Matter of Boucher (Carriage House Realty Corp.), 2013 NY Slip Op 02571 (2d Dept Apr. 17, 2013), decided last week by a Brooklyn appellate panel, offers a routine narrative of a dysfunctional close corporation owned by two, 50/50 shareholders, one of whom sought and won an order granting judicial dissolution. What makes it noteworthy is the court’s handling of an issue that repeatedly crops up in 50/50 cases, namely, the engagement of counsel by the respondent shareholder to represent the corporation at the corporation’s expense in opposition to the dissolution petition. The lawyer who appeared for the corporation in Boucher learned the hard way that courts will not allow one 50% shareholder to use corporate funds to resist dissolution sought by the other 50% shareholder.

Last week’s decision caps a five-year litigation saga that started when Tracy Boucher, as 50% shareholder of a real estate brokerage named Carriage House Realty Corp., sued for judicial dissolution claiming deadlock under Business Corporation Law § 1104. The dissolution petition named the corporation as the sole respondent. The other 50% shareholder, Joan Gorta, engaged counsel who appeared and filed opposing papers on behalf of the corporation.

In April 2008, Suffolk County Justice Denise F. Molia issued an order (read here) granting the dissolution petition and appointing a receiver based on her finding that the deadlock between Boucher and Gorta was preventing the corporation from operating for the mutual benefit of its shareholders. About two weeks later, the corporation’s attorney filed a motion to be relieved as counsel, which Justice Molia granted by order issued in May 2008 (read here). Ms. Gorta subsequently retained new counsel to represent her personally. In November 2008, Justice Molia approved a sale of the corporation’s assets to Ms. Gorta (read order here).

In July 2010, the receiver sought an order approving his and his counsel’s respective commissions and fees, and authorizing final distributions of the remaining corporate proceeds to the two shareholders. While the motion was pending, the corporation’s lawyer who had exited the case in May 2008 filed his own motion seeking payment from the corporation over $23,000 in unpaid fees for the services he rendered opposing the dissolution petition. Justice Molia granted the receiver’s motion and denied the corporation lawyer’s motion by order issued in September 2011 (read here), stating that the lawyer lacked standing in the proceeding and had no procedural right to intervene in the case.

The lawyer filed an appeal. In its order last week, the Appellate Division, Second Department, affirmed Justice Molia’s order denying his fee application, but not on the procedural grounds cited by the lower court. “Specifically,” the appellate court wrote,

there is no authority for allowing counsel fees incurred in defending a dissolution proceeding of this type to be paid out of corporate funds.

The decision cited several case precedents for the quoted proposition, including Matter of Park Inn Ford, Inc., 249 AD2d 307 (1st Dept 1998); Matter of Rappaport, 110 AD2d 639 (2d Dept 1985); and Matter of Cantelmo, 278 AD 800 (1st Dept 1951). In Cantelmo, the court commented that the corporate “attorneys’ recourse is against . . . the party who retained them,” meaning the 50% shareholder who hired the attorney to appear on behalf of the corporation. Perhaps Ms. Gorta’s legal travails are not over.

It can be tempting for the shareholder with the power of the company checkbook to tilt the playing field by tapping company funds to finance litigation against a co-owner. But if you think about it, one 50% shareholder should not have to subsidize indirectly the other 50% shareholder’s legal fees in what essentially is a dispute between shareholders. The corporation, although necessarily named as a respondent, is a nominal party that should not, as the court stated in Matter of Clemente Bros., Inc., 19 AD2d 568 (3d Dept 1963), assume a “militant alignment on the side of one of two equal, discordant stockholders”. Also, as a matter of corporate governance a 50% shareholder ordinarily lacks voting power and authority as a director or officer to engage counsel on the corporation’s behalf, particularly in matters outside the ordinary course of business.

You may ask, is the rule different in dissolution proceedings brought by oppressed minority shareholders under Business Corporation Law § 1104-a? Yes and no. Dissolution proceedings under § 1104-a trigger the corporation’s and respondent shareholder’s right to avoid dissolution by electing to purchase the petitioner’s shares for fair value under Business Corporation Law § 1118. In Matter of Levitt (Public Relations Aids, Inc.), 109 AD2d 502 (1st Dept 1985), the court opined that it can be proper for a shareholder to use company funds for his or her legal fees after — but not before — an election is made to purchase the petitioner’s shares, since all that remains is the determination of the fair value of the petitioner’s shares.