The dynamic and often volatile nature of business partnership break-ups can necessitate the petitioner’s application at the outset of a dissolution case for a preliminary injunction to restrain the other party from taking corporate actions pending determination of the petition. Depending on the circumstances and immediacy, the petitioner may seek to enjoin particular, threatened actions — mortgaging company assets, signing a lease, terminating employees, making distributions, etc. — and/or present the court with a generic request to restrain the respondent from engaging in any transactions on the company’s behalf outside the "ordinary course" of business. As in any litigation, the grant or denial of injunctive relief at the earliest stage of the case can have a profound effect on the future course of the dissolution proceedings and the relative strengths of each side’s negotiating position, and thus must be carefully considered by counsel before taking the plunge.
Recent back-to-back decisions by Queens County Commercial Division Justice Orin R. Kitzes illustrate the risk and reward of preliminary injunction skirmishes in corporate dissolution contests. In Matter of Vassilakis (150-11 Corp.), Short Form Order, Index No. 21248/08 (Sup Ct Queens County May 19, 2009), Justice Kitzes denied a 20% shareholder’s application to preliminarily enjoin the majority shareholder from selling the business or, alternatively, sequestering the sale proceeds. Three days later, in Matter of Kan (3 Win, Inc.), Short Form Order, Index No. 6265/09 (Sup Ct Queens County May 22, 2009), Justice Kitzes granted the petitioner-50% shareholder’s application to preliminarily enjoin the other 50% shareholder from doing any business outside the ordinary course, including selling any of the several companies at issue or relocating them to another state.
What makes these cases especially interesting is that in both, the respondent shareholder asserted the same primary defense of lack of standing, based on assertions that the petitioner was not a shareholder. In both, Justice Kitzes concluded that the defense could not be determined without an evidentiary hearing. Why, then, did he grant the injunction in one case and not the other?
In Vassilakis, the alleged 20% shareholder of a pizza/delicatessen business petitioned for judicial dissolution under Section 1104-a of the Business Corporation Law on the ground of oppression. He alleged that the majority shareholder expelled him from the day-to-day operation and management of the company and terminated his relationship with the corporation. The majority shareholder contended that the petitioner was never a shareholder by reason of his failure to pay his portion of the amount invested in the corporation; that he did not sign any closing documents for the purchase of the business; and that he worked as an employee only at the corporation. The petitioner, who never was issued a stock certificate, countered by submitting various tax documents identifying him as a shareholder.
Justice Kitzes first concluded that the petitioner had sufficiently pleaded a cause of action for dissolution based on oppression under BCL Section 1104-a(a)(1), and that his affidavit and tax documents on the one side, and the respondent’s denial of petitioner’s shareholder status on the other, required an evidentiary hearing to determine petitioner’s standing to seek dissolution. Turning to the preliminary injunction application, Justice Kitzes denied the petitioner’s request to restrain the majority shareholder from selling the business or, alternatively, sequestering the sale proceeds, writing as follows:
As noted, this action is primarily one for the dissolution of a pizza/delicatessen and there is conflicting evidence regarding Petitioner being an owner of the corporation. While the mere existence of an issue of fact does not preclude a finding of likelihood of success on the merits, this Court finds that the submitted evidence suggests that the resolution of this matter is likely to be resolved without the dissolution of the corporation. Consequently, Petitioner has not established the first element in procuring injunctive relief, likelihood of success on the merits.
Justice Kitzes also found that the petitioner, who sought "to recoup money invested and payments for the sale of his shares of ownership in the corporation when it is sold," failed to establish that he would suffer irreparable injury without an injunction, and that the burden upon the corporation of enjoining a potential sale outweighed the threatened harm to petitioner.
Now let’s turn to the Kan case, in which a 50% shareholder petitioned under BCL 1104-a for judicial dissolution of a series of commonly-owned corporations involved in the trucking business. The petitioner alleged that the other 50% shareholder "looted" corporate funds to purchase a private residence and for other non-corporate purposes. The petitioner asked to preliminarily enjoin him from transacting any unauthorized business and from exercising any corporate powers except in the ordinary course of business; from taking any action to dissolve the corporations(presumably meaning voluntarily); and otherwise compelling the respondent to maintain the status quo pending the dissolution proceeding. As in Vassilakis, the respondent asserted the defense of lack of standing based on evidence not specified in the court’s decision, although it does note that no stock certificates were issued reflecting the ownership interests of either party. Also as in Vassilakis, Justice Kitzes ordered an evidentiary hearing to determine the petitioner’s shareholder status.
With respect to the application for preliminary injunction, Justice Kitzes employed the same analysis (and virtually the same wording) used in Vassilakis but reached the opposite conclusion to grant the application, as follows:
As noted, this action is for the dissolution of several trucking corporations and there is conflicting evidence regarding petitioner being an owner of the corporation. The Court notes that the mere existence of an issue of fact does not preclude a finding of the likelihood of success on the merits and this Court finds that the submitted evidence suggests that, assuming standing is found, the resolution of this matter is likely to be resolved with the dissolution of the corporation. Consequently, Petitioner has established the first element in procuring injunctive relief, likelihood of success on the merits.
Justice Kitzes went on to find that the relief sought by petitioner, "to recoup corporate assets and preventing further looting of the corporations," was "sufficiently unique" to establish irreparable injury, and that the balance of equities weighed in his favor as compared to the burden upon the corporations from preventing a sale or relocating operations to New Jersey.
The pair of decisions in Vassilakis and Kan lack detailed recitations of the facts and the parties’ contentions, making it more difficult to draw lessons from the different outcomes notwithstanding some basic similarities in the two cases. We don’t know, for instance, if the evidence of the 50% petitioner’s shareholder status in Kan was significantly stronger than the 20% petitioner’s in Vassilakis. Is that why the court found a likelihood of ultimate dissolution in the former but not the latter? Or was it based on the comparative strength of the underlying merits of the oppression and/or looting allegations? Or — this is pure speculation — perhaps the respondent shareholder in Vassilakis but not in Kan indicated his willingness to elect a buyout of the petitioner in the event the court sustains the petitioner’s stock ownership after a hearing?
One final note. BCL Section 1115 grants the court in judicial dissolution proceedings broad authority at any stage of the proceeding to grant injunctive relief against the corporation, its directors, officers and creditors to preserve corporate assets. There are decisions in the Manhattan-based Appellate Division, First Department (e.g., Matter of Greenhouse (HGK Asset Management, Inc.), 238 AD2d 291 (1st Dept 1997)) holding that an applicant for injunctive relief under Section 1115 need not show a probability of irreparable injury, which is one of the elements of the traditional tri-partite test for interim injunctive relief under Section 6301 of the Civil Practice Law and Rules, and which Justice Kitzes applied in Vassilakis and Kan. I have not seen any decisions treating this issue by the Second Department, which encompasses Queens County where Justice Kitzes presides, nor do I know if the point was raised by the litigants’ counsel in Vassilakis and Kan.