New York’s statutes authorizing judicial dissolution of close corporations require the petitioner to own 50% of the voting shares in deadlock cases and at least 20% in shareholder oppression cases.
I’ve featured on this blog many cases involving battles over the petitioner’s stock ownership and standing to seek dissolution. One judge captured the essence of the problem when he wrote, in Matter of Pappas (Corfian Enterprises, Inc.), that in ”the real world, particularly that in which close corporations operate, clear evidence of share ownership is often not found in the corporate books and records, for any number of reasons.”
You can say that again. Last week, a panel of the Albany-based Appellate Division, Third Department, in Matter of Sunburst Associates, Inc., 2010 NY Slip Op 02135 (3d Dept Mar. 22, 2012), reversed a trial court’s decision that had thrown out a dissolution petition on the ground the petitioner owned no shares in a corporation that operated a small chain of tanning salons. What makes the case particularly interesting is the fact that, on the one hand, the respondent relied on a document signed by the petitioner confirming that the respondent was the sole shareholder and, on the other hand, the petitioner relied on the corporation’s subsequent tax returns, some of which were signed by the respondent, identifying the two parties as 50/50 shareholders. These two ingredients were just part of an evidentiary bouillabaisse of contradictory documents and conflicting testimony offered at trial.
The case stems from a petition brought under §1104 of the Business Corporation Law for judicial dissolution of Sunburst Associates, Inc. based on 50/50 shareholder deadlock. The petitioner, Michael Vilardi, and the respondent, Fred Babbino, each as a 50% shareholder, formed Sunburst in 1995 to operate a pair of tanning salons in the greater Albany, New York area. The operations later expanded to five locations. Babbino had principal responsibility for finance and personnel, Vilardi for operations. The two owners received equal compensation.
The trial centered on two key events in 2007. First, in July 2007, the owners signed an agreement whereby Vilardi endorsed his stock certificate over to Babbino in escrow purportedly to secure an unquantified and unidentified indebtedness by Vilardi to Babbino “in relation to corporate activities.” A recital in the agreement left a blank space for the dollar amount of the indebtedness; it was never filled in. The agreement provided that delivery of the stock to Babbino “shall not change . . . [Vilardi's] voting rights or status as an officer, director or shareholder of the corporation” and that the corporation shall carry on “as if [the] shares of stock had not been transferred to [Babbino] by [Vilardi].” The agreement contained no terms addressing the duration of the escrow or the conditions for release of the stock from escrow. Vilardi claimed that he had previously endorsed in blank his stock certificate and had left it in the company safe; that he received no consideration from Babbino for transfer of shares; and that not until shortly before trial did he learn that someone had filled in the words, for “value received,” on the back of the certificate.
Second, in August 2007, Vilardi and Babbino signed an oddly named ”statement of corporate action” stating that Babbino was the sole shareholder, officer and director of Sunburst as of July 30, 2007. The document further stated that it was intended to “confirm to those with whom Sunburst Associates, Inc. does business as to who the corporate officers are, and who has authority to act for and on behalf of [Sunburst].” Babbino signed the document as the sole shareholder, director and officer of Sunburst, and Vilardi signed it to affirm that the statements set forth therein were “true and accurate for Sunburst.” Vilardi contended that the statement did not effect a transfer of stock ownership and was only intended for use with Sunburst’s lenders to show that Babbino, whose credit history was stronger than Vilardi’s, was in control of Sunburst.
At the trial Vilardi placed in evidence unsigned copies of the corporation’s tax returns for the years 2007, 2008 and 2009, all of which identified Vilardi and Babbino as 50/50 shareholders. Babbino testified that he “believes” he signed the 2007 returns, that he was unsure if he signed the 2008 returns, and that he did not sign the 2009 returns, although he did admit signing and filing his personal returns for those years inclusive of Sunburst’s K-1s reporting his 50% ownership. Babbino contended that the tax returns were not probative of ownership because the tax preparer was “very good friends” with Vilardi and admitted in her testimony that the returns may have been “inaccurate.” Babbino also contended that upon discovering the “mistake” he attempted to correct the tax returns but was stymied by the tax preparer.
The parties offered sharply conflicting accounts of their relationship and roles in the company in the period 2007 through 2010 when Vilardi sued for dissolution. Babbino contended that Vilardi was a mere executive employee throughout the period. Vilardi contended there was no change in their respective management duties or shareholder status following the 2007 documents; that he invested $50,000 in the business in each subsequent year; and that he continued to receive the same compensation. Babbino claimed that the $50,000 “investments” were intended to ”offset” Vilardi’s compensation.
Trial Court’s Decision
In September 2010, the trial court held an evidentiary hearing on the issue of whether Vilardi was a 50% shareholder as required for standing under BCL §1104. On November 23, 2010, the trial court issued a one-page Decision and Order dismissing the petition based on a bare recital of ”the Court having decided and found that petitioner, Michael Vilardi, owns no stock in Sunburst Associates, Inc., and that respondent, Fred Babbino owns one hundred percent of the stock in said corporation.”
The Appellate Decision
Vilardi appealed to the Appellate Division, Third Department. His appeal brief (read here) argued that the July 2007 escrow agreement lacked consideration and was unenforceable; that even if enforceable the escrow agreement did not effectuate an outright transfer of his shares to Babbino; that the endorsement on the back of the stock certificate and the August 2007 ”statement of corporate action” could not be considered apart from the escrow agreement and likewise did not effectuate a transfer of his shares to Babbino; and that the parties’ subsequent conduct including the 2007-09 tax returns eviscerated Babbino’s claim of sole ownership of all of Sunburst’s shares.
Babbino’s opposing brief (read here) primarily argued that the parol evidence rule precluded any consideration by the court of extrinsic evidence to disprove Vilardi’s unrestricted endorsement for “value received” of his stock certificate over to Babbino and Vilardi’s unequivocal representation in the August 2007 statement of Babbino’s 100% ownership. As to the blank dollar amount in the escrow agreement and the issue of consideration, Babbino pointed to the accountant’s testimony that Vilardi at the time was indebted to Babbino for $187,000, and he argued that the omission did not render the documents so ambiguous as to justify circumventing the parol evidence rule. Babbino also argued that the weight of the evidence as a whole justified the trial court’s determination that Vilardi held no shares in Sunburst.
And the winner is: neither side! Although it rejected Babbino’s reliance on the parol evidence rule, the appellate court found that it could not exercise “intelligent” appellate review due to the trial court’s omission of any findings of fact in its bare-bones decision. Here’s what the court said:
[U]pon our review of the record, in view of the conflicting testimony and documentation presented by the parties — reflecting two completely divergent explanations of the facts — resolution of the issue of standing depends, in large part, upon credibility determinations. However, in its decision and order, Supreme Court simply indicated that it had “decided and found the essential facts which the [c]ourt deems established by the evidence,” without any elaboration whatsoever as to what those facts were, what evidence it found determinative and what, if any, credibility determinations it made (compare Matter of Pickwick Realty, 246 AD2d 863, 865-866 ; Matter of Pappas v Corfian Enters., Ltd., 22 Misc 3d 1113[A] , affd 76 AD3d 679 ). While we recognize that “this Court’s authority ‘is as broad as that of the trial court’ and includes the power to ‘render the judgment it finds warranted by the facts, taking into account in a close case the fact that the trial judge had the advantage of seeing the witnesses’” (Matter of Pappas v Corfian Enters., Ltd., 76 AD3d 679, 679 , quoting Northern Westchester Professional Park Assoc. v Town of Bedford, 60 NY2d 492, 499 ), where, as here, we are unable to discern the basis of Supreme Court’s determination, intelligent appellate review is foreclosed. We, therefore, reverse the order and remit the matter to Supreme Court to make additional findings, after such further proceedings as it deems appropriate, and to render a new decision and order, accordingly.
Disappointing? Yes. Surprising? No. Unlike a jury verdict, a decision upon a “bench” trial before a judge entitles the losing side to “de novo” review of the trial record by the appellate court. In other words, the appellate court can make its own findings and reach its own conclusions based on its independent review of the trial testimony and exhibits, the one exception being witness credibility determinations ”in a close case” where the trial court has the advantage of seeing and hearing the witnesses first hand. But the appellate function remains one of review, and without any findings of fact or credibility assessment by the trial judge, the appellate court is incapable of fulfilling its role.
So now we wait to see what happens next before the trial court. Note that the appellate decision in Sunburst leaves it up to the trial judge whether to conduct any further proceedings before rendering a new decision with the requisite findings. It will be interesting to see if the appellate court’s rejection of Babbino’s parol evidence argument, which presumably he also raised before the trial court, will have any effect. Whatever the outcome, I’ll wager the case makes a return trip to the Appellate Division.