This is the fourth in a series of postings on a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.

Part I of the series (read it here) reviewed the basic facts of the case and discussed the defendants’ initial, unsuccessful challenge to Marciano’s standing to seek dissolution based on allegations that he deliberately sought to conceal from tax authorities and federal prosecutors his stock ownership interest in Champion. Part II (read it here) covered some additional issues raised in the court’s initial decision in the case, including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment. Part III (read it here) highlighted portions of the court’s second decision in the case in which it denied Marciano’s motion to compel payment to him of distributions pending the litigation and granted his motion for leave to amend his complaint.

In this Part IV, we look at Justice Warshawsky’s third decision in the case dated September 19, 2007, occasioned by the defendants’ renewed assertions that Marciano lacked standing to seek dissolution and that their exclusion of him from the business was reasonably required to protect the business in response to the unrelated stock fraud charges brought against him by federal prosecutors.

As noted above, defendants first advanced those assertions by way of an unsuccessful pre-answer motion to dismiss the petition-complaint.  On this latter occasion, following discovery, defendants moved for a summary judgment of dismissal based on what the defendants portrayed as undisputed evidence (a) that Marciano had no legal or beneficial ownership interest in Champion and (b) that Marciano’s interim plea agreement, whereby he pleaded guilty to certain of the felonies charged against him, conclusively justified defendants’ decision to oust him from any participation in the dealership’s business affairs.

1.     Marciano’s Stock Ownership

In support of their dismissal motion, defendants pointed to the fact that in accordance with the parties’ express design, Leasing always owned 100% of Champion, hence Marciano owned no stock at all in Champion, and held only 1% interest in Leasing.  Defendants’ position was buttressed by the undisputed fact that Champion’s governing corporate documents were never modified to identify Marciano as a shareholder, officer or director, and by the companies’ tax returns likewise inconsistent with Marciano’s claimed ownership.

In opposition, Marciano contended that the respective parent-subsidiary relationship between Leasing and Champion, together with his documented 1% interest in Leasing, was structured by the defendants and their accountants for their own benefit, and constituted only one component of the overall arrangement by which Marciano became involved with the business.  Specifically, Marciano claimed that the entities were so fashioned as an accommodation for defendants who had incurred substantial carry forward losses, phantom income and other liabilities associated with their own prior leasing business for which they effectively agreed to remain liable through the organizational structure adopted, and for which they otherwise would have been required to reimburse Marciano.  According to Marciano, the accommodation was not intended to alter the underlying ownership agreement reached by the parties with respect to Marciano’s 38% beneficial interest in the dealership entity.

Marciano also relied on the defendants’ deposition testimony that an oral or handshake agreement was reached with respect to Marciano’s claimed interest in Champion; that Marciano received a 38% share of the distributions corresponding to his claimed stock interest; that defendants held out Marciano as a principal and owner in documents submitted to Bentley and their lender; and that defendants in their recordkeeping blurred the distinction between Champion and Leasing.

Justice Warshawsky denied defendants’ motion.  Viewing the evidence in the light most favorable to Marciano, as required on a motion for summary judgment, Justice Warshawsky concluded that Marciano had raised issues of fact requiring a trial with respect to his ownership claims.  “Specifically,” the judge wrote, “there is documentary evidence in the record, including the defendants’ own deposition testimony, which supports Marciano’s assertion that the parties intended him to be, and indeed treated him as if he were, a shareholding owner of [Champion]”.  Justice Warshawsky also cited case precedent for the proposition that the fact that stock certificates were never formally issued to a party is not in itself conclusive of the party’s shareholder status.

2.     Justifiable Freeze-Out

In July 2004, a federal grand jury in the Eastern District of New York indicted Marciano and others for conspiracy, money laundering and securities fraud arising out of an IPO involving a high-tech company known as Xybernaut.  In December 2005, Marciano’s partners in the Champion venture, Messrs. Todd and Brustein, barred Marciano from participating in the dealership’s operations and locked him out of the business premises, justifying his exclusion in part on the negative fallout from his indictment.  As discussed in Part II of this series, Justice Warshawsky in his September 2006 ruling rejected the defendants’ initial argument for dismissing the case based on the criminal indictment, finding that there needed to be “further factual development through discovery” concerning “the accuracy and intensity of the claimed negative impacts identified by the defendants”.

As subsequently reported in the Washington Post, in March of 2007, Marciano entered a plea agreement convicting him of a single count of money laundering the proceeds of a securities fraud.  In the case before Justice Warshawsky, as part of their summary judgment motion, the defendants contended that Marciano’s guilty plea definitively established that he had no legitimate interest in remaining an active player in the Champion entities in light of the Bentley dealership agreement that authorized termination upon a principal’s conviction of a crime.

In response, Marciano claimed that the defendants from the inception “cynically utilized the indictment as a pretext to demonize” Marciano and then oust him from the Champion entities while attempting to “steal” his 38% ownership interest.

Justice Warshawsky focused on the evidence surrounding Bentley’s termination rights and its reaction to Marciano’s indictment and conviction, and concluded that he could not “assign determinative import to the newly entered plea”.  The Bentley agreement authorized termination if a dealership principal is convicted of a crime and if, in Bentley’s opinion, the conviction will adversely affect the dealer’s or Bentley’s good will or reputation.  According to Justice Warshawsky, the defendants “have not tendered evidence in admissible form indicating that termination is imminent or even currently under consideration based upon communications or statements from Bentley”.

More specifically, Justice Warshawsky cited deposition testimony of defendant Todd to the effect that Bentley had been noncommittal and had “not passed judgment” on Marciano’s indictment.  The judge also highlighted a January 2006 letter from Bentley, responding to a December 2005 letter from the defendants advising it of Marciano’s indictment, in which rather than expressing disapproval Bentley praised Marciano, stating that it “has always respected John’s professionalism as well as the business and financial acumen which we believe he brought to the dealership”.  Finally, Justice Warshawsky distinguished other dissolution cases supporting ejectment of a business partner for criminal misconduct where the wrongdoing involved perpetration of acts either against the subject corporation or within the course of the corporation’s business activities.

To be continued . . .