## Facts

- S. L. & E., Inc. (SLE) was a closely held corporation whose only significant asset was commercial property in Rochester, New York.
- Lewis General Tires, Inc. (LGT) operated a tire business and was SLE’s sole tenant.
- In 1956, SLE leased the property to LGT for $1,200 per month ($14,400 per year), with SLE responsible for real estate taxes.
- The lease expired in 1966, but LGT remained in possession through 1972 at the same rent, while property taxes increased.
- Donald E. Lewis, an SLE shareholder but not an LGT shareholder, sued derivatively on SLE’s behalf alleging the director-defendants (his brothers) wasted SLE’s assets by maintaining an unreasonably low rent.
- The director-defendants controlled both SLE (lessor) and LGT (lessee) and testified they treated SLE largely as a vehicle to benefit LGT rather than as a separate entity.
- Expert evidence supported substantially higher fair market rent for 1966–1972 than $14,400 annually.
- A shareholders’ agreement required certain non-LGT-owning siblings, including Donald, to sell SLE shares to LGT in 1972 at book value; Donald alleged the low rent depressed SLE earnings and thus reduced book value.
- LGT intervened seeking specific performance of Donald’s obligation to sell his SLE shares at book value.

## Issues

1. In a derivative action challenging an inter-corporate transaction controlled by the same directors on both sides, who bears the burden to prove the transaction’s fairness and the absence of waste?
2. Whether attorneys’ fees could be awarded to defendant directors and the corporation absent statutory authority or bad faith by the plaintiff.
3. Whether specific performance of the stock-sale obligation could rest on book value calculated using allegedly depressed rental income.

## Decision

- The Second Circuit reversed and remanded.
- The district court erred by placing on Donald the burden to prove waste; because the directors were conflicted, they bore the burden to prove the lease terms were fair and reasonable to SLE and did not constitute waste.
- The directors had not carried that burden under the proper standard, requiring further proceedings.
- The court reversed the awards of attorneys’ fees to the defendant directors and to SLE for lack of a proper basis.
- The court indicated that any specific-performance remedy must be based on a book-value calculation that reflects a properly determined fair rental value for the relevant period.

## Legal Principles

- The business judgment presumption does not control where directors have a conflict of interest and effectively stand on both sides of a transaction.
- In self-dealing or conflicted transactions, the interested fiduciaries bear the burden to demonstrate the transaction’s fairness and reasonableness and to show there was no waste.
- Where an affiliate transaction may have depressed corporate earnings used in a contractually significant valuation metric (such as book value), courts may require recalculation using fair market terms before enforcing related contractual remedies.
- Attorneys’ fees generally are not shifted to defendants in derivative litigation absent statutory authority or plaintiff bad faith.

## Conclusion

The court held that directors who controlled both lessor and lessee corporations had to prove the fairness of below-market rent and the absence of waste, reversed fee awards lacking a valid basis, and remanded for determination of fair rental value and corresponding adjustment of book value relevant to enforcing the stock-sale agreement.


Lewis v. S. L. & E., Inc., 629 F.2d 764 (2d Cir. 1980)