Nine miles away, in the courtroom of Queens County Commercial Division Justice Orin R. Kitzes, the atmosphere has been anything but bucolic as the restaurant’s 50-50 owners have waged a bitter shareholder dispute for over two years, including a deadlock dissolution proceeding under Section 1104 of the Business Corporation Law.
In the midst of those proceedings, the 50% shareholder who petitioned for dissolution died. The ensuing, convoluted legal proceedings ultimately boiled down to one question: Did the petitioner’s death entitle the surviving shareholder to enforce the valuation and buyout provision in the shareholders’ agreement, thereby mooting the dissolution proceeding?
The short answer is "yes". Here’s the full story:
In January 2001, Joanna ("Nana") Loiselle and Aristotelis ("Telly") Vagianderis as 50-50 shareholders formed Kalamaki Taverna, Inc. to operate the restaurant known as Telly’s Taverna. A month later they entered into a written shareholders’ agreement including an optional provision for stock buyout upon death, as follows:
In the event of the death of a stockholder, the Corporation business may be continued by the surviving parties on giving notice of such election to continue to the legal representative of said deceased party within thirty (30) days following the death of such deceased party. The deceased party’s interest in the Corporation shall terminate on the date of his or her death and the value of the interest of such deceased party in the Corporation shall be determined as of the date of such deceased party’s death. The interest so determined shall be paid to his or her legal representative . . ..
Sometime over the next five years Nana and Telly had a falling out. In January 2006, Telly filed a deadlock dissolution petition, also accusing Nana of diverting corporate funds. In February 2006, Nana filed a separate suit against Telly seeking his removal as officer and director of the corporation and alleging that Telly "withdrew" from the corporation and stopped working due to permanent illness and disability. A month later, in March 2006, Telly died.
Under New York law, the death of a claimant divests the court of jurisdiction until a duly appointed personal representative is substituted for the deceased party under Section 1015 of the Civil Practice Law and Rules. In June 2006, preliminary letters testamentary were issued to Telly’s brother, Ioannis ("John") Vagianderis, who thereafter moved to be substituted as the named party to the proceedings. In January 2007, Justice Kitzes denied John’s motion without prejudice after his preliminary letters expired without obtaining a judicial extension (read decision here).
Permanent letters testamentary were issued to John appointing him Telly’s executor in February 2007. In a July 2007 order (read here), Justice Kitzes substituted John as a party. In the same order he also ordered a hearing on the dissolution petition’s disputed allegations; denied appointment of a temporary receiver; directed that John be given access to the corporation’s books and records; and enjoined Nana from using corporate funds to pay legal fees in the dissolution proceeding or in her plenary action.
Nana made the next move, asking the court for summary judgment compelling John to sell to her the estate’s 50% stock interest for $150,000 under the shareholders’ agreement’s buyout provision. Justice Kitzes’s November 2007 decision denied the motion because Nana had failed to amend her complaint following Telly’s death to plead a cause of action for such enforcement (read here). Parenthetically, none of the court’s decisions discusses how the $150,000 was arrived at, or indicates whether it represents a fair estimation of the shares’ market value. In light of John’s intense opposition I have to assume it is significantly below market.
Nana heeded the court’s advice and moved for leave to amend her complaint, which was granted over John’s objections by order issued in February 2008 (read here).
Next came Nana’s renewed summary judgment motion to enforce the buyout provision. Nana contended that she gave timely notice under the shareholders’ agreement of her intent to continue the business and to acquire the estate’s shares, and that the estate’s legal standing to dissolve the corporation therefore was extinguished. John opposed, arguing that the buyout provision may not be invoked because the dissolution proceeding was pending at the time of Telly’s death, citing the New York Court of Appeals’ decision in Matter of Penepent Corp., 96 NY2d 186 (2001). In Penepent, the Court held that a statutory election underBCL 1118 to purchase the petitioner’s shares for fair value in an oppressed minority shareholder proceeding under BCL 1104-a was not vitiated by the post-election death of the petitioner, and therefore refused to grant enforcement of a buyout-upon-death provision in the parties’ shareholders’ agreement.
Justice Kitzes agreed with Nana’s position in a pair of October 2008 rulings (read here and here) granting enforcement of the contractual buyout and dismissing the dissolution proceeding as moot. Here’s what he wrote:
The shareholder’s agreement submitted herein explicitly provides that the decedent’s interest in the corporation was terminated as of the date of his death. The evidence submitted also demonstrates that, upon his death, the plaintiffs gave timely notice of the intent to redeem the decedent’s shares of stock and thereby exercised the right to purchase his interest in accordance with the shareholder’s agreement. Since the decedent is no longer the holder of an interest in the corporation, the plaintiffs’ right to acquire the decedent’s shares in the corporation and continue the corporation prevails. Contrary to the defendant’s contention, and under the circumstances presented, that right is neither pre-empted nor abrogated by the pending judicial dissolution proceeding. [Citations omitted.]
* * * * * * *
The defendant is ordered to adhere to the buy-out provisions of the shareholder’s agreement. The provisions of the shareholder’s agreement regarding the valuation of the corporate stock shall also be followed.
The court’s enforcement of the parties’ agreement based on Nana’s timely election to purchase makes sense. It also is consistent with Penepent where the Court of Appeals carefully explained that the question in that case was "not whether the mandatory buy-out provision in the shareholder agreement was enforceable. Rather, the question is whether it was controlling where a valid section 1118 election had already been made." The Section 1118 election is available only in dissolution proceedings brought under BCL 1104-a for oppression, looting, etc., not in a deadlock dissolution proceeding such as the one brought by Telly. Thus, there was no irrevocable statutory election to purchase by Nana that would have impeded her ability to enforce the more favorable (to her) buyout under the shareholders’ agreement.