On October 23, 2013, Justice Schweitzer of the New York County Commercial Division issued a decision in Greenzweig v. Kenmare Mott Realty Assoc. Inc., 2013 NY Slip Op. 32735(U), illustrating the potential procedural complexities of lawsuits involving competing claims of ownership of a closely-held business.
Justice Schweitzer summarized the parties’ claims regarding their ownership of Kenmare Mott Realty Associates, Inc. as follows:
Morris pleads in the Complaint that: his brother Joseph started Kenmare Mott in 1989 and was its sole shareholder; and Joseph told Morris that his shares in the company, and the building it owned, were being held in trust for his four siblings and would pass to them in equal proportion on Joseph’s death.
Yaakov affirms that his Uncle Joseph gave him Kenmare Mott outright in 2003 because of their close relationship, and the care Yaakov had taken of him after his heart attack.
Bessie affirms that: in 1995, financial problems forced Joseph to assign his shares to his father, Bessie’s husband David; David then became the sole shareholder, officer and director of the company; Bessie took out a mortgage on her home to help the business, and Kenmare Mott has been making the monthly mortgage payments since 1995; in 2002, on Bessie’s 76th birthday, her husband David assigned her his shares in Kenmare Mott by handing her the stock certificates in front of family members; since then Kenmare Mott has paid Bessie $400 on a weekly basis; David died from cancer in 2003; after David’s death, Joseph managed the property and continued his mother’s weekly $400 payments; after Joseph had a heart attack, Yaakov started helping out with management as Joseph’s assistant; and after Joseph had a stroke, Yaakov took over the management, with assistance from his brother Levi, continuing to pay his grandmother the weekly $400.
Bessie also affirms that: Yaakov has been pocketing $9,000 in cash each month; he took out two mortgages on the building amounting to $1,454,671 without her consent; he has threatened to cut off her monthly payment of $400; she fired Yaakov and his brother Levi, but they refused to leave; Bessie hired a management company named A.M. Katz Management that notified the tenants that as of April 10, 2013, it would collect the rent and undertake services. In addition, Bessie attaches a translated Yiddish statement by Yaakov that he would abandon his claim if she would give him 25% of the business, and let him continue to manage the building with his brother.
These competing claims resulted in a host of both substantive and procedural disputes, including a motion to intervene and for the appointment of a receiver by Bessie Greenzweig. Justice Schweitzer granted those motions, holding that intervention was proper because “Bessie’s claim and the main action involve common questions of law and fact” and that there would “be no prejudice to the existing parties, nor will there be any delay if the court permits Bessie to intervene.” He further held that Ms. Greenzweig had met her burden of “mak[ing] a clear evidentiary showing of the necessity for the conservation of property and the protection of the interests of the litigant.” (Internal quotations omitted).
While the need for action to take control of the business and preserve its assets while the competing claims of ownership could be resolved was clear, parties should remember that there are downsides to the appointment of a receiver, including loss of control of the business, payment of a commission of up to 5% of the sums the business receives, CPLR 8004(a), and “[i]f, at the termination of a receivership, there are no funds in the hands of the receiver, the court . . . may fix the compensation of the receiver and the fees of his attorney” and “direct the party who moved for the appointment of the receiver to pay” that amount, CPLR 8004(b).