This is the last in a series of five postings about 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 as laid out in the court’s September 2006 decision and discussed the court’s denial of defendants’ pre-discovery dismissal motion in which defendants argued that Marciano lacked standing to seek dissolution because allegedly he concealed from tax authorities and federal prosecutors his claimed stock ownership interest. Part II (read it here) covered some additional issues raised in the court’s initial decision 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 June 2007 decision 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. Part IV (read it here) addressed the court’s September 2007 decision in which it denied defendants’ motion for summary judgment contesting Marciano’s share ownership and arguing that Marciano’s March 2007 guilty plea to unrelated stock fraud charges justified their excluding him from the business operations.
This Part V examines the court’s final decision dated December 7, 2007, concerning a new twist in the proceedings triggered by the defendants’ assignment of a valuable dealership lease held by a company co-owned by Marciano to another company owned solely by the defendants. A postscript follows for readers interested in the outcome of the case and some reflections on its greater meaning.
Marciano Opens a Second Front and Obtains Preliminary Injunction
Justice Ira Warshawsky’s decision gives the following set-up of the relevant facts (citations to the record are omitted):
This is the latest installment in a contentiously litigated commercial dispute arising out of the parties’ soured, professional relationship and the subsequent ouster of plaintiff John Marciano from involvement in the “Champion” family of high-end automobile dealership entities.
Unlike the previous motions, however, the current applications for, inter alia, stated injunctive relief and the appointment of a temporary receiver, feature an entirely new, companion action — containing fiduciary duty and debtor-creditor causes of action — in which both opposing counsel and the Bank of America have now been joined as party defendants.
In sum, the plaintiff contends that in August of 2007, [the codefendants] — with the alleged tortious assistance of their attorneys [ ] — concocted a scheme by which they fraudulently, and without Marciano’s participation, conveyed and then effectively appropriated a valuable dealership lease held by Champion affiliate 115 South Service Road, LLC [“South Service”].
Notably, the subject lease contained a $6.5 million option to purchase the dealership property, now allegedly valued at more than double the option price. It is undisputed that Marciano currently holds a one-third, ownership in South Service.
The decision offers other details of the transaction, such as a small upfront payment of only $25,000 by the transferee entity coupled with a “vague, unsecured representation” of a future appraisal to determine the balance of the assignment consideration; the transferee entity immediately exercised the purchase option and obtained a $14 million mortgage loan from Bank of America portions of which allegedly were paid out to the co-defendants; and the co-defendants had South Service give Champion Motor Group a $6 million promissory note supposedly to repay monies advanced by Champion for building improvements, which loans Justice Warshawsky noted were “entirely unsupported by the bookkeeping and accounting history pertinent to both involved entities.”
Justice Warshawsky found that the defendants’ opposing submissions failed to refute Marciano’s fact-specific claims of a fraudulent conveyance and “bogus” promissory note. He also rejected their attempt to analogize the assignment to a freeze-out merger, stating that, in this case, there was no merger and no forced elimination of a minority interest for a prescribed fair value.
Justice Warshawsky granted Marciano a preliminary injunction only to the extent of continuing the provisions of the previously-granted temporary restraining order, the terms of which unfortunately are not described in the decision. What is known is that Justice Warshawsky did not as requested compel the defendants to disgorge and restore all allegedly diverted property; he did not as requested appoint a temporary receiver; and he did require that Marciano post a $500,000 undertaking as condition for the injunction order.
For readers who’ve persevered through this series looking forward to an exciting dénouement, I have some disappointing news: there is no winner to report.
According to the court information available online, the case went to trial before Justice Warshawsky starting December 17, 2007, and settled mid-trial on December 20, 2007. I spoke with one of the attorneys involved, who advised that the terms of the settlement are confidential. Alas, we will never know how the court would have ruled on the basic questions of Marciano’s share ownership and standing to seek dissolution, or the validity of his exclusion from the business due to his indictment and conviction on stock fraud charges.
There nonetheless are some valuable insights to be drawn from the case. Here goes:
1. The standout feature of this case is the fact that Marciano was able to get to a trial in the face of documentary evidence, including tax returns and stock ownership records, that starkly negated Marciano’s claimed 38% stock interest in the Champion group of companies. There are numerous dissolution cases in which petitioners alleging oppression have lost at the outset because of tax filings inconsistent with their claimed ownership of shares meeting the 20% threshold. Marciano overcame pretrial dismissal by weaving together a complex factual scenario suggesting that all three owners collaborated for various financial accounting and tax reasons in creating on paper an ownership structure that masked or at least departed from the parties’ internal agreement. This was enough for Justice Warshawsky to subject the issue to the crucible of trial.
2. The Marciano case illustrates the dynamic nature of dissolution litigation. Unlike many if not most commercial disputes, in dissolution cases the parties remain locked in a business, financial and quasi-partner relationship while the litigation lingers, giving one or both sides opportunity and incentive to wage extra-judicial campaigns and to engage in self-help that often leads to more litigation activity. The post-commencement fights in Marciano over distributions and the lease conveyance, among others, serve as a reminder to future litigants that, when the dissolution petition is filed, the fight has just begun.
3. Last January I wrote a piece for this blog called “Get Thee to the Commercial Division!” (read it here) in which I strongly recommended that attorneys file dissolution cases in the Commercial Division whenever possible. The attention and expertise devoted to the Marciano case by Justice Warshawsky of the Nassau County Commercial Division is Exhibit A to my recommendation.
4. Finally, the December 2007 Marciano decision makes a cameo appearance in the New York Court of Appeals’ controversial February 2008 decision in Tzolis v. Wolff sanctioning derivative claims by LLC members (discussed here). Tzolis holds up Marciano (albeit mistakenly citing it as a New York County case) as an example of pre-Tzolis courts “blurring, if not erasing, the traditional line between direct and derivative claims” in their effort to find a “substitute remedy” for breach of fiduciary duty by LLC members. I, for one, do not see Marciano in quite the same light. Rather, accepting as true Marciano’s allegations concerning the fraudulent lease conveyance and bogus promissory note, it appears to me that Marciano was intended to suffer and did suffer a direct injury to his interests as a member of South Service for which he has a direct cause of action.