There’s nothing special about the corporate dissolution case brought by David Wenger involving a family-owned construction business. The facts of the case are garden variety, as these things go. The case presents no novel legal issues. The court’s decision, ordering an evidentiary hearing to determine the petition’s disputed allegations of oppression, is nothing if not anti-climactic.
But that’s exactly why I want to write about it, to illustrate what happens in the ordinary dissolution case, where there are no knockout punches in the first round. That plus, it’s my first occasion to highlight a decision by Suffolk County Commercial Division Justice Emily Pines.
The court’s decision in Matter of Wenger (L.A. Wenger Contracting Co.), Index No. 31701/08 (Sup Ct Suffolk County Nov. 12, 2008), describes a case of corporate and family dysfunction pitting father against son. In August 2008, the son, David, as a 31% shareholder filed a petition to dissolve L.A. Wenger Contracting Co. of which his father, Louis, is majority owner. Upon filing the petition David obtained a temporary restraining order enjoining his father from disbursing company funds to any shareholder, officer or director except in the ordinary course of business. David’s petition also sought appointment of a receiver pursuant to Section 1113 of the Business Corporation Law.
The petition sought dissolution under BCL Section 1104-a based on allegations of shareholder oppression and fraudulent conduct by his father over a period of years, including the conveyance of company-owned real property to David’s father and sister for no consideration; denying David access to company information; and failure to make distributions. Louis’s answer to the petition denied that he wasted or improperly diverted corporate assets; denied that David was frozen out of corporate governance; and contended that the alleged real property transfers were for the corporation’s benefit. Louis also countered that David had “deliberately removed himself” from the family business over seven years earlier and was using the dissolution proceeding “in an improper attempt to take over a business run by [Louis] for over fifty nine years.”
What happens when the litigants file such contradictory written submissions at this early stage in the proceedings? The answer requires some familiarity with judicial dissolution procedure. Unlike lawsuits commenced by ordinary summons and complaint, BCL Section 1106 requires that a corporate dissolution case be commenced by petition and Order to Show Cause signed by a judge which, among other things, fixes a so-called “return date” for the hearing of the petition. The initial return date normally is not an evidentiary hearing. Rather, it typically is handled by the court as a conference or oral argument by the lawyers to state their positions for and against dissolution. Some judges take the papers “on submission”, i.e., without any in-court appearance by the lawyers, and will later issue a written decision. Either way, the threshold question for the court is whether, based on the papers alone, it can make a ruling granting or denying the dissolution petition, or whether the papers raise material issues of fact that cannot be determined without an evidentiary hearing. Essentially it’s the same question judges face all the time when deciding motions for summary judgment: Are there disputed issues of fact?
In the Wenger case, Justice Pines concluded that the determination of David’s petition requires an evidentiary hearing because of the disputed facts. Here she succinctly states the governing law and its application to the case before her:
The appropriateness of an order of dissolution or other related remedy pursuant to [BCL Section 1104-a] is in each case vested in the sound discretion of the court considering the application. Matter of Kemp & Beatley v. Gardstein, 64 NY2d 63, 484 NYS2d 799 (1984).
Where the allegations in a Petition by a minority shareholder to dissolve a closely held corporation pursuant to BCL 1104-a are disputed, the courts of this State have held that a hearing is mandatory both to determine whether the oppressive conduct set forth by the statute exists and to decide the appropriate remedy. In re WTB Properties, Inc., 291 AD2d 566, 737 NYS2d 654 (2d Dept 2002) ; Matter of Steinberg v. Cross Country Paper Products Corp., 249 AD2d 341, 671 NYS2d 341 (2d Dept 1998). . . .
In this case, the minority and majority shareholders have set forth far differing versions of the facts. When contested as they are here, the Court must, through a full record, including the testimony of the parties, determine whether the majority shareholder has, in fact, been engaged in improper transfers, self dealing, or whether, as stated by [Louis], all actions have been appropriate under the circumstances.
Justice Pines also ruled that there was not “sufficient information at this stage” to determine that appointment of a receiver was necessary to preserve the assets of the corporation. She did, however, continue the temporary restraining order barring disbursements to preserve the status quo.
There have been numerous cases in which courts grant or deny dissolution without holding an evidentiary hearing. For instance, in Matter of HGK Asset Management, Inc., 228 AD2d 246 (1st Dept 1996), the appellate court affirmed an order of dissolution without a hearing where the respondent shareholders’ papers opposing the petition failed to raise a factual issue of oppression. Wenger nonetheless is a good reminder for petitioners that their ultimate objective, whether it be liquidation of the company or inducing the other side to purchase their shares, may not be achievable in the first round of litigation, and that they may have to incur the additional time and considerable expense of an evidentiary hearing.
Update October 2, 2010: By short form order dated September 23, 2010 (2010 NY Slip Op 32675[U]), Justice Pines denied summary judgment motions filed by both sides and scheduled the case for trial on October 4, 2010. The summary judgment motions focused on the disputed issue whether son David validly held a stock interest in the company pursuant to a grantor retained annuity trust created by his father.