Shareholder Fails to Meet Standard for Corporate Dissolution

On January 10, 2019, Justice Friedman of the New York County Commercial Division issued a decision in Matter of Quazzo v. 9 Charlton St. Corp., 2019 NY Slip Op. 30098(U), holding that a shareholder had failed to meet the standard for corporate dissolution on summary judgment, explaining:

Business Corporation Law § 1104-a (a) provides in pertinent part:

The holders of shares representing twenty percent or more of the votes of all outstanding shares of a corporation ... entitled to vote in an election of directors may present a petition of dissolution on one or more of the following grounds: (1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; (2) 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.

Cristina fails on this record to demonstrate oppression as a matter of law. Oppressive actions have been defined to refer to conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner's expectations in entering the partcular enterprise. There is authority that where a party has contributed capital or services to a corporation, oppression may be based on the very denial of a party's shareholder status. Here, in contrast, it is undisputed that Cristina did not commit capital to Charlton (or the other corporations), and did not have an active role in Charlton (or the other corporations). Cristina does not submit legal authority, and the court does not find, that under these circumstances, Ugo's denial of her status as a shareholder of Charlton rises to the level of oppression warranting dissolution of the corporation.

Nor does Cristina otherwise establish oppression on this record. As to her claim that she has been denied access to books and records of Charlton, it is undisputed that she did not demand such access until November 2010, after she requested a distribution from a family trust account and she rejected Ugo's demand that she sign a general release as a condition of the distribution.

Cristina also fails to demonstrate oppression based on denial to her of distributions for Charlton, It is undisputed that Stephen and Marco each received a distribution from Charlton for 2010 of approximately $6,800. There is no evidence, however, that any other distributions---let alone, substantial distributions---were made over the many years in which Cristina claims she has had an ownership interest in Charlton.

To the extent that Cristina bases her oppression claim on forgery of her signature on corporate documents, she relies on the affidavit of Khody Detwiler, a forensic document examiner, opining that Cristina's signature was forged on four corporate documents in 2003. Ugo and Stephen both deny any knowledge of: or involvement in, the alleged forgeries. Although their denials are conclusory, assessment of the expert's opinion requires a credibility determination, which is not properly made on a motion for summary judgment.

Finally, Cristina's claim of financial mismanagement is based on the affidavit of James Donohue, Cristina's forensic accountant, opining that rents have not been paid into the corporation's accounts, funds have been transferred to third-party accounts (of Walter Gabutti and Fiorella Carli), and taxes have not been paid. Ugo opposes this claim, stating in conclusory fashion: "Insofar as I am concerned, nothing inappropriate has taken place." Stephen denies ever having had any involvement in the management of Charlton or the other corporations, and states that Ugo alone managed the corporations. He further claims that, after he learned of Cristina's allegations in these lawsuits, he urged his father to hire an independent third-party property management firm. Citing Cristina's allegations of mismanagement, Stephen asserts that the only evidence of asset misuse, if any, points to Ugo. Neither Ugo nor Stephen submits evidence responding to the claims of Cristina's forensic accountant. Nevertheless, Mr. Donohue forthrightly acknowledges that certain records regarding rents and deposits were unavailable to him, and that he made estimates or relied on evidence not in the record, in calculating the discrepancy between rents and tax returns and between loans to the corporations from third parties and transfers from the corporate accounts to third party accounts. The court accordingly holds that Mr. Donohue's opinion cannot be adequately assessed on this record and that a triable issued of fact exists as to the alleged mismanagement.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.