Contender to 50% Stock Interest Wins Decisive Round in Battle Over Nominee Agreement
I previously reported on a March 2009 appellate decision in a case called Yemini v. Goldberg involving a fight over stock ownership in a holding company called ANO, Inc. The appeals court reversed a trial court decision denying Oded Goldberg's application for a preliminary injunction against Ari Yemini. The dispute centered on the enforceability of a Nominee Agreement that identified Goldberg as the "true owner" of a 50% interest in ANO and designated Yemini as Goldberg's nominee to act on the latter's behalf with respect to the acquisition and operation by ANO of what became a two-thirds interest in another company called Candlewood Holdings, Inc. The appeals court held that the Nominee Agreement was an enforceable "declaration of trust" notwithstanding that Goldberg's 50% interest never was reflected in ANO's corporate records or tax returns, or that other corporate documents including a shareholders agreement expressly identified Yemini as 100% stockholder, or that Goldberg omitted ANO in his net worth affidavit in legal proceedings with his ex-wife.
Now the other shoe has dropped on Yemini. Following the appellate decision Goldberg moved for partial summary judgment prohibiting Yemini from holding himself out as ANO's 100% owner and directing Yemini to issue and deliver certificates to Goldberg's wholly-owned assignee, Goldberg Commodities, Inc., reflecting its 50% ownership of ANO. In addition to the Nominee Agreement, Goldberg offered evidence of his funding of the Candlewood acquisition and a subsequent $1.5 million loan agreement that identified each of Goldberg and Yemini as 50% owners of ANO.
In opposition, Yemini contended that the Nominee Agreement was subject to a verbal agreement conditioning its effectiveness on Goldberg investing in the Candlewood acquisition. Yemini alleged that the approximately $200,000 Goldberg claimed to have invested in fact was cash provided by Yemini to Goldberg, which Goldberg deposited and then wire transferred to ANO's account, and thus represented Yemini's contribution, not Goldberg's. Yemini also offered a $122,000 promissory note dated over a year later from Goldberg to Yemini, and a letter from Goldberg a few years after that referring generally to a "verbal agreement" surrounding the Nominee Agreement.
The decision dated November 17, 2009 (2009 NY Slip Op 32745(U)), by Nassau County Commercial Division Justice Stephen A. Bucaria, rejected Yemini's contentions as unsupported by any probative evidence, and it therefore granted Goldberg's summary judgment motion. Justice Bucaria found that Yemini offered no documentary proof that he gave the funds to Goldberg, such as a signed receipt, or that Yemini even had the cash available. He found no connection between the promissory note and the funds used to finance the Candlewood acquisition. Justice Bucaria also cited Yemini's testimony that those funds eventually were repaid to Goldberg, and he found that Goldberg's letter referring to a "verbal agreement" reinforced Goldberg's position rather than weakened it. In the letter, Goldberg revoked Yemini's authority as his nominee, which made no sense unless Yemini was Goldberg's nominee in the first place.
Justice Bucaria also faulted Yemini's position for attempting to vary the terms of the Nominee Agreement, writing as follows:
When the parties set forth their entire agreement in a writing, a party may not introduce extrinsic evidence or prior or contemporaneous statements to establish that a different oral agreement exists. (See, e,g., W.W.W. Associates, Inc. v. Giancontieri, 77 NY2d 157, 162) ("Evidence outside the four corners of the document as to what was really intended but unstated or misstated is generally inadmissible to add or vary the writing."); Braten v. Bankers Trust Co., 60 NY2d 155 (refusing to enforce oral agreement that contradicted the terms of the parties' written agreement); Harris v. Hallberg, 36 AD2d 857, 2nd Dept., 2007). Plaintiff's [Yemini] argument is contradicted by the express wording of the ANO Nominee Agreement that states the agreement is effective as of the date of the agreement.
The second issue addressed in the decision is Goldberg's transfer of his 50% interest in ANO to his company, Goldberg Commodities. Goldberg asserted that he wanted the interest to be held by Commodities because the funds for his capital contribution came from Commodities via its lending facility and to take advantage of Commodities' tax situation. Yemini argued that he never would have consented to the transfer because Commodities' pre-existing debt might impair Candlewood's ability to secure outside financing. He also argued that a provision in the Candlewood shareholders' agreement prohibited any transfer of Goldberg's ANO interest without the consent of the third Candlewood investor named Moore.
Justice Bucaria readily dispatched Yemini's objections. First, there was no written agreement with Goldberg, or any provision in ANO's bylaws, that prohibited the transfer to Commodities. Second, Moore testified at the hearing that he had no objection to the transfer so long as Goldberg remained the 100% owner of Commodities.
Re-reading the prior lower court decision by Justice Leonard Austin (who subsequently was elevated to the Appellate Division) denying Goldberg's injunction motion, what comes through is the court's disdain for Goldberg's "unclean hands" based on the concealment of his interest in ANO from his ex-wife and tax authorities. The subsequent appellate reversal paid no attention to those factors in finding that the Nominee Agreement was enforceable in accordance with its plain terms. Perhaps what makes this case different from others in which the courts have refused relief based on somewhat similar circumstances is Yemini's apparent knowing participation in at least some of the artifices.
Update October 7, 2011: In a Decision and Order dated October 4, 2011 (read here), an appellate panel denied Yemini's appeal from Justice Bucaria's February 2010 order granting Yemini's motion to reargue and, upon reconsideration, adhering to his November 2009 summary judgment ruling discussed above.
Nominee Agreement Trumps Corporation Records in Fight Over Stock Ownership
I recently did a series of postings on challenges to standing in corporate dissolution cases where the petitioners lacked stock certificates or other conclusive evidence of their share ownership (see here, here and here). I didn't expect to return to the topic so soon, but a new decision out of the Appellate Division, Second Department, reversing a lower court's order denying injunctive relief, warrants another visit.
The case, Yemini v. Goldberg, involves a fight over the ownership of a New York corporation called ANO, Inc. which is an acronym for Ari N Oded, Ari being plaintiff Ari Yemini and Oded being defendant Oded Goldberg.
ANO was formed in June 1999 to purchase an interest in another company called Candlewood Holdings, Inc. The only ANO stock certificate ever issued was issued on June 22, 1999, to Yemini who also was identified as sole director and shareholder in corporate resolutions adopted the same date.
On July 1, 1999, ANO acquired a 50% interest in Candlewood (later increased to two-thirds). On that same date, Yemini and Goldberg entered into a "Nominee Agreement" denominating Goldberg as "Principal" and Yemini as "Nominee". The Nominee Agreement contains the following two recitals:
WHEREAS, the Principal is the true owner of fifty (50%) percent of the common stock of ANO, Inc., a New York corporation (the "Corporation");
WHEREAS, the Nominee shall act as nominee for the Principal in connection with said Corporation and in connection with the Stock Acquisition Agreement by and between ANO and Candlewood Holdings, Inc.("Candlewood"), dated as of July 1, 1999 (the "Stock Acquisition Agreement".
The Nominee Agreement contains provisions authorizing the Nominee to take all actions required to purchase the Candlewood interest; requiring the Nominee to provide the Principal with all documents concerning ANO; prohibiting the Nominee from taking any action with regard to the Principal's interest in ANO without the Principal's express instructions; and appointing the Principal the Nominee's attorney-in-fact with the power to execute all agreements, instruments, etc. required to be signed by the Nominee.
In 2005, Yemini sued Goldberg for the latter's alleged failure to make certain capital contributions for a separate business venture. Apparently, by this time Yemini refused to acknowledge Goldberg as owning any interest in ANO, prompting a countersuit by Goldberg and an application by him for preliminary injunction with regard to a meeting of the shareholders of Candlewood.
The matter proceeded to an 11-day evidentiary hearing before Nassau County Commercial Division Justice Leonard B. Austin (recently elevated to Associate Justice of the Second Department), who denied Goldberg's injunction motion in a decision reported at 15 Misc 3d 1142(A), 2007 NY Slip Op 51117(U) (Sup Ct Nassau County 2007).
Justice Austin found that, other than the Nominee Agreement and ANO's name, there were "no indicia of ownership of ANO or any interest therein" by Goldberg. In addition to the stock certificate and resolutions mentioned above, Justice Austin pointed to a Candlewood shareholders agreement and employment agreement that identified Yemini as sole shareholder, both of which agreements Goldberg knew about when they were executed in July 1999, and to ANO's tax returns which, with Goldberg's knowledge, also identified Yemini as sole shareholder. Justice Austin further noted that, until the litigation, Goldberg never asserted rights as a shareholder of ANO or demanded a turnover of the ANO stock.
Justice Austin also held that Goldberg was unlikely to succeed on the merits because he lacked "clean hands" and was estopped from taking inconsistent positions. This arose primarily from Goldberg's involvement in legal proceedings with his ex-wife in 2002, in which he filed a net worth affidavit that omitted mention of ANO as an asset. "A party, such as Goldberg", Justice Austin wrote,
who has hidden an interest in ANO from his wife in a matrimonial action, has failed to disclose this interest to a lender and repeatedly failed to disclose the interest in ANO to the tax authorities, has unclean hands and cannot obtain relief.
Not so fast, says the Second Department in a decision on Goldberg's appeal ordering that he be granted a preliminary injunction based on the Nominee Agreement. Yemini v. Goldberg, 60 AD3d 935, 2009 NY Slip Op 02353 (2d Dept 2009). Here's the key passage from the appellate decision:
Parties are free to make their own arrangements regarding beneficial ownership of securities as definitive between them (see UCC § 8-207[a], Official Comment 3; Delaware v New York, 507 US 490, 505). This nominee agreement "constituted a declaration of trust" (Brotman v Meyers, 41 AD2d 547, 547). It is irrelevant that Yemini at all times retained ownership of the ANO stock certificates (see Matter of Benincasa v Garrubbo, 141 AD2d 636, 638).
The appellate decision does not comment on the issue of unclean hands relating to Goldberg's non-disclosure of his ANO stock interest in his matrimonial case. It does state, however, that judicial estoppel does not apply because there is no evidence that Goldberg "secured a judgment in his favor in the proceeding in which he allegedly took an inconsistent position".
The lower court and appellate decisions do not relate Goldberg's reasons for wanting the Nominee Agreement, or refer to any testimony from Yemini explaining his reasons for executing it. In my experience, such arrangements usually are driven by tax considerations. In other cases courts have refused to uphold undocumented stock ownership claims in the face of contradictory tax or other official filings. This case is different because the lawyer-prepared Nominee Agreement contains the adverse shareholder's explicit, signed recognition of the disputed stock interest.
