Dueling Dissolution Petitions Beget Dissolution Without Consideration of Alternate Remedies
February 06, 2023
This blog frequently covers cases considering a shareholder’s request to dissolve a corporation under New York’s oppression-based corporate dissolution statute, BCL 1104-a. That statute allows a shareholder to petition for dissolution of a corporation on the grounds that those in control of the corporation have engaged in “illegal, fraudulent or oppressive actions,” (BCL 1104-a[a]), or that the “property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation” (BCL 1104-a[a]).
But even upon a showing of oppression or other misconduct satisfying the requirements of BCL 1104-a, dissolution is not a given. That is because BCL 1104-a(b) requires the court to consider “whether liquidation is the only feasible means whereby the petitioners may reasonably expect to obtain a fair return on their investment.” Dissolution should be a remedy of last resort, and a court has broad discretion to fashion a less-drastic, alternative remedy to dissolution. Consider, for example, this post about a case ordering a compelled buyout of the complaining shareholder (Zulkofske v Zulkofske, 2012 NY Slip Op 51210(U) [Suffolk Co., 2012]), or this post about a case finding money damages sufficient to remedy the oppressive conduct (Hammad v Jamal Kamal Corp., 68 Misc 3d 1227(A) [Queens Co., 2020]).
Based on the principle that dissolution should be a remedy of last resort, the Court of Appeals in Matter of Kemp & Beatley introduced another layer into the “available remedies” analysis of BCL 1104-a(b). Even when dissolution is an appropriate remedy, the court must give the shareholders the option to save the corporation by buying out the complaining shareholder: “[e]very order of dissolution . . . must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder’s stock at fair value” (64 NY2d 63 ).
Against this backdrop, consider the Second Department’s recent decision in Marum v Graffeo, which affirmed an order of dissolution of a closely-held corporation entered without a hearing, despite contested allegations and apparent non-consideration of alternative remedies (179 NYS3d 621 [2d Dept 2023]).
Dueling Dissolution Petitions for Whitestone Vision Center
Whitestone Vision Center, Inc. (“WVC”), was a closely-held corporation owned by two 50% shareholders, Graffeo and Marum. Apparently due to friction between the two owners, Graffeo stepped aside from day-to-day operations, leaving Marum to run the business.
When that friction reached a boiling point in 2016, Marum, the shareholder in control of the business, fired the first shot by petitioning for dissolution under BCL 1104-a on the grounds that Graffeo had diverted assets away from the Corporation—he had allegedly used a corporate credit card for personal expenses. Marum also cited “irreconcilable differences and dissention between the two shareholders.”
In response, Graffeo filed a counter-petition for dissolution, also under BCL 1104-a, and also alleging “irreconcilable differences” between the shareholders. While styled as a petition for dissolution, Graffeo’s petition sought a hearing to consider and determine an alternative remedy: a compelled buyout of Graffeo’s shares by the owner in control—Marum.
Both sides denied the other’s respective allegations of misconduct, effectively presenting the Court with two contested dissolution petitions under BCL 1104-a, each side hurling allegations of dissolution-worthy misconduct at the other.
Dissolution Granted as “Unopposed”
By Order dated October 25, 2018, Queens County Commercial Division Justice Marguerite A. Grays entered an order dissolving the corporation without resolving the contested factual allegations. The Court held:
The branch of each party’s motion for an Order directing the judicial dissolution of Whitestone Vision Center, Inc., pursuant to BCL § 1104-a, is granted without opposition. . . A review of the record herein demonstrates that each party has made a prima facie showing of entitlement to dissolution under BCL § 1104-a(1) and (2) . . . There is no need for a hearing in this case concerning whether dissolution is warranted. Neither party contests that issue.”
The Order did not determine which shareholder was the oppressed one. Nor did it provide either owner with the option to avoid dissolution by buying out the other.
Graffeo Discovers Additional Oppressive Conduct
In addition to ordering dissolution, the Court’s October 25, 2018, order granted Graffeo’s motion for immediate access to WVC’s books and records. Whereupon, according to Graffeo, he uncovered evidence of Marum’s alleged systematic failure to account for cash receipts, resulting in Graffeo’s conclusion that Marum was diverting approximately $4,000 per month from WVC.
Graffeo’s Motion to (Re)Consider Alternative Remedies
Upon discovery of the additional alleged misconduct, Graffeo moved to reconsider the Court’s order granting dissolution of WVC without necessity of a hearing and without consideration of alternative remedies. Angling for a compelled buyout of his interest, Graffeo argued that the Court overlooked his request for a hearing to determine whether Marum’s oppressive actions warranted alternative relief to dissolution.
By Order dated October 31, 2019, Justice Grays denied Graffeos’ motion to reconsider. She observed that there was no need for a hearing, since, “[t]here was no genuine dispute about the existence of deadlock and dissention.” The Court further held that:
To the extent that Graffeo seeks alternative relief that Marum be ordered to purchase Graffeo’s shares of stock, a Court cannot accomplish dissolution by ordering one 50% shareholder to sell his assets or interest in the corporation to the other 50% shareholder at a private sale; rather the only authorized distribution is at a public sale or liquidation (Sternberg v Osman, 181 AD2d 899).”
This Order raises a few questions in my mind:
- Why the reference to “deadlock and dissention”? That calls to mind a dissolution petition under BCL 1104—which allows a 50% shareholder to petition for dissolution based on shareholder deadlock, without a finding of “fault” by either party. Here, by contrast, both shareholders sought dissolution under BCL 1104-a. And while they both ultimately sought the same relief, WVC’s shareholders here vigorously contested who was at fault.
- Similarly, the case cited by the Court for its apparent lack of authority to compel a buyout, Sternberg v Osman, concerned a request for a compelled buyout after a finding of deadlock warranting dissolution under BCL 1104. In BCL 1104-a cases, the Court does have the power to compel a buyout, even between 50/50 shareholders (see Zulkofske v Zulkofske, 2012 NY Slip Op 51210(U) [Suffolk Co. June 28, 2012]).
- Finally, compelled buyout or not, what about the requirement of 1104-a(b) that less-drastic remedies be considered, or the mandate in Matter of Kemp that an order of dissolution under 1104-a include an option to avoid dissolution by buying out the oppressed shareholder at fair value? By ordering dissolution without first determining which shareholder was at fault, the Court could consider neither.
Graffeo appealed the denial of his motion to reconsider, arguing that the Court erred in refusing to grant a hearing to consider the alternate relief he demanded—a compelled buyout of his interests—as required by 1104-a(b) and Matter of Kemp. Graffeo pinned his argument on his newly discovered evidence of Marum’s financial misconduct, which Graffeo argued, required consideration of a compelled buyout.
Marum argued that denial of the motion to reconsider was appropriate because Graffeo failed to show new facts—ones that he could not have discovered and have raised prior to the Court’s October 25, 2018, order—justifying reconsideration.
By Order dated January 11, 2023, the Second Department affirmed the Trial Court’s decision. The Court held:
Here, contrary to Graffeo’s contention, the purported new facts offered in support of that branch of his motion which was for leave to renew were available to him prior to the issuance of the order dated October 25, 2018. Moreover, Graffeo failed to establish that the purported new facts would have changed the prior determination . . . Accordingly, the Supreme Court properly denied that branch of Graffeo’s motion which was for leave to renew.”
Would a Forced Buyout Have Been Appropriate Here?
Way back in 2007, Peter Mahler observed that dissolution involving 50/50 shareholders raises some of the trickiest tactical decisions for litigation counsel. Reading the Trial Court’s and the Second Department’s decisions, I can’t help but see a host of interesting arguments lost to the tactical maneuvering by Graffeo. Why file a counter-petition asking for dissolution when you really want a different remedy? Why not appeal the trial court’s original order granting dissolution? Why not avail yourself of the buy-sell provision in the corporation’s shareholders agreement? And, as the Second Department wondered, why not raise the alleged financial misconduct the first time around?
As Graffeo tells the story, if there ever was a case for a compelled buyout, this is it. Courts are more likely to compel a buyout upon a finding of grounds for dissolution under BCL 1104-a where those in control of the corporation threaten to abuse the dissolution process by bringing the corporation’s assets with them through dissolution, then resuming the business under another entity to the exclusion of the oppression shareholder (see Zulkofske v Zulkofske, 2012 NY Slip Op 51210(U) [Suffolk Co. June 28, 2012] [compelling buyout because the respondent’s son owns over 60% of the corporation’s ongoing customer base, and dissolution would have effectively allowed the respondent to bring that customer base with him]; Matter of Clever Innovations, Inc., 2012 NY Slip Op 02536 [3d Dept 2012] [affirming forced buyout because “through dissolution, petitioner seeks to avoid paying the [oppressed shareholder] the fair value of its shares while personally continuing to profit by operating the company’s business either individually or through a new corporation”]).
Shortly after the order granting dissolution, according to Graffeo, Marum closed WVC and opened up another optical company, taking over WVC’s lease, inventory, employees, and customer base.
Do Graffeo’s procedural missteps make any of those facts less compelling such that dissolution was correctly granted on contested facts, without a determination of which shareholder was at fault, without a hearing, without apparent consideration of alternative remedies, and without the optional buy-out required by Kemp? You decide.
In the final analysis, though, Marum v Graffeo lends more weight to the age-old adage: be careful what you wish for.