I recently did a series of postings on challenges to standing in corporate dissolution cases where the petitioners lacked stock certificates or other conclusive evidence of their share ownership (see here, here and here).  I didn’t expect to return to the topic so soon, but a new decision out of the Appellate Division, Second Department, reversing a lower court’s order denying injunctive relief, warrants another visit.

The case, Yemini v. Goldberg, involves a fight over the ownership of a New York corporation called ANO, Inc. which is an acronym for Ari N Oded, Ari being plaintiff Ari Yemini and Oded being defendant Oded Goldberg. 

ANO was formed in June 1999 to purchase an interest in another company called Candlewood Holdings, Inc.  The only ANO stock certificate ever issued was issued on June 22, 1999, to Yemini who also was identified as sole director and shareholder in corporate resolutions adopted the same date.

On July 1, 1999, ANO acquired a 50% interest in Candlewood (later increased to two-thirds).  On that same date, Yemini and Goldberg entered into a “Nominee Agreement” denominating Goldberg as “Principal” and Yemini as “Nominee”.  The Nominee Agreement contains the following two recitals:

     WHEREAS, the Principal is the true owner of fifty (50%) percent of the common stock of ANO, Inc., a New York corporation (the “Corporation”);

     WHEREAS, the Nominee shall act as nominee for the Principal in connection with said Corporation and in connection with the Stock Acquisition Agreement by and between ANO and Candlewood Holdings, Inc.(“Candlewood”), dated as of July 1, 1999 (the “Stock Acquisition Agreement”.

The Nominee Agreement contains provisions authorizing the Nominee to take all actions required to purchase the Candlewood interest; requiring the Nominee to provide the Principal with all documents concerning ANO; prohibiting the Nominee from taking any action with regard to the Principal’s interest in ANO without the Principal’s express instructions; and appointing the Principal the Nominee’s attorney-in-fact with the power to execute all agreements, instruments, etc. required to be signed by the Nominee.

In 2005, Yemini sued Goldberg for the latter’s alleged failure to make certain capital contributions for a separate business venture.  Apparently, by this time Yemini refused to acknowledge Goldberg as owning any interest in ANO, prompting a countersuit by Goldberg and an application by him for preliminary injunction with regard to a meeting of the shareholders of Candlewood.

The matter proceeded to an 11-day evidentiary hearing before Nassau County Commercial Division Justice Leonard B. Austin (recently elevated to Associate Justice of the Second Department), who denied Goldberg’s injunction motion in a decision reported at 15 Misc 3d 1142(A), 2007 NY Slip Op 51117(U) (Sup Ct Nassau County 2007).

Justice Austin found that, other than the Nominee Agreement and ANO’s name, there were “no indicia of ownership of ANO or any interest therein” by Goldberg.  In addition to the stock certificate and resolutions mentioned above, Justice Austin pointed to a Candlewood shareholders agreement and employment agreement that identified Yemini as sole shareholder, both of which agreements Goldberg knew about when they were executed in July 1999, and to ANO’s tax returns which, with Goldberg’s knowledge, also identified Yemini as sole shareholder.  Justice Austin further noted that, until the litigation, Goldberg never asserted rights as a shareholder of ANO or demanded a turnover of the ANO stock.

Justice Austin also held that Goldberg was unlikely to succeed on the merits because he lacked “clean hands” and was estopped from taking inconsistent positions.  This arose primarily from Goldberg’s involvement in legal proceedings with his ex-wife in 2002, in which he filed a net worth affidavit that omitted mention of ANO as an asset.  “A party, such as Goldberg”, Justice Austin wrote,

who has hidden an interest in ANO from his wife in a matrimonial action, has failed to disclose this interest to a lender and repeatedly failed to disclose the interest in ANO to the tax authorities, has unclean hands and cannot obtain relief.

Not so fast, says the Second Department in a decision on Goldberg’s appeal ordering that he be granted a preliminary injunction based on the Nominee Agreement.  Yemini v. Goldberg, 60 AD3d 935, 2009 NY Slip Op 02353 (2d Dept 2009).  Here’s the key passage from the appellate decision:

Parties are free to make their own arrangements regarding beneficial ownership of securities as definitive between them (see UCC § 8-207[a], Official Comment 3; Delaware v New York, 507 US 490, 505).  This nominee agreement “constituted a declaration of trust” (Brotman v Meyers, 41 AD2d 547, 547).  It is irrelevant that Yemini at all times retained ownership of the ANO stock certificates (see Matter of Benincasa v Garrubbo, 141 AD2d 636, 638).

The appellate decision does not comment on the issue of unclean hands relating to Goldberg’s non-disclosure of his ANO stock interest in his matrimonial case.  It does state, however, that judicial estoppel does not apply because there is no evidence that Goldberg “secured a judgment in his favor in the proceeding in which he allegedly took an inconsistent position”.

The lower court and appellate decisions do not relate Goldberg’s reasons for wanting the Nominee Agreement, or refer to any testimony from Yemini explaining his reasons for executing it.  In my experience, such arrangements usually are driven by tax considerations.  In other cases courts have refused to uphold undocumented stock ownership claims in the face of contradictory tax or other official filings.  This case is different because the lawyer-prepared Nominee Agreement contains the adverse shareholder’s explicit, signed recognition of the disputed stock interest.

Update March 25, 2013: By Order dated March 5, 2013 (read here), Justice Bucaria directed the dissolution of Candlewood Holdings, Inc. upon application by Yemini.

  • justmoney

    How do these decisions effect nearly all stocks and bonds that have Cede & Co as nominee. I doubt the average invester has a written agreement with Cede & Co,
    Cede holds over $40 trillion worth of stocks, bonds, notes, etc.
    Does virtually the entire wealth of our nation lay in the hands of one court decision?
    PAM: No. Cede & Co. acts as a depository and stock transfer agent for banks, institutions and brokers holding publicly traded shares of customers, which is very different (and conveys no voting power) from the kind of nominee agreement in the case I discussed which gave the nominee full authority over management decisions of the privately-owned company.