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.
"Unclean Hands" Defense Can Backfire in Deadlock Dissolution Case
The seminal New York case defining "oppressive" conduct under the statute authorizing a minority shareholder to seek corporate dissolution, Matter of Kemp & Beatley, Inc., 64 NY2d 63, 74 (1984), cautioned that a minority shareholder "whose own acts, made in bad faith and undertaken with a view toward forcing an involuntary dissolution, give rise to the complained-of oppression should be given no quarter in the statutory protection." This language gave birth to what has become known as the "unclean hands" defense in shareholder oppression cases under Section 1104-a of the Business Corporation Law (BCL). The unclean hands defense often is based on allegations that the petitioning minority shareholder secretly is involved with or planning to launch a competing business to steal the customers and good will of the company whose dissolution is sought.
Over the years since Kemp, the unclean hands defense also has crept into dissolution cases brought by a 50% shareholder under BCL Section 1104 based on deadlock and internal dissension. Unlike oppression cases under Section 1104-a, where the minority shareholder must prove some form of at-fault or unfair conduct by the majority, cases under Section 1104 focus on the deterioration of the relationship between the two 50/50 shareholders and the resulting corporate paralysis, without necessarily assigning fault to one side or the other.
A recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria, in Matter of Rieger (Airmarine Electroplating Corp.), Short Form Order, Index No. 010524/09 (Sup Ct Nassau County Aug. 27, 2009), illustrates the difficulty of maintaining the unclean hands defense in a deadlock dissolution case where, absent compelling proof, the allegations of inequitable conduct by the petitioner can themselves contribute to the court's sense of shareholder hostility and corporate dysfunction warranting dissolution.
Rieger involved a fight between brother and sister Ernest and Laurie Rieger. The Riegers are 50/50 shareholders of Airmarine Electroplating Corp. which is in the business of refurbishing airplane parts. The Riegers also co-own a second company called Airlift Hydraulics which holds the FAA certificate enabling Airmarine to receive FAA aircraft component refurbishing manuals.
Ernest filed a petition for judicial dissolution of Airmarine under Section 1104 based on animosity and dissension between himself and his sister. He alleged that they could not reach agreement on how to manage the corporation; that the ensuing deadlock prevents the corporation from benefiting the shareholders; and that no purpose would be served by holding a shareholders or directors meeting.
Laurie sought dismissal of the petition based on Ernest's "unclean hands". As described in Justice Bucaria's decision, Laurie claimed that Ernest was seeking to dissolve Airmarine
to create his own personal corporation using the same clients and the same FAA certificate that are used by [Airmarine]. Laurie alleges that her theory is bolstered by the fact that Ernest does not seek to dissolve Airlift Hydraulics, because then he would no longer be in possession of the FAA certificate and would not be able to open his own personal Aircraft refurbishing corporation.
Laurie also alleged that her brother was misappropriating corporate funds, taking excessive salary, and "hiding" documents from her.
The court's reference to Laurie's "theory" may or may not indicate a lack of hard proof of her brother's plans to start his own refurbishing business. In any event, Justice Bucaria held that her unclean hands defense was not adequate to stave off dissolution since "'the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation's affairs'" (quoting Matter of Goodman v. Lovett (200 AD2d 670)). Laurie's allegations of misconduct by her brother, Justice Bucaria wrote,
essentially demonstrate that the standard for involuntary dissolution has been met. Laurie and Ernest clearly do not agree on how the Corporation should be run, and act in a hostile manner towards one another. Laurie further admits that the company has not been operating at a profit as of late, and she has provided no plan that the company will do so in the future. Laurie states that Ernest has breached his good faith duty to her as a co-shareholder, and this only re-iterates that the standard for involuntary dissolution has been met.
The fact that Laurie claims Ernest acted in bad faith regarding the management of the Corporations is of no moment, inasmuch as the dissension and distrust is palpable and real. The petitioner showed, and the respondent reinforced, that the disagreements between the two parties "pose an irreconcilable barrier to the continued functioning and prosperity of the corporation." [Citations omitted.]
It would be an overstatement to say that the unclean hands defense has no application in the deadlock dissolution context. I can readily imagine a scenario in which a 50% shareholder deliberately manufactures dissension and brings a dissolution proceeding in furtherance of a plan to walk off with the company's customers. It really boils down to a matter of proof and, as Rieger illustrates, in the absence of compelling proof the allegations of unclean hands only serve to reinforce the atmosphere of irreconcilable hostility supporting involuntary dissolution.
