Judge Delivers Setback to Harry Hoiles’ Suit to Break Up Paper Chain

An Orange County judge issued a devastating blow Wednesday during the trial of a lawsuit to dissolve the family-held Freedom Newspapers Inc. by barring evidence about any reasonable expectations that the heirs of founder R.C. Hoiles had in managing the company or leaving it with a share of the assets.

Superior Court Judge Leonard Goldstein ruled that reasonable expectations were irrelevant to dissident shareholder Harry H. Hoiles’ claim of being treated so unfairly that state law would require the breakup of the Irvine-based media chain.

Instead, Hoiles must show by the actions and conduct of the other two branches of the family that the majority unfairly froze him out of management and took steps to devalue his family’s one-third share of the stock.

Goldstein also ruled that evidence of the libertarian philosophy--espoused by the founder and the cornerstone of the company--was irrelevant generally, but it could be used when it relates to the company’s operations or editorial positions. The judge informally instituted that rule during the early stages of the 3-week-old trial and on Wednesday decided to make it formal.

“It hurts,” said Vernon W. Hunt Jr., the Santa Ana lawyer for Harry Hoiles, about the ruling on reasonable expectations.

But Hunt said such evidence is still relevant in another portion of the case, which accuses the majority shareholders of breaching fiduciary duties. Such breaches, however, can only lead to damages, not to dissolution of the company.

“It’s a very important ruling,” said Leonard A. Hampel of Costa Mesa, attorney for the majority shareholders--the families of Mary Jane Hoiles Hardie and the late Clarence H. Hoiles.

“The effect of the ruling should be to streamline the case, and it should avoid the wandering type of questioning,” Hampel said. “Now they have to deal with specific acts that they alleged in their complaint, and we believe the acts are all consistent with the law.”

Constant defense objections, many of them upheld, had slowed down the testimony during the first two weeks. But after Goldstein’s ruling Wednesday morning, few objections were made all day.

The libertarian issue is a key element of Harry Hoiles’ trial strategy because it provides the basis for his claim that all family members had reasonable expectations about what they could do with their ownership interests.

So when the lawyers argued for a day and a half over a defense motion to ban any evidence about libertarian philosophy, they also raised the issue of whether Hoiles’ reasonable expectations could be used to show that he was treated unfairly.

To dissolve the corporation under state law, Hoiles has to prove that the actions of the majority owners constituted “persistent fraud, mismanagement or abuse of authority or persistent unfairness” toward his family.

Hoiles’ 5-year-old complaint claims that the acts constituting persistent unfairness were the refusal to elect Hoiles as chief executive officer; a stock restriction agreement among the majority; a bylaw change to replace the chief executive officer’s post with a ruling troika; the majority’s counter-proposal to yearlong negotiations to split up the company, and a recapitalization plan that Hoiles objected to and one that was never implemented.

In testimony Wednesday, Mary Jane Hardie acknowledged that she wanted to eliminate her brother from any management of Freedom Newspapers because he was “a very disruptive person”