Donahue v. Draper

Douglas Donahue (plaintiff) and Thomas Draper (defendant) were equal owners of Donahue-Draper Corporation (DDC). The company was very successful, but ultimately the parties had a falling out. Because Draper’s wife, Ethel, was a director of DDC, Draper effectively had two votes to Donahue’s one. Draper and Ethel used their votes to see to the liquidation of the company, at which point Draper restarted Thomas F. Draper Company (TFD), the sole proprietorship he had run before DDC. For this reboot of TFD, Draper used DDC’s space, staff, and telephone number. TFD also sold to many former clients of DDC. Donahue sued Draper for breach of the fiduciary duty owed in a close corporation, alleging a freezeout. Among other things, Donahue sought damages for the goodwill of DDC. Donahue presented expert testimony that DDC had $1,574,000 of goodwill. To reach that amount, the expert used three different methods. In his base method, he took DDC’s normalized net earnings, adjusted for inflation, added a multiplier of 6.4 that he thought appropriate for DDC’s type of business, and then deducted DDC’s net tangible assets. The jury found only $536,750 of goodwill in the company and found that half of that goodwill belonged to Donahue. Draper appealed the trial court’s finding with respect to goodwill. Among other things, Draper argued that the success of DDC was largely due to his personal skill and thus was not subject to a share as goodwill.