When husband and wife hold shares as joint tenants with right of survivorship, can one of them seek corporate dissolution without joining the other?
Petitioner Marianthi Mouzakitis and her husband, Leonidas, own 15% of the common shares of Pearl Nightlife, Inc. as tenants by the entirety. The corporation operates a restaurant in Bayside, New York, that opened in March 2008. The Mouzakitises contributed $125,000 for their interest. Ms. Mouzakitis alleged that the controlling shareholders failed to make required contributions, failed to pay salaries and dividends, withheld access to corporate books and records, and diverted corporate funds and assets including liquor and food allegedly diverted to other restaurants separately owned by the corporation’s president. In May 2008, the other shareholders allegedly had the petitioner arrested at the restaurant.
As a 15% shareholder, Ms. Mouzakitis lacked standing to seek judicial dissolution under Sections 1104 (deadlock – 50%) or 1104-a (oppression – 20% minimum) of the Business Corporation Law. She therefore petitioned for common law dissolution of the corporation which, as framed by the New York Court of Appeals in Leibert v. Clapp, 13 NY2d 313 (1963), can be sought by any minority shareholder where the majority shareholders "so palpably breached their fiduciary duties they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by the statute."
The respondents contended that the petitioner could not bring the action without her husband since they owned the shares as tenants by the entirety, a form of ownership whereby each spouse holds an undivided interest in the whole of the property with rights of survivorship. Respondents relied on Rust v. Turgeon, 295 AD2d 962 (4th Dept 2002), where the court dismissed a deadlock dissolution claim for lack of standing under BCL Section 1104. The petitioner in Rust alleged that he and a second shareholder owned 100% of the corporation’s shares as joint tenants with right of survivorship. The court ruled that if Rust
were determined to be a joint tenant of all of the shares, his interest would be an undivided interest in all of the shares, and he could not be deemed a holder of one half of the shares as required by[BCL] 1104(a).
In opposition, Ms. Mouzakitis relied on case law permitting one cotenant to enforce and preserve jointly held property rights. Her attorney also advised the court that he spoke by phone with the husband, Leonidas, who was in Greece, and that the husband "agreed to this action to enforce the parties’ rights."
Justice Satterfield agreed with the respondents and denied the petition without prejudice to renewal, stating that the petitioner, "if she is so advised, may remove the unnecessary obstruction to her case which has appeared at its early stage by having her husband join a new proceeding."
I confess, I’m a little puzzled by the disposition in light of the fact that, according to the docket information available online, the caption of the proceeding names both husband and wife as petitioners. Under rules of New York practice, when there are multiple petitioners united in interest, only one of them need verify the petition (CPLR 3020(d); BCL 1105). I can only speculate that something in the record indicated to the court that the husband never authorized counsel to name him as a petitioner.
I also wonder if the necessary-party doctrine isn’t the better analysis of the problem in Mouzakitis. In Rust, the petitioner lacked standing to proceed under BCL 1104 because, as a joint owner with the respondent of 100% of the corporation’s shares, he could not under any circumstances satisfy the statute’s requirement of a 50% stock interest. The common law dissolution sought in Mouzakitis has no standing requirement other than being a shareholder, which Ms. Mouzakitis certainly is. Given her husband’s joint, undivided interest in the shares and his right of survivorship, he should be deemed a necessary party under CPLR 1001(a) whose joinder likely cannot be excused given that a judgment of dissolution would terminate his interest in the shares.
Update: After husband and wife jointly filed a new dissolution proceeding, in a February 2009 decision Justice Kitzes denied the respondents’ motion to dismiss the case. Read about it here.