This is the third 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. Part II (read it here) reviewed a number of additional issues addressed in the court’s September 2006 initial decision in the case, including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment; Marciano’s request to dissolve the related LLC’s; and Marciano’s application for various forms of interim relief and for extensive discovery.

In this Part III, we turn to the second of Justice Warshawsky’s four written opinions in the case, dated June 15, 2007, in which he considers Marciano’s motions to compel payment to him of distributions pending the litigation and for leave to amend his complaint to add claims based on defendants’ alleged financial abuses in the year following commencement of the litigation.

1.     Marciano’s motion to compel interim distributions.

A minority shareholder who is frozen out of the business and subsequently files for judicial dissolution is hardly surprised when the controlling shareholders cut off distributions while the litigation rages. The Appellate Division, First Department’s decision in Matter of HGK Asset Management, Inc. (Greenhouse), 238 AD2d 291 [1997], authorizes a court to order payment of salary and benefits to the excluded shareholder pending the dissolution proceeding. The Second Department’s decision in Deborah Int’l Beauty Ltd. v. Quality King Distributors, Inc., 175 AD2d 791 [1991], also gives courts authority to enforce provisions in shareholder agreements mandating distribution of net income pending dissolution proceedings.

Marciano took a different tack toward the same end, but came up short. He alleged that, prior to litigation, he had received shareholder distributions including monthly payments of $6,250 on account of interest due him for his $1 million letter of credit and for “services rendered”. After suit was filed, initially the defendants voluntarily continued the monthly payments which they used as evidence that Marciano was not being oppressed. A couple of months after the court’s first ruling in September 2006, however, the defendants cut off the payments after they secured a release in favor of Marciano from all liabilities arising from the letter of credit and other personal guarantees, and because Marciano was no longer providing any services.

Justice Warshawsky agreed with defendants, stating that “[u]nder these factual circumstances, the plaintiff has not established his entitlement to injunctive relief compelling the defendants to continue making the monthly payments which they have since terminated”.

2.     Marciano’s motion to amend his complaint.

The life cycle of a corporate dissolution case can run from a few weeks to several years. The longer it goes on, the more incentive and opportunity the excluded shareholder has to add new claims to his or her original petition or complaint for alleged post-commencement wrongdoing by the controlling shareholders who continue to operate the business and control the finances.

Marciano did just that, about a year after starting his lawsuit, by moving for leave to amend his complaint to add individual and derivative claims for an accounting, breach of fiduciary duty and for repayment of a personal loan to one of the defendants. The proposed pleading included a new section alleging wrongful acts that occurred or that Marciano discovered after initiation of the action including denial of access to corporate records, excessive compensation and personal expenses taken by the defendants, and other alleged looting and waste of corporate assets.

Citing New York’s liberal policy favoring amendment of pleadings, Justice Warshawsky granted Marciano’s motion to amend although he also cautioned that the newly added derivative claims were contingent on his being a shareholder at the time of the alleged wrong.

To be continued . . .