Potential Creditor Drags Corporation in Stalled Dissolution Proceeding into Receivership
January 16, 2023
The dissolution of a company—and the winddown and liquidation that usually follow—often impacts a broad range of stakeholders beyond just the owners of the company, including creditors and potential creditors, who often are stuck awaiting the outcome of the dissolution process before they get paid.
The waiting can be doubly painful when a corporation is the subject of an involuntary dissolution proceeding under BCL 1104 or BCL 1104-a, since those proceedings can drag on seemingly indefinitely.
Last year, my co-blogger Frank McRoberts offered a construction of the Business Corporation Law that gave creditors and potential creditors an alternative: a path to insert themselves (and their claims) into a contested dissolution proceeding. It went like this:
- BCL 1117 (a) provides that in a judicial dissolution proceeding under Article 11 (such as 1104 or 1104-a), the provisions of BCL 1005 through 1008 “shall apply.”
- BCL 1008 states that creditors of the to-be-dissolved corporation may petition the court for various relief, including: (a)(3) the determination of the creditor’s claims against the corporation, (a)(5) the determination of the creditor’s claims to hold the shareholders personally liable, and (a)(8) for the appointment of a receiver over the corporation.
- Based on the above, creditor could rely upon the BCL 1117 / 1008 combination to intervene in a judicial dissolution proceeding and ask the court with jurisdiction over the dissolution proceeding for the relief specified in BCL 1008(a)(1 – 11).
Despite this apparent statutory authorization, requests from creditors to intervene in involuntary dissolution proceedings are relatively rare. I had not seen it done until a recent decision from New York County Justice Arlene P. Bluth, In re Golan Floors, Inc., Index No. 655063/2019 (Sup Ct, New York County 2023), which grants a potential creditor’s application to have a receiver appointed in a dissolution proceeding. And, as we’ll see below, it took a staggering fact pattern to get there.
Court Orders Dissolution of Golan Floors
Gadi Ruham and Danny Hodak are former friends that went into several different businesses together, including the recently-closed New York City Restaurant Taboon and Golan Floors Inc., a flooring installation and repair company. Since about 1994, Ruham and Hodak were each 50% shareholders of Golan Floors, for which there was no shareholders agreement and apparently scant observance of corporate formalities. Ruham was generally responsible for running Golan Floors.
When the relationship between Ruham and Hodak soured, Hodak in September 2019 filed two petitions for judicial dissolution: one for Taboon and one for Golan Floors. Hodak alleged that the dissolution of Golan Floors was necessary under BCL 1104 because he and Ruham were deadlocked in the management of the Company (read here a more detailed discussion of the deadlock-based dissolution statute, BCL 1104). Hodak also sought appointment of a receiver under BCL 1113 to oversee the winddown and liquidation of the company.
Less than a week after Hodak filed his dissolution petition, Golan Floors, Ruham, and Hodak were all sued in New York County by Farhadi, a dissatisfied customer who alleged that Golan Floors damaged his furniture and performed seriously substandard work in connection with the restoration of his Chelsea condominium unit (Farhadi v Golan Floors Inc., et al., No. 655203/2019).
Ruham did not file any opposition to Hodak’s petition to dissolve Golan Floors.
On August 14, 2020, Justice Bluth entered an order granting without opposition the petition for dissolution. The Court directed Hodak to submit a proposed order/judgment “which provides for the appointment of a receiver to wind down the corporation, conduct an accounting of the assets and debts of the corporation, sell its assets in a commercially reasonable manner and direct that the debts of the corporation be paid from the proceeds of sale and any cash on hand . . .”
Post-Dissolution Order Missteps
After the order granting dissolution of Golan Floors, the case takes a turn from the routine to the bizarre. First, Hodak submitted what appears to be a form proposed judgment and order for the appointment of a receiver and windup of the Corporation, but he left the form blank; he did not propose a receiver or otherwise submit an order in compliance with Justice Bluth’s direction. After some months, when it became apparent that the Court was not going to fill in the blanks for him, Hodak submitted a second proposed judgment and order, this one suggesting appointing himself as the receiver to winddown and dissolve Golan Floors. Again, the Court declined to act on the second proposed judgment and order.
Almost ten-months later and more than a year after the Court’s order granting the dissolution, Ruham tried his hand: he submitted a third proposed judgment and order, this time proposing that he be appointed the receiver over Golan Floors.
The parties then seemingly got distracted by other issues, filing a series of letters and a proposed order to show cause (for which the motion fee was never paid) concerning alleged improper transfers out of Golan Floors’ bank accounts and an episode where Hodak was allegedly padlocked in the company’s offices by a Golan Floors employee. But despite the frenzied filings, no party did what the Court’s dissolution order asked them to do: submit a proposed judgment appointing a receiver and providing for the windup and dissolution of the Company.
All the while, the Farhadi litigation against Golan Floors, Hodak, and Ruham continued. That case saw equally strange maneuvering from Hodak and Ruham. Hodak brought a third-party complaint against the Golan Floors employee that locked him in the office, and Ruham tried to have his counsel appear for Golan Floors without Hodak’s consent, which prompted a motion to disqualify by Hodak.
Wading through a mess of motions, New York County Justice Nock issued an order disqualifying Ruham’s lawyers from representing Golan Floors in the Farhadi action. But because Justice Bluth in the dissolution action had ordered that a receiver be appointed over Golan Floors, only the not-yet-appointed-receiver could hire new counsel. Justice Nock therefore stayed the Farhadi litigation until a receiver was appointed in the dissolution action.
The Customer’s Motion to Appoint a Receiver in the Dissolution Proceeding
Justice Nock’s order left the customer in a difficult position. His case against Golan Floors was stayed until a receiver was appointed in the dissolution proceeding, but for more than two years neither Hodak nor Ruham were able to (or at least, had little interest in trying to) comply with the Court’s order so that a receiver could be appointed.
So the customer took matters into his own hands. He filed a motion in the dissolution proceeding (to which he was not a party), proposing a neutral receiver and requesting that the Court appoint his proposed receiver.
Ruham opposed the motion, arguing that the dissolution proceeding must be deemed dismissed as abandoned—by that time, the parties were two-years out of compliance with the order of dissolution. He also argued that the customer lacked standing to intervene in the dissolution proceeding.
Justice Bluth granted the customer’s motion. She recounted the “unusual procedural history of this proceeding,” and held that the various letters and other filings made over the years since dissolution was granted—despite all being procedurally improper—saved the case from dismissal for abandonment.
The Court also rejected Ruham’s argument that the customer lacked standing to participate in the selection of the receiver, noting that “it matters little whether or not Mr. Farhadi has standing to make the instant motion because there is a Court order that granted the request for the appointment of a receiver and petitioner (who has standing) agrees with Mr. Farhadi’s choice.”
Third-Party Involvement in Dissolution Proceedings
Neither the customer’s motion nor the Court in Golan Floors cited the authority under which the customer was permitted to move for appointment of a receiver in the dissolution proceeding despite his not being a party to that proceeding, but a combination of BCL 1117 and 1008 is my best guess.
Additionally, under BCL 1008, the customer almost definitely could have asked for more than simply the appointment of a receiver, including that the merits of his claims—both his direct claims against Golan Floors and his veil-piercing claims against Hodak and Ruham—be adjudicated in the dissolution proceeding.
The BCL 1117/1008 combination can be a powerful tool for creditors seeking involvement in a contested dissolution proceeding. Based on my review of the caselaw, courts that consider a non-party’s request to intervene in a dissolution proceeding under CPLR 1012 or 1013 (the general intervenor statutes) tend to allow intervention only by owners or potential owners of the business (compare Matter of Karl Springer Woodworking, Ltd., 148 Misc 2d 626, 628 [Sup Ct 1990] [allowing wife to intervene in dissolution proceeding of husband’s woodworking business where ownership was marital property]; and Bich v Bich, Index No. 652092/2020 [Sup Ct NY County 2022] [granting minority members’ motion to intervene in case seeking dissolution of LLC); with Matter of Osman v Sternberg, 168 AD2d 490 [2d Dept 1990] [non-shareholders not entitled to intervene in corporate dissolution proceeding]). BCL 1117 and 1008 broaden this universe of potential intervenors.
Golan Floors demonstrates that under the right circumstances, a dogged creditor (or, as in this case, potential creditor) may properly be given a voice in a proceeding for dissolution of the corporation—potentially a more favorable option than attempting to enforce a judgment separately against a judicially dissolved entity. Perhaps other creditors will take note.