agreement by a court via joint petition.[5] But what if they did not get approval? What if they were not aware of the need for judicial approval? What if they filed a separate petition? It has remained an open question for family law practitioners and scholars as to what effect a failure to get judicial approval would have on a matrimonial agreement . . . until now.

 

The Case

In Radcliffe 10, L.L.C. v. Burger, the Louisiana Supreme Court, for the first time, weighed in on the validity of matrimonial agreements that are not judicially approved and provided a definitive, somewhat troubling, answer.[6] The story of Radcliffe begins at the end of another legal story, one in which Radcliffe 10, L.L.C. (“Radcliffe”) received a judgment against Ronald Burger that exceeded $3.4 million dollars.[7] After the judgment was rendered, but before it was signed by the court, Ronald and his wife Lynda entered into a matrimonial agreement that terminated their community property regime and partitioned their community property between them.[8] The Burgers sought and received judicial approval of their agreement—again before the signing of Radcliffe’s judgment—but the petition filed was not joint, naming Lynda as a defendant rather than as a joint petitioner.[9] Radcliffe, taking note of this irregularity, sought to have the matrimonial agreement declared an absolute nullity, and the trial court ruled as such.[10] Hearing the case on appeal, the Louisiana First Circuit Court of Appeal split evenly, five to five, on the issue of whether the failure to file a joint petition rendered the matrimonial agreement an absolute nullity—which can be raised by any party at any time, including in this instance the judgment creditor, Radcliffe—or a relative nullity—which can only be raised by the party whom the nullity protects.[11] Being split evenly, no executable majority judgment could be issued, and the trial court decision was left standing.[12] Writs were subsequently sought and granted.[13]

 

The Decision

To determine whether the procedural defect at the heart of the case rendered the matrimonial regime between Ronald and Lynda an absolute or a relative nullity, the Louisiana Supreme Court looked to prior case law and the writings of prominent Louisiana legal scholars.[14] If the object of the requirement of judicial approval in article 2329 was a “rule of public order,” intended to protect a large class of persons, then the violation of it would render the agreement an absolute nullity; if it was “a rule intended for the protection of private parties,” the violation of it would only render the agreement a relative nullity.[15] After considering all of the aforementioned sources, the Louisiana Supreme Court determined that the requirement for judicial approval found in article 2329 was intended to protect the “less worldly” spouse in a marriage from entering into disadvantageous matrimonial agreements he or she did not fully understand.[16] Therefore, the Court held that the failure of the Burgers to get proper judicial approval rendered the agreement only a relative nullity and, as such, this nullity could only be raised by the parties it protected—the Burgers themselves.[17] Without being an absolute nullity, Radcliffe as a non-protected party had no right to raise the issue.[18] The Louisiana Supreme Court reversed the trial court judgment and dismissed Radcliffe’s action with prejudice.[19]

 

The Dissents

Both Justice Guidry and Justice Clark dissented.[20] Although the justices dissented separately, both dissents focused on the same two points: (1) that article 2329 is clear and unambiguous in its requirement of a joint petition and (2) that although article 2329 primarily protects the spouses, it does afford protections to other persons, such as creditors, heirs, and legatees, and should thus be considered a rule of public order.[21] Both justices would have affirmed the trial court’s holding that the agreement between the Burgers was an absolute nullity.

 

So What? What’s the Big Deal?

The Louisiana Supreme Court’s determination that failure to properly seek and obtain judicial approval of a matrimonial agreement under article 2329 only renders such an agreement a relative nullity is troubling. A close look at the facts of Radcliffe reveals why. Ronald Burger had a significant judgment rendered against him and before that judgment could be signed, he and his wife Lynda terminated their matrimonial regime and partitioned their marital property. While the timing of the Burger’s matrimonial agreement may have been—but likely was not—coincidental, it effectively prevented Ronald’s judgment creditor, the party whom Ronald had been adjudged to have harmed, from going after any of the formerly marital property that had been partitioned to Lynda or any of Lynda’s future earnings to satisfy the lawful judgment that had been rendered in their favor. The Louisiana Supreme Court’s ruling has essentially opened the door for any married person to avoid judgments against him or her in the same manner. As the Supreme Court has determined that the requirement of judicial approval is only for the protection of the spouses, why should two spouses, against one of whom a judgement has been rendered, not simply terminate their matrimonial regime?

This decision opens the door for married couples to manipulate their matrimonial regimes to avoid their responsibilities to creditors. The law should not condone and permit creative manipulation of the law to avoid one’s responsibilities, and it should certainly not condone the manipulation of the marital regime for patrimonial gain or protection. This decision, together with the law underlying it, should be revisited and this open door to wanton manipulation shut and locked.

[1] La. Civ. Code art. 2325 (2017) (“A matrimonial regime is a system of principles and rules governing the ownership and management of the property of married persons as between themselves and towards third persons.”).

[2] Id. art. 2330.

[3] Id. art 2331 (“A matrimonial agreement may be executed by the spouses before or during marriage. It shall be made by authentic act or by an act under private signature duly acknowledged by the spouses.”).

[4] Id.

[5] Id. art. 2329.

[6] No. 2016–C–0768, 2017 WL 362085 (La. Jan. 25, 2017).

[7] Id. at *1.

[8] Id. Although the record does not mention it, one would guess that Mrs. Burger received the bulk—if not all—of the martial property.

[9] Id.

[10] Id.

[11] Radcliffe 10, L.L.C. v. Burger, 191 So. 3d 79, 84 (La. Ct. App. 2016).

[12] Id.

[13] Radcliffe 10, L.L.C. v. Burger, 204 So. 3d 998 (La. 2016).

[14] Radcliffe 10, L.L.C. v. Burger, 2017 WL 362085 at *4–5.

[15] Id. at *6.

[16] Id. at *4.

[17] Id. at *6.

[18] Id. The Supreme Court did note that the creditor had a separate action under Louisiana Civil Code article 2376 through which he could challenge any allegedly fraudulent transfers made pursuant to the agreement. Id. at *5–6.

[19] Id. at *6.

[20] Id. at *7.

[21] Id. at *7–9.

[22] Id.

The Catahoula Basin: Historically a River, Currently a Lake—Who Owns It?

 

by Ryan King, Senior Associate

Catahoula Lake is the largest freshwater lake in Louisiana, covering over 46 square miles.[1] During the 20th century, this body of water experienced significant geographical modifications because of man-made water control structures.[2] What was once a meandering stream that seasonally flooded thousands of acres within the river basin for several months each year has permanently flooded the basin since 1973, creating what is currently known as “Catahoula Lake.”[3]

Changing the designation of a body of water from “lake” to “river” has serious implications for landowners and the state. Currently, the Catahoula Basin is commonly known as a “lake”—a designation that would preserve ownership of the land below the ordinary high-water mark for the state.[4] However, in the recent case Crooks v. State, the court analyzed the historical background of the water body, concluding that the Catahoula Basin is legally a “river”[5] —which would preserve the ownership of the banks, the area between the ordinary low and high watermarks, for the riparian landowners.[6]

That conclusion also resulted in a finding that the State had unlawfully expropriated the river banks and owed the landowner plaintiffs over 30,000 acres of flooded land and nearly $38 million in damages, as well as over $4.5 million in unpaid oil and gas royalties.[7] This comment will provide a summary of the analysis used by the court in determining the legal identity of the historically non-permanent water body, commonly known as Catahoula Lake.

  1. Legal Background of the Catahoula Basin

Upon joining the Union in 1812, Louisiana “acquired title, by virtue of its inherent authority, to the beds of navigable water bodies situated within its boundaries.”[8] Additionally, much of the Catahoula Basin was specifically designated as “swampland” and transferred to the state by the federal government under the Swampland Acts of 1849 and 1850.[9] Both the plaintiff landowners and the State stipulated in Crooks that Catahoula Lake was navigable in 1812;[10] therefore, Louisiana acquired ownership of the water body up to its ordinary high-water mark upon admission to the Union and had the power to determine the rights of the riparian owners.[11] Louisiana law dictates that the area of land between the ordinary low mark and ordinary high mark of navigable rivers is privately owned,[12] but that the land below the ordinary high mark of a lake is owned by the state.[13] Thus, the legal classification of the Catahoula Basin as a river or a lake determines whether the plaintiff landowners or the State owns the lands beneath the ordinary low-water and ordinary high-water marks of Catahoula Lake.

  1. The Catahoula Basin in 1812

The expert witnesses for the plaintiffs and the State agreed that the historical evidence is the best evidence for determining the status of the basin in and around 1812. The Crooks court extensively reviewed the historical reports from the early 1800’s through the 1960’s to determine whether the area is legally a river or a lake.

The reports indicated that in 1804, Thomas Jefferson sent William Dunbar on an expedition that included the Catahoula Basin.[14] Dunbar described the body of water as having an inflow from Little River “[that] preserves a channel running water at all season, meandering along the bed of the lake; but all other parts of it superficies during the dry season from July to November . . . are completely drained & become clothed in the most luxuriant herbage,” which becomes grazing land for “immense herds of deer.”[15] This description presents the primary basis for the court’s analysis of the water body’s legal classification.

Historically, the basin was composed of a small meandering stream for half of the year with extremely gradual banks, such that the seasonal overflow of waters from backed up tributaries caused the flooding of thousands of acres, turning the meandering stream into a lake.[16] In short, for half of the year, the basin contained a meandering stream, called Little River, surrounded by thousands of acres of grassland; for the other half of the year, Little River overflowed and flooded the thousands of acres of grassland creating what seemed to be a seasonal lake.[17] Based on Dunbar’s description and the expert testimony, the court concluded that Dunbar’s description of a meandering water body is entirely consistent with a river, not a lake.[18]

Next, the court relied upon the initial boundaries of Catahoula Parish adopted by the legislature in 1808. Most noteworthy is the fact that the legislature set Little River as the southern boundary, and not Catahoula Lake, thus implying that the channel of Little River traversed the entire Catahoula Basin.[20]  If the water body was considered a lake at the time, the parish boundary would have likely terminated at the edge of the lake, and not at the edge of the stream meandering through the lake.

In 1816, William Darby, another explorer, published a journal and map of his observations of the Catahoula Basin.[21] The court honed in on Darby’s assertion that designating the basin as a “lake” is a misnomer that would mislead individuals into believing it was a “constant repository of water,” when in fact it is “reservoirs filled annually by the hand of nature.”[22] Darby further noted that as the water is seasonally drained by the river depression, the lakebed becomes “a meadow of succulent herbage, with channels for the waters that continue meandering through them.”[23] This description was bolstered by the map, which also showed the channel of the Little River traversing the entirety of the Catahoula Basin.[24]

The court also examined later historical evidence from the mid 1900s,[25] which confirmed the earlier findings of Darby and Dunbar regarding the permanent and complete transversal of the basin by Little River and the seasonal inundation of the surrounding low lands.

Based on the historical evidence, the court found that in 1812, the Little River was a permanent body of water that completely traversed the Catahoula Basin and would seasonally overflow the otherwise vegetated surrounding low land, flooding thousands of acres.[26]

  1. Analysis

            In State v. Placid Oil, the court developed a several-factor test that is useful in determining whether a body of water is a lake or a river. However, the Crooks court determined that the Placid Oil test is applicable only to permanent bodies of water[28] and relied upon out-of-state authority to determine the treatment of seasonably flooded areas.

The court adopted the rule from the Illinois case Nottolini v. Lasalle National Bank, concluding that a “mere temporary body of water and specifically . . . the so-called Catahoula Lake, cannot be classified as a ‘Lake.’”[29] The court bolstered its conclusion by the Nebraska Supreme Court decision in Cooper v. Sanitary District No.1, finding that a stream seasonally flooding adjacent lands in its flood plain retains its character as a stream.[30] Finally, the court looked to the Louisiana case Schoeffler v. Drake Hunting Club for the principle that “the mere fact that privately-owned land or waterways are flooded or navigable does not render them public.”[31]

Based on the interpretation of Nottolini, Cooper, and Schoeffler, the court concluded that, in 1812, the Catahoula Basin did not meet the reasonably permanent requirement to be considered a lake,[32] but that it “was a permanent river that seasonally overflowed and covered its banks.”[33] Ultimately, this holding establishes the seasonally flooded lands of the Catahoula Basin as the banks of a river, which are privately owned by the riparian landowners.

III.      Damages & Conclusion

The plaintiffs argued that the permanent flooding of thousands of acres in the Basin caused by the construction of the Jonesville Lock and Dam structure in 1973 constituted an inverse condemnation for which they are due compensation.[34] The State raised exceptions of prescription[35] and no right of action because of a lack of property interest by the landowners.[36] The court concluded that the constant interference with the plaintiffs’ natural servitude of drain caused by the dam structure established a continuing tort, preventing the running of prescription.[37] Additionally, the court determined that the plaintiffs have a right of action against the State for unlawful expropriation of their lands because the “Act of Assurances” portion of the contract between the state and the federal government required the state to acquire all drainage servitudes around the Catahoula Basin necessary for the construction and maintenance of the dam structure.[38] The state was also required to hold the federal government harmless against all damages arising from the dam project.[39]

Consequently, the court found that an unlawful expropriation occurred and that the plaintiffs are due compensation for the full extent of their loss of enjoyment of the lands that were once seasonally dry.[40] The damages from the expropriation were fixed at $1,260 per acre for the entire class of plaintiffs, who were legally determined to be the owners of the 30,393.84 acres at issue.[41] Additionally, the riparian owners were awarded $4,694,309.68 for mineral royalties received by the state from their lands.[42]

Whether the holding in Crooks will affect the legal identification of other Louisiana water bodies remains to be seen. Its impact will likely be limited to water bodies with the similar geologic trait of being non-permanent and seasonally flooded, while permanent water bodies will likely continue to be analyzed under the Placid factors.

 

[1] Crooks v. State, No. 224,262, 2016 WL 3197532, at *5 (La. Dist. Ct. May 17, 2016).

[2] Id. at * 1.

[3] Id. at *2.

[4] Id. at *7 (citing State v. Placid Oil Co., 300 So. 2d 154, 172 (La. 1973)).

[5] Id. at *26–27.

[6] Id. at *7 (citing LA. Civ. Code art. 456 (2016)).

[7] Id. at *45.

[8] Id. at *6 (citing Act of April 8, 1812, ch. 50, 2 Stat. 701 (admitting the State of Louisiana to the Union)).

[9] Id.

[10] Id. at *3.

[11] Id. at *6 (first citing Shively v. Bowlby, 152 U.S. 1 (1894), and then citing State v. Richardson, 72 So. 984 (La. 1916)).

[12] LA. Civ. Code art. 456 (2017).

[13] Crooks, 2016 WL 3197532, at *6 (first citing State v. Placid Oil Co., 300 So. 2d 154 (La.1973), and then citing McCormick Oil & Gas Corp. v. Dow Chem. Co., 489 So. 2d 1047 (La. Ct. App. 1986)).

[14] William Dunbar, The Forgotten Expedition, 1804-1805: The Louisiana Purchase Journals of Dunbar and Hunter (Trey Berry et al. eds., 2006).

[15] Id. at 20.

[16] Crooks, 2016 WL 3197532, at *18.

[17] Id.

[18] Id. at *9.

[19] Id.

[20] Id. at *10.

[21] William Darby, A Geographical Description of the State of Louisiana (Johann P. Homann ed., 1817).

[22] Id. at 195.

[23] Id.  

[24] Crooks, 2016 WL 3197532, at *12.

[25] Id. at *13­–14 (citing Willian Chawner, Geology of Catahoula and Concordia Parishes, 32–33 35­ (1936); LA. Dep’t of Pub. Works, Catahoula Lake Area Report, 3–5 (1954)).

[26] Id. at * 13.

[27] See generally State v. Placid Oil Co., 300 So. 2d 154 (La.1973).

[28] Crooks, 2016 WL 3197532, at *24.

[29] Id. at *25 (citing Nottolini v. Lasalle Nat’l Bank, 782 N.E.2d 980 (Ill. 2d Dist. 2003)).

[30] Id. (citing Cooper v. Sanitary Dist. No. 1, 19 N.W. 2d 619, 624 (Neb. 1945)).

[31] Id. (citing Schoeffler v. Drake Hunting Club, 919 So. 2d 822, 827 (La. Ct. App. 2006)).

[32] Id. at *26.

[33] Id. at *27.

[34] Id. at *41.

[35] Id. at *28­–31.

[36] Id. at *33.

[37] Id. at *31.

[38] Id. at *33.

[39] Id.

[40] Id. at *41.

[41] Id. at *45 (The total acreage shown combines the “lake plaintiffs” and the “swamp plaintiffs.”).

[42] Id.

The Interplay Between Shareholder Oppression Suits and Derivative Actions in Closely Held Corporations

 

by Hunter Schoen, Issue Editor

Introduction

In any corporation, minority shareholders are vulnerable to the decisions of majority shareholders. Majority shareholders can deny minority shareholders participation or financial rights, such as refusal to pay them dividends. In addition to this vulnerability, closely held corporations pose unique risks to minority shareholders because of the lack of marketability of their shares.[1] Unlike a typical corporation, there is no readily available market where minority shareholders of a closely held corporation can sell their shares.[2] Because of this lack of marketability, traditionally, the only remedy provided to minority shareholders was judicial dissolution under the Louisiana Business Corporation Law (“LBCL”). The LBCL, however, provided only meager protection to minority shareholders because courts were reluctant to enforce the remedy.[3] The Louisiana Business Corporation Act changed this lack of protection for minority shareholders.

On January 1, 2015, the Louisiana Legislature replaced the LBCL with the Louisiana Business Corporation Act (“LBCA”).[4] Among the rights and remedies created by the LBCA, the new statutory regime provides an alternative to judicial dissolution for minority shareholders in a closely held corporation—shareholder oppression suits.[5] Due to the relative youth of the LBCA, an attorney may not appreciate the interplay between a shareholder oppression suit and a derivative action—an action filed by a shareholder to challenge the actions of a corporation—and the consequences of filing one before the other. To adequately represent the interests of a minority shareholder, an attorney should be acutely aware of the interplay between the two.

 

Shareholder Oppression Suits vs. Derivative Actions

In a shareholder oppression suit, the shareholder withdraws from the corporation and receives compensation for the value of his or her shares. The LBCA provides, “If a corporation engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder’s shares at their fair value.”[6] Under the LBCA, “oppression” is defined as when a corporation fails “to deal fairly and in good faith with the shareholder.”[7] Often, an act or omission by a corporation that constitutes oppression—making it an appropriate basis for a shareholder oppression suit—may also be the basis of a derivative action.

A derivative action asserts a right on behalf of the corporation.[8] An example of a derivative action is a suit filed for breach of fiduciary duty, such as misappropriation of corporate funds for personal expenses.[9] Although closely related, an important distinction between a shareholder oppression suit and a derivative proceeding is that an oppression suit is brought on behalf of a withdrawing shareholder and a derivative proceeding is brought on behalf of the corporation.[10] This distinction has significant procedural implications, namely the issue of standing, as well as substantive effects.

 

The Effects of Filing One Before the Other

To have standing to bring a derivative action, a shareholder must be “a shareholder of the corporation at the time of the act or omission complained of” and must “fairly and adequately represent[] the interest of the corporation in enforcing the right of the corporation.”[11] In a successful shareholder oppression suit, however, a shareholder withdraws from the corporation and thus loses standing to bring a derivative action, as the shareholder no longer adequately represents the interest of the corporation.[12] Therefore, before filing a shareholder oppression suit, a shareholder should assert all potential derivative actions.

In addition to the procedural implication of standing, a shareholder should file a derivative action first because a derivative action can potentially increase the fair value of a corporation’s stock. The derivative action can increase stock value in two ways: first, a corporation may be compensated through the litigation, thus increasing the fair value of each share; and second, a stayed derivative action is valued as an asset of the corporation.[13] Although any pending derivative actions are stayed upon the filing of a shareholder oppression suit,[14] the judge will nonetheless have to address the issues presented in the derivative action as they relate to the fair value of the corporation’s shares.[15] Given these effects, ideally a shareholder should file a derivative action before the institution of a shareholder oppression suit and have the action recognized as an asset. As judges and attorneys interact with the novel portions of the LCBA, however, this scenario will not always be the case.

What happens in the event an attorney does not file an applicable derivative action before filing a shareholder oppression suit, or a previously filed derivative action is not recognized as an asset? In these instances, a shareholder is not entirely out of luck. In a shareholder oppression suit, the litigation is largely based upon the fair value of the shares, not the withdrawal itself.[16] Expert testimony from a certified valuation analyst or an accredited business valuator can be used to determine the fair value of the shares. When valuing the shares of a closely held corporation for a buyout, fair value is calculated through investment value.[17] In valuing the shares based upon investment value, industry standards require the valuator to adjust the corporation’s books to account for misappropriated funds.[18] This valuation will effectively litigate the issues that would have been brought in the derivative action. Nevertheless, a derivative action should be filed before a shareholder oppression suit because it could be valued as an asset or addressed in a different manner by the judge on a case-by-case basis.[19]

 

Conclusion

With little to no jurisprudence stemming from the LBCA regarding shareholder oppression suits, an attorney may not realize the value of filing a derivative action before a shareholder oppression suit. When a derivative action is not asserted first, the relevant issues sought to be remedied in the action may be determined when valuing the stock. If the expert testimony is unconvincing or a judge does not interpret the expert testimony in the shareholder’s favor, the fair value of the stock may be lower than if a corporation’s harmful conduct was first challenged in a derivative action. Asserting derivative actions before filing a shareholder oppression suit will require the judge to address the pending litigation and formally bring to light issues that will affect the value of the stock before the shareholder oppression suit commences.

 

[1] Douglas K. Moll, Shareholder Oppression and the New Louisiana Business Corporation Act, 60 Loy. L. Rev. 461, 467 (2014).

[2] Id.

[3] See, e.g., Glenn G. Morris & Wendell H. Holmes, Business Organizations § 40.11, in Louisiana Civil Law Treatise (4th ed. 2013 & Supp. 2016).

[4] La. Rev. Stat. § 12:1-101 through 1-1704 (2017).

[5] Id. § 12:1-1435. Before the LBCA, the only remedy for an oppressed shareholder was involuntary dissolution under the LBCL. This drastic measure was frowned-upon by the courts and was rarely granted. Effectively, minority shareholders had no remedy in instances of shareholder oppression. See Morris & Holmes, supra note 3, § 22.08.

[6] La. Rev. Stat. § 12:1-1435A.

[7] Id. § 12:1-1435B.

[8] See id. § 12:1-741.

[9] See Moll, supra note 1, at 502.

[10] Compare La. Rev. Stat. § 12:1-1435A, with La. Rev. Stat. § 12:1-741.

[11] La. Rev. Stat. § 12:1-741A.

[12] See Maison Orleans P’ship in Commendam v. Stewart, 167 So.3d 1 (La. Ct. App. 2014) (holding that under the LBCL, petitioner gave up all rights to assert any claims, including derivative ones, when petitioning for dissolution).

[13] See Steven G. Durio et al., Louisiana Business Corporation Act is A Game Changer: A Discussion of Remedies and the Valuation Standard, 63 La. B.J. 396, 398 (2016).

[14] La. Rev. Stat. § 12:1-1437.

[15] Moll, supra note 1, at 505.

[16] See La. Rev. Stat. § 12:1-1436A(1).

[17] See, e.g., Blake v. Blake Agency, Inc., 486 N.Y.S.2d 341, 347 (N.Y. App. Div. 1985) (defining investment value as the earnings of the corporation).

[18] See, e.g., Raskin v. Walter Karl, Inc., 514 N.Y.S.2d 120, 121 (N.Y. App. Div. 1987). The adjustment of the books means that the valuator will add back the value of the misappropriated funds.

[19] Durio et al., supra note 13, at 398 (“While the LBCA is largely silent on handling such pending litigation, foreign jurisprudence indicates that these determinations will continue to occur on a case-by-case basis; Louisiana will likely follow this trend.”).