## Facts

- James P. Hollis and Dan H. Hill co-founded First Financial USA, Inc. (FFUSA), a closely held Nevada corporation that marketed first-lien mortgage notes and related non-security financial products.
- Hollis and Hill each owned 50% of FFUSA and served as directors and officers: Hill was president and ran the Houston office; Hollis was vice president and ran the Melbourne, Florida office.
- The parties also owned equal interests in a related Texas broker-dealer business formed to sell securities products.
- FFUSA performed well through 1997, and both Hollis and Hill drew salaries from the company.
- In late 1997, Hill complained that Hollis was not carrying an equal share of the workload and stopped paying Hollis’s salary. Hill proposed buying Hollis out, but Hollis rejected the offer.
- Hill threatened to close the broker-dealer business and start his own competing operation. He also shifted part of FFUSA’s business into a sole proprietorship in his own name without Hollis’s knowledge.
- Hill stopped providing financial reports to Hollis and refused Hollis access to FFUSA’s books and records. Hollis hired counsel and asserted his shareholder inspection rights for FFUSA and the broker-dealer.
- Shortly before an inspection, the parties reached a temporary agreement: Hill would acquire Hollis’s interest in the broker-dealer business; Hill would draw a $200,000 salary from FFUSA; and Hollis would draw a $120,000 salary from FFUSA.
- The truce did not last. Hill again cut off company reports, reduced his own salary, eliminated Hollis’s salary, disconnected phone service to Hollis’s office, terminated the Florida office lease, removed Hollis as vice president, and made a capital call on Hollis.
- Hollis filed suit on December 8, 1998, alleging shareholder oppression and breach of fiduciary duty and seeking equitable relief (including dissolution and, in the alternative, a compelled buyout).
- The district court found Hill’s conduct oppressive and a fiduciary breach. Rather than dissolve FFUSA, it ordered Hill to buy Hollis’s shares and set the valuation date at February 28, 1998 (the date it selected as the start of oppression). Hill appealed.

## Issues

1. Whether, in a two-owner closely held corporation operated like an incorporated partnership, Hill owed Hollis fiduciary duties and whether Hill’s conduct amounted to shareholder oppression and breach of those duties.
2. Whether the district court abused its discretion by selecting February 28, 1998 as the valuation date for a court-ordered buyout, rather than a later date reflecting the course of the oppressive conduct.

## Decision

- The Fifth Circuit affirmed the district court’s findings that Hill owed Hollis fiduciary duties and that Hill’s actions constituted oppressive conduct and a breach of those duties.
- The Fifth Circuit affirmed the equitable remedy requiring Hill to purchase Hollis’s 50% interest as an alternative to dissolution.
- The Fifth Circuit vacated and remanded solely on the valuation-date issue, holding that the buyout should be valued as of December 8, 1998, the date Hollis filed suit, not February 28, 1998.

## Legal Principles

- In a closely held corporation with equal owners who both manage the business and depend on mutual trust and participation, the relationship may be treated as similar to a partnership for fiduciary-duty purposes.
- Co-owner fiduciary duties in that setting include good faith, loyalty, and fair dealing; conduct aimed at freezing out a co-owner (cutting off compensation, information, and participation) can breach those duties.
- “Oppression” in a close corporation can be shown by wrongful conduct that substantially defeats a shareholder’s reasonable expectations of participation, financial return, and access to information, effectively rendering ownership illiquid or worthless.
- Courts applying state close-corporation doctrines may grant equitable relief short of dissolution, including a compelled buyout, when dissolution would be wasteful and a buyout will fairly compensate the oppressed owner.
- A buyout valuation date must be fair in light of the wrongful conduct; selecting a date too early—before significant later acts that affect value—can undercompensate the oppressed shareholder and constitutes reversible error. In this case, the filing date of the lawsuit was the proper valuation date.

## Conclusion

Hollis v. Hill holds that in a two-person, jointly managed close corporation, a co-owner may owe partnership-like fiduciary duties and may be liable for oppressive freeze-out conduct such as cutting off salary, diverting business, and denying access to records; the Fifth Circuit approved a forced buyout as equitable relief but required the buyout price to be calculated as of the date Hollis sued (December 8, 1998), not an earlier date chosen as the beginning of oppression.


Hollis v. Hill, 232 F.3d 460 (2000)