stock certificate 1First a books and records proceeding. Then a declaratory judgment action. Then dissolution proceedings. Six years of litigation including two appellate rulings, just to establish who’s a shareholder and who’s not, all because the owners of two closely held corporations formed decades ago never bothered to issue stock certificates or otherwise attend to corporate formalities.

It didn’t help that the two corporations, formed in the 1960’s, never elected pass-through taxation as subchapter S corporations, hence the companies never issued form K-1’s identifying the shareholders and their stock percentages.

In last week’s appellate ruling in Zwarycz v Marnia Construction, Inc., 2015 NY Slip Op 06239 [2d Dept July 22, 2015], which affirmed a June 2014 post-trial decision by Westchester County Supreme Court Justice Robert DiBella, the plaintiff Michael Zwarycz overcame the absence of a stock certificate or any other direct evidence of share ownership to establish his 50% interest in two corporations that own residential apartment buildings in Yonkers, New York.

Zwarycz’s victory last year before Justice DiBella turned bittersweet, however, when his follow-up petitions to dissolve the two corporations based on deadlock and internal dissension were dismissed by a different judge. Those November 2014 rulings are the subject of Zwarycz’s pending appeals.

Pitted against Zwarycz are the two adult children of his original business partner, William Sullivan, Sr., who died in 1973, and the estate of Sullivan Sr.’s sister, Helen Sullivan, who died in 2001. Sullivan Sr.’s status as a shareholder was never in dispute, nor was that of his two children who inherited from him a combined 50% interest. Zwarycz contended that from inception he owned the other 50%. In opposition, Helen’s executrix, backed by Sullivan Sr.’s two children, contended that Sullivan Sr. and Helen were the original 50/50 shareholders of both corporations.

The legal tussle started in 2009, when Zwarycz allegedly was locked out of the corporations and filed a proceeding to obtain the two corporations’ books and records, in response to which the Sullivans refused to recognize his stock ownership. The court granted Zwarycz access, only to discover no records of share certificates having ever been issued to anyone, no list of shareholders, officers and directors, and no records of any director or shareholder meetings.

Zwarycz then commenced a second lawsuit seeking a declaratory judgment that he owns 50% of the outstanding shares of the two corporations, named Marnia Construction, Inc. and Stemar Construction, Inc. In 2011, the court granted summary judgment dismissing Zwarycz’s suit on the grounds that it was barred by the statute of limitations and the doctrine of laches. Zwarycz successfully appealed and had his complaint reinstated by the Appellate Division, Second Department, in January 2013 (read here).

Justice DiBella conducted a non-jury trial in July 2013 and issued his Decision and Order in June 2014 (read here), granting judgment in Zwarycz’s favor. The court’s 17-page decision lays out in detail much of the testimony and exhibits offered by both sides, but for present purposes I’ll highlight the court’s key findings:

  • Zwarycz, an experienced home builder, brought the concept of the business to Sullivan Sr. and “was the individual responsible for conjuring up this venture.”
  • The names of the two corporations derived from the first names of their respective wives.
  • Zwarycz “made direct capital contributions to each corporation by transferring his 50% ownership of vacant land to both corporations” for development as residential apartment buildings.
  • Zwarycz’s home address was used as the corporate address of both corporations.
  • Zwarycz worked six days a week as a general contractor for more than a year on each project, without compensation.
  • Zwarycz hired and assisted an attorney to apply for a zoning variance for one of the projects. The attorney testified that he understood Zwarycz and Sullivan Sr. were “partners and shareholders.”
  • Numerous documents identified Zwarycz as the corporations’ president.

Justice DiBella found the Sullivans’ view of the evidence — that Zwarycz was only a janitor or superintendent — “not credible.” Justice DiBella also found that not until after Sullivan Sr. died “that there is any evidence to support defendants’ contentions of Helen’s ownership interests.”

The Second Department’s affirmance last week of Justice DiBella’s ruling found that “credible testimony and other evidence regarding [Zwarycz’s] contributions to, and involvement with, Stemar and Marnia, prior to William Sullivan’s death, supported his claim that he was the owner of 50% of the shares of each corporation.” Commenting on the absence of any stock certificate supporting Zwarycz’s claim, the court wrote:

The mere fact that a corporation did not issue any stock certificates does not preclude a finding that a particular individual has the rights of a shareholder (see Kun v Fulop, 71 AD3d at 833; French v French, 288 AD2d 256, 256; Blank v Blank, 256 AD2d 688). In the absence of any stock certificate, a court must examine other available evidence to determine the validity of a putative shareholder’s claim (see Kun v Fulop, 71 AD3d at 833; Hunt v Hunt, 222 AD2d 759, 760).

A Pyrrhic Victory?

On the heels of Justice DiBella’s ruling, in August 2014, Zwarycz filed dual petitions to dissolve the two corporations under Section 1104 of the Business Corporation Law based on deadlock and internal dissension (read here and here). The Sullivans opposed the petitions.

In two, almost identical decisions issued in October 2014 (read here and here), Westchester County Commercial Division Justice Alan D. Scheinkman dismissed Zwarycz’s claims for dissolution “without prejudice to these claims being pursued again in the event a shareholders’ meeting is not held within a reasonable time or in the event that, subsequent to the date hereto, cause for dissolution arises.” Justice Scheinkman found that,

[w]hile it is true that there is enmity between the parties, and while it is also true that counsel for the [Sullivans] represented that [they] would not agree to a shareholders’ meeting pending the outcome of an appeal [from Justice DiBella’s decision], the fact remains that [each] corporation owns real estate and has historically made a profit.

Justice Scheinkman also found that the Sullivans’ previous refusal to acknowledge Zwarycz’s stock ownership neither was “frivolous” nor justified a conclusion that the two sides are unable to manage the corporations together prospectively.

It appears from the public record that Zwarycz is due later this month to perfect his appeals from Justice Scheinkman’s orders denying dissolution, which apparently were deferred pending the determination of the Sullivans’ appeal from Justice DiBella’s decision. I imagine Zwarycz won’t get a decision until sometime in 2016, which will make it an even 50 years since the now 88-year old Zwarycz went into business with Sullivan Sr.

At Zwarycz’s advanced age, who knows whether, via dissolution and liquidation or otherwise, he’ll ever see any return on his investment in the two companies.

It’s worth speculating (admittedly with the benefit of hindsight) whether Zwarycz might have been better off filing dissolution petitions back in 2009, instead of seeking only a declaration of his 50% ownership, in which case the ownership dispute would have played out as a challenge to Zwarycz’s standing to seek dissolution. Maybe, just maybe, Zwarycz would have benefitted from having the same judge hearing the live testimony concerning Zwarycz’s contributions to the corporations’ existence and success — and the other shareholders’ unconvincing refusal to acknowledge the same — concurrently decide the equities of a dissolution remedy.