Three Strikes You’re Out: Sebrow Revisited
June 27, 2022
A year and a half ago, we blogged about a decision in which Bronx County Supreme Court Justice Llinet M. Rosado ruled that a shareholder’s alleged stock transfer through a bequest in his last will and testament was ineffective to transfer the stock to his widow where a written shareholders’ agreement prohibited transfers except to the shareholder’s “issue” (a legal term of art for children) or to any other person upon “unanimous consent” of all shareholders.
Sebrow v Sebrow (69 Misc 3d 1064 [Sup Ct, Bronx County 2020]), stands for the proposition, expressed by other courts in cases like Matter of Gusman (178 AD2d 597 [2d Dept 1991]), and Isaacson v Beau Label Corp., (93 AD2d 880 [2d Dept 1983]), that written transfer restrictions or buy-sell agreements governing closely-held business interests will trump, and potentially defeat, conflicting testamentary bequests. For that reason, closely-held business owners and their estate lawyers should always satisfy themselves that their estate plans do not contravene any of the decedent’s contracts.
Recently, three separate courts issued a trio of decisions in the ongoing Sebrow litigations both cementing and expanding upon the holdings of the original Sebrow decision. Each decision was a decisive loss for Berry Sebrow (“Betty”), the widow who claimed to have acquired shares of stock from her deceased husband, David Sebrow (“David”), through a residuary clause in David’s will.
The Injunction Decision
The first decision came on April 8, 2022, in a separate lawsuit the surviving shareholder, Zvi Sebrow (“Zvi”), commenced early this year against Betty alleging claims for a declaratory judgment that Betty has no ownership interest or control in the entity, Worbes Corporation (“Worbes”), tortious interference with prospective business relations, abuse of process, malicious prosecution, and breach of fiduciary duty. Zvi’s complaint alleged that Betty filed her original lawsuit without any merit and continued it for the sole purpose of obstructing Zvi’s efforts to sell a building owned by Worbes for several million dollars, including filing a false notice of pendency against the property, and acting “for the sole purpose of inflicting intentional monetary harm” on Worbes and Zvi.
The same day he filed his complaint, Zvi moved by order to show cause for a preliminary injunction seeking two forms of relief: (i) “authorizing” Zvi “to sign any contracts, deeds, or other documentation binding Worbes to a sale” of its assets; and (ii) “enjoining” Betty from “interfering” with the sale of Worbes’s assets.
In his affidavit and memorandum of law, Zvi explained that Worbes was insolvent and heavily in arrears on real property taxes for its single asset, a commercial property in the Bronx, with a tax foreclosure sale imminent. Zvi explained that he, as sole surviving shareholder of Worbes, had concluded it was in the best interest of Worbes to sell its building to a buyer named Maujer for $5.5 million to avoid foreclosure, and was on the cusp of doing just that, the only hindrance being Betty’s ongoing lawsuit against Zvi, where, post-dismissal, she had both: (i) moved for leave to reargue, renew, and to amend her dismissed complaint; and (ii) appealed to the Appellate Division – First Department from the dismissal of her original complaint.
Betty opposed the injunction motion with just an attorney affirmation.
In Worbes Corp. v Sebrow (74 Misc 3d 1229 [A] [Sup Ct, Bronx County 2022]), Justice Fidel E. Gomez granted Zvi’s motion for an injunction in full. The Court held:
Plaintiffs’ motion seeking a preliminary injunction and a mandatory preliminary injunction is granted. Significantly, on this record, plaintiffs establish all the requisite elements warranting the issuance of a preliminary injunction, including a high likelihood of success on the merits of their cause of action for declaratory judgment. Moreover, because absent the sale of [the property] to Maujer, it is likely that it will be sold upon the conclusion of the tax foreclosure action for less than the sum Maujer is willing to pay, it is clear that the circumstances here are extraordinary so as to warrant the issuance of a mandatory preliminary injunction allowing the sale . . . .
Justice Gomez’s decision is lengthy and thoughtful – well worth a read.
The Appellate Decision
The second decision came on May 19, 2022, in the form of a total affirmance of Justice Rosado’s dismissal of Betty’s original complaint.
In Sebrow v Sebrow (205 AD3d 563 [1st Dept 2022]), the Appellate Division ruled:
The documentary evidence on the motion to dismiss established that plaintiff is not a shareholder of Worbes Corporation and thus does not have standing to bring either individual or derivative claims. Specifically, the terms of the stockholders’ agreement provide, among other things, that the shares owned by plaintiff’s deceased husband – shares that plaintiff claims she now owns – could be transferred only with the consent of defendant or by a testamentary disposition to the deceased husband’s issue. However, because neither one of these events occurred, the stock was never transferred to plaintiff.
The Court also held:
- Betty’s “conclusory allegation that her husband’s signature on the agreement was a forgery” were “insufficient to create an issue of fact contesting the signature’s authenticity”;
- Betty “submitted no evidence supporting her argument that her husband had actually signed a different shareholder agreement that did not prevent him from bequeathing or otherwise transferring his ownership interest in Worbes to her”; and
- “In any event, given [Betty’s] complaint, which asserts her interest in the shares based upon the terms of the stockholders’ agreement,” she “cannot now be heard to argue that the agreement is not legitimate or is of no legal effect.”
You can read the appeal briefs here, here, and here.
The Reargument, Renewal, and Amendment Decision
The third decision came on May 23, 2022, when Bronx County Supreme Court Justice Mary Ann Brigantti issued a Decision and Order denying in full Betty’s motion for leave to reargue, renew, or replead the dismissal of her original complaint. Featured front and center was the appeal court’s decision from just four days earlier. Justice Brigantti ruled that in light of the Appellate Division’s decision, in which Betty’s arguments “were rejected by the Appellate Division,” Betty failed to demonstrate any grounds for reargument or renewal.
Given the Courts’ rulings that Betty failed to become shareholder of Worbes, what happened to David’s stock upon his death?
The shareholders’ agreement provided that any attempted transfer or disposition not in conformity with the shareholders’ agreement “shall be a nullity and unenforceable.” In his injunction memorandum of law, Zvi argued that when David’s alleged residual bequest of his stock to Betty failed, his “shares of Worbes were forfeited back to the corporation, rendering Zvi Sebrow, to the exclusion of all others, the sole owner of Worbes.”
Justice Gomez agreed, ruling on the “likelihood of success” prong “it is likely that the Court will issue a declaratory judgment” declaring that “because there was never a testamentary disposition to [David’s issue] and because [Zvi] never consented to the transfer of [David]’s shares to [Betty], upon [David]’s death, [David]’s shares in Worbes reverted to Worbes.”
One issue left unresolved by the three decisions, and presumably open to future litigation, is whether David’s estate will be entitled to compensation for his shares, or for a pro rata payment from the proceeds of the sale of Worbes’s valuable building. Worbes’s shareholders’ agreement contained no buy-sell provision, nor a formula for compensating a deceased shareholder’s estate for his stock, but it seems hard to believe a court would conclude the Estate would be entitled to nothing for David’s shares. In fact, pursuant to Justice Gomez’s injunction decision, just a few days ago, Zvi’s attorneys paid into court in excess of $4 million in surplus proceeds from the sale of the building, presumably for eventual distribution among the litigants.