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NY Business Divorce Information on Dissolution and Other Disputes Among Owners of New York Corporations, LLCs and Partnerships

Court Dismisses Shareholder Derivative Action Due to Inconsistent Stock Ownership Claim in Prior Lawsuit

Posted in Derivative Actions, Family-Owned Businesses, Standing

Note to Readers:

This month marks the 5th anniversary of the New York Business Divorce blog. Every Monday morning, without fail for five years, I’ve posted a new article highlighting a new court decision or other development of interest to lawyers, business owners, business appraisers, and anyone else concerned with broken relationships among owners of closely held business entities.

When I started the blog, my greatest fear was running out of things to write about. After five years of blogging, I can say with great confidence that, the human condition and human relations being what they are, there is an endless stream of business partners falling out of love and into court. Of course, I’m also very grateful to the many judges in New York who take the time and care to write informative decisions in cases involving dissolution and other disputes among business partners.

The most rewarding part of blogging has been the many new relationships it’s led to over the last five years with business owners, other lawyers, other bloggers, accountants, appraisers, and academics. I’ve learned from them that education can be a wonderful, two-way street.

I appreciate the feedback I get from readers. If you’d like to share thoughts about anything I write about, please post a comment, it’s quick and easy to do. If you’re a lawyer (or a judge!) with an unpublished decision that might be of interest to other readers, send it to me. If there’s anything else you’d like me to write about, let me know.

And now, let’s start the next five years.

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I doubt Mark Twain had litigation in mind when he offered the advice, “Always tell the truth. That way, you don’t have to remember what you said.” For litigants, though, failing to remember or, worse yet, negating what was said in a prior lawsuit can have drastic consequences when a judge in a subsequent lawsuit concludes that the same litigant, having succeeded in the prior case by taking one position, is now taking a contrary position simply because his interests have changed.

I’ve previously written several posts on shareholder disputes in which, as it’s known, the doctrine of judicial estoppel against inconsistent positions has been raised successfully as a defense to a corporate dissolution petition or other shareholder suit:

  • In Light v. Boussi (read here), Justice Carolyn Demarest invoked judicial estoppel to dismiss a dissolution petition by a putative 50% shareholder who failed to disclose his alleged stock ownership in his prior bankruptcy proceeding.
  • In Glatzer v. Webster (read here), also decided by Justice Demarest, the court applied judicial estoppel to defeat a claim of ownership in an LLC by an ex-spouse who, in prior divorce proceedings, disclaimed an ownership interest.
  • In Watkins v. J C Land Development, Ltd. (read here), Justice Emily Pines dismissed a shareholder derivative action by a putative 50% shareholder who, in prior federal sentencing proceedings, failed to disclose his alleged stock holding.

The Rubio Lawsuit

Justice Pines had another opportunity to apply judicial estoppel in her decision last month in Rubio v. Rubio, 2012 NY Slip Op 52218(U) (Sup Ct Suffolk County Nov. 26, 2012), involving a shareholder dispute over a family-owned auto dealership. In Rubio, it was the plaintiff’s inconsistent disavowal of a stock ownership interest in prior litigation with his ex-wife that proved fatal to his shareholder derivative claims against his brother and others in the suit before Justice Pines.

Smithtown Nissan, Inc. was formed by members of the Rubio family in 1988 to operate a Long Island auto dealership. At some point, the share ownership became 50% for the father, Joseph, and 25% each for brothers Gary and Thomas, both of whom were actively involved in running the business.

In 2012, Gary filed a shareholder’s derivative action against Thomas and outside professionals alleging claims for corporate waste and improper diversion of corporate assets. Gary’s complaint alleged that he owned 25% of the corporation’s shares.

Thomas and the other defendants moved to dismiss the complaint on the ground Gary owned no shares. They primarily relied on a fully executed Purchase and Sale Agreement dated October 2009 reflecting Gary’s sale of his 24.5% stock interest to his father, Joseph, in consideration of the latter’s payment of a $188,000 mortgage loan on Gary’s residence.

Gary responded by affidavit claiming that the 2009 stock transfer to his father, which was intended to raise funds in the midst of Gary’s divorce from his wife, Jennifer, was never consummated. In support of his claim, Gary proffered the corporation’s 2009 and 2010 tax returns identifying him as a 25% shareholder. He also proffered a November 2011 letter from the lawyer who represented Thomas and Joseph in a separate lawsuit brought by Jennifer against the Rubios and the corporation in which she sought to set aside the 2009 stock transfer as a fraudulent conveyance. The letter advised Joseph that it would constitute perjury were he to state that a  transfer of Gary’s interest had in fact occurred.

In reply, Thomas and the other defendants pointed to Gary’s April 2010 deposition testimony and May 2011 verified answer to Jennifer’s complaint, in which Gary stated under oath that he transferred all of his shares to his father in exchange for his father’s payment of Gary’s mortgage loan; that the transfer was not fraudulent; and that it was done for his wife’s benefit. The defendants also submitted a so-ordered settlement stipulation and the parties’ allocution in Jennifer’s lawsuit, under which the corporation agreed to continue Gary’s employment and salary from which payments would be made to Jennifer. The court would not have approved the settlement, defendants argued, if it had any inkling that Gary was still a shareholder.

Justice Pines’s Ruling

Justice Pines’s analysis begins with a quoted description of the judicial estoppel defense as laid out in her prior decision in the above-mentioned Watkins case:

The well recognized doctrine of judicial estoppel is designed to protect the integrity of the court system as a whole by prohibiting deliberate alteration of a stated position before the same or different courts in order to obtain favorable treatment. New Hampshire v Maine, 532 US 742 (2001); Festinger v Edrich, 32 AD3d 412 (2nd Dep’t 2006). The doctrine prohibits a party who, having obtained a favorable ruling based upon an asserted position, seeks to alter the position simply because the litigant’s interests have changed. Jones Lang Wooten USA v Leboeuf, Lamb, Greene & MacRae, 243 AD2d 168 (1st Dep’t 1998) leave to appeal dismissed, 92 NY2d 962 (1998).

Justice Pines next concludes that “[t]here is no question that what occurred in Watkins is akin to the scenario set forth before the Court in the case at bar.” Here’s how she sums up Gary’s untenable position:

Faced with a litigation commenced by his ex spouse, that Gary Rubio had transferred his stock in Smithtown Nissan, Inc. in 2009, in violation of the Debtor and Creditor Law, in order to avoid his obligations under the settlement of his matrimonial action, Gary Rubio, both in sworn testimony and in verified pleadings before this Court’s colleague, Justice Gerald Asher, stated that he had, indeed, transferred all of his shares of such entity to his father, Joseph Rubio, in exchange for $188,509.87, which sum he utilized to make mortgage payments on the marital residence. Gary Rubio appended, in the pleadings before that Court, both a copy of the canceled check demonstrating that he had received and utilized the funds and a copy of the 2009 stock transfer agreement. Now the same party states under oath before this Court that the transfer never occurred.

Justice Pines next addresses and rejects Gary’s argument that judicial estoppel does not apply because, whatever he stated in the prior litigation against his ex-wife, that lawsuit terminated in settlement as opposed to a judgment. First, she writes, “the settlement was approved by Justice Asher on the record.” Second,

it is clear from the total record in that case, that there was no dispute and indeed that both parties before Justice Asher submitted sworn statements in the action before that jurist that Gary Rubio had transferred all his shares in the corporation that is the subject of this lawsuit and was not an owner of the corporation at the time he appeared before Justice Asher and settled his ex-wife’s claim of over $568,761.11 for approximately $200,000.00. The combination of the sworn pleadings and the deposition testimony by Gary Rubio in connection with [Jennifer's] action, were part of the record before another court of coordinate jurisdiction.

In addition, Justice Pines finds ”no rational basis” on which the settlement of the prior litigation by Gary’s ex-wife against the corporation “could have occurred if Gary Rubio was still a shareholder of that entity when the stipulation was presented to the Court.” And what of the corporation’s 2010 tax return listing Gary as a 25% shareholder notwithstanding the 2009 stock transfer agreement with his father? “[A]s damaging as that may appear,” Justice Pines observes, “and, in this Court’s opinion it should be corrected, it was not presented to a court in order to avoid a specific action, i.e., the invasion of corporate assets by the ex spouse of Gary Rubio.”

I’ve been handling business divorce litigation far too long not to know that what meets the outsider’s eye when reading court decisions in cases of this sort does not reveal the whole story. There’s some awfully curious stuff going on in the background of Rubio, including a reference in the decision to Thomas’s recent “ouster” from control of the dealership “by vote of Gary Rubio and Joseph Rubio,” and another reference to a 2011 “gift” by Joseph of one-third of his shares in the corporation to Gary, which Gary did not rely on in opposing the dismissal motion. If Gary and Joseph are united in interest, why didn’t they join forces to sue Thomas in the name and right of the corporation, rather than Gary as a minority shareholder bringing a derivative action? Then, of course, there’s the unamended 2010 tax return listing Gary as a shareholder and the 2010 letter from Joseph’s attorney advising him it would constitute perjury to state that Gary had in fact transferred shares to him. Is this a case of opportunistic behavior tied to shifting alliances within the family?

Likely we’ll never know the answer. In the meantime, we’ll just have to be content with a better understanding of judicial estoppel and its application when, as in Rubio, the requisite prior “favorable ruling” consists of a so-ordered stipulation of settlement.