## Facts

- Gallegos Law Firm, P.C. (GLF) was a closely held New Mexico professional corporation with five attorney-shareholders.
- Mary E. Walta owned 25% of GLF’s shares and worked as an attorney-shareholder; J.E. “Gene” Gallegos owned 50% and controlled corporate decision-making.
- Internal conflict arose over GLF’s financial decisions, including contingent-fee case risk and use of a line of credit.
- Gallegos initiated a restructuring presented as a dissolution and buyout of all shareholders, but he privately arranged for continued participation for every shareholder except Walta.
- Under GLF’s shareholder agreement/bylaws, a departing shareholder was entitled to book value for vested shares (assets minus liabilities as of the departure date).
- In buying Walta’s shares, Gallegos used a valuation date months before her departure and excluded substantial accounts receivable from the asset calculation.
- Walta received $20,000 for her shares (roughly her original purchase price), despite evidence that inclusion of receivables supported a materially higher book-value figure.

## Issues

1. What fiduciary duties of good faith, loyalty, and fair dealing a majority shareholder/director in a closely held corporation owes a minority shareholder during a buyout or restructuring.
2. Whether sufficient evidence supported punitive damages based on a culpable mental state accompanying the fiduciary-duty breach.
3. Whether the economic loss rule barred the fiduciary-duty tort claim where damages overlapped with contract damages (raised on appeal but not preserved).

## Decision

- The Court of Appeals affirmed the judgment, including the punitive damages award against Gallegos.
- The court held that, in a closely held corporation, controlling shareholders and directors owe minority shareholders a heightened fiduciary duty of utmost good faith and loyalty, especially in buyouts.
- The evidence supported the jury’s finding that Gallegos breached fiduciary duties by using control to structure and value the transaction in a manner unfair to Walta.
- The evidence permitted a finding that Gallegos acted with a culpable state of mind (dishonest or oppressive motive or willful disregard of Walta’s rights), supporting punitive damages.
- The court declined to decide the economic loss rule argument because it was not raised in the trial court and was not reviewed as fundamental error.

## Legal Principles

- Shareholders and directors in a closely held corporation owe each other fiduciary duties resembling partnership duties, including fairness, honesty, and good faith.
- A controlling shareholder must not use corporate control to engage in self-dealing or oppressive conduct that disadvantages a minority shareholder in a squeeze-out or forced buyout.
- When purchasing a minority shareholder’s interest, the controlling shareholder must provide full and accurate disclosure of material financial information and must deal objectively fairly in valuation and process.
- Punitive damages for breach of fiduciary duty require proof of a culpable mental state accompanying the wrongful conduct (beyond mere mistake or negligence), and may be upheld where the record supports inferences of bad faith or willful disregard.
- Appellate courts will not reach unpreserved issues, including an economic loss rule defense first raised on appeal.

## Conclusion

The court affirmed punitive damages where a majority shareholder in a closely held professional corporation used control over restructuring and stock valuation to force out a dissenting minority shareholder at an unfairly depressed price, violating heightened fiduciary duties of utmost good faith and loyalty; an unpreserved economic loss rule defense was not addressed.


Walta v. Gallegos Law Firm, P.C., 40 P.3d 449 (N.M. Ct. App. 2001)