"Well over one and a half years have been wasted on a defense which is utterly without support."

Pretty strong stuff, coming from a recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria in Rosenfeld v. Luccaro, 2009 NY Slip Op 30963(U) (Sup Ct Nassau County Apr. 23, 2009), where the court granted dissolution of two closely held corporations based on "hopeless" deadlock and bitter dissension between two 50% shareholder factions.  The court’s sharp words were provoked by the respondent’s assertion that the petitioners were not — and had never been — shareholders, despite a seeming avalanche of corporate and tax records to the contrary.    

The subject corporations were formed in the 1970s by 50-50 shareholders Anthony Luccaro’s father and Walter Rosenfeld to own and operate a marina called Toms Point Marina located in Port Washington on Long Island.  Anthony Luccaro subsequently acquired his father’s interest, and Rosenfeld died some time in the 1980s.  His estate’s distributees included his second wife, Judith, and his three children from a prior marriage.

Fast forward to 2007, when the Rosenfeld children commenced judicial dissolution proceedings under Sections 1104 and 1104-a of the Business Corporation Law, claiming deadlock and oppression by Luccaro who allegedly refused to recognize the election of petitioner Todd Rosenfeld as director, refused access to the bylaws and other books and records, threatened the life of petitioner Steven Rosenfeld if he entered the marina property, operated the marina as a cash business without proper controls and employed his family members without proper accounting, refused to issue K-1 tax forms to the Rosenfelds, and took cash and other distributions for himself without making any distributions to the Rosenfelds.

Luccaro initially opposed dissolution by affidavit contending that the estate of Walter Rosenfeld had sold the decedent’s 50% stock interest to Luccaro, and that the sale proceeds were paid to the estate and distributed to the decedent’s heirs.  Luccaro’s affidavit further alleged that Luccaro’s father, as a prerequisite of his son’s purchase of the father’s interest, insisted that his son protect himself with a buy/sell cross purchase agreement with Walter Rosenfeld whereby the survivor would acquire all of the decedent’s shares.  The Rosenfeld petitioners denied the existence of any cross purchase agreement — which it appears Luccaro never produced — and, in support of their stock ownership, submitted their father’s will, company tax returns, stock certificates and a 1986 affidavit of Judith, their father’s second wife, attesting to her conveyance to the Rosenfeld children of her 7.5% interest.  In reply, Luccaro contended that the petitioners introduced falsified documents and he denied the genuineness of his signature on various documents.

By decision dated October 29, 2007, Justice Bucaria denied the petitioners’ motion for summary judgment of dissolution as premature (Luccaro had not yet served an answer) and because of the need for a hearing to resolve Luccaro’s challenge to the legitimacy of the petitioners’ evidence concerning their stock ownership.  The decision noted that Luccaro had the burden of proof at such hearing.

Immediately afterward, the Rosenfelds served Luccaro with a formal notice requiring him to admit or deny that none of the companies’ tax returns from 1985 to 2005 showed Luccaro as anything other than a 50% shareholder, and also to admit or deny the genuineness of the tax returns submitted by the Rosenfelds in support of their dissolution application.  Luccaro denied all.

The hearing began in November 2007 before Special Referee Thomas Dana.  Luccaro failed to appear.  The Special Referee granted a continuance to allow the Rosenfelds to seek discovery from Luccaro of all of the company’s tax returns from 1983 to date, all stock certificates, minutes of all shareholder and director meetings, and all records concerning the formation of the two companies.  In January 2008, after Luccaro failed to produce documents, the Rosenfelds moved to compel the company’s accountant to release tax returns, also contending that Luccaro was evading the court’s production order because the records would undermine his claim to be sole owner.  By decision dated March 14, 2008, Justice Bucaria ordered production of the companies’ tax records for in camera inspection by the Special Referee.

After the in camera inspection, the Special Referee directed that the records be turned over to the Rosenfelds and indicated that, before any continuance of the hearing, a summary judgment motion would be appropriate based upon the records produced.  The Rosenfelds did just that, contending that the undisputed documentary evidence merited a finding that they owned 50% of the corporations, and that the evidence of deadlock and oppression likewise supported a summary determination in favor of dissolution.

Justice Bucaria’s April 23, 2009 decision granted dissolution.  He found that the Rosenfelds established their 50% stock ownership based on the companies’ stock ledgers and tax records, none of which Luccaro refuted.  The only contrary evidence that Luccaro could point to was the hearing testimony by Walter Rosenfeld’s second wife in which she denied her signature on the 1986 assignment of her 7.5% stock interest to the Rosenfeld children.  If credited, her testimony would have relegated the Rosenfeld children to minority shareholder status, thereby depriving them of standing to seek dissolution based on deadlock under BCL Section 1104 (but not oppression under Section 1104-a).  Justice Bucaria observed that the notarized assignment was entitled to a "presumption of  due execution" rebuttable only by "clear and convincing evidence to the contrary" which he found lacking due to Judith’s testimony admitting that her handwriting had changed after she suffered a stroke in 1995, that the stroke affected her memory, and her "confused" statement that she did not inherit any shares from her late husband.  Accordingly, Justice Bucaria concluded, Luccaro failed to meet his burden of proof to show that the Rosenfelds were not 50% shareholders.

Justice Bucaria predicated his order of dissolution on deadlock under Section 1104 without any explicit mention of oppression under Section 1104-a.  He wrote that "Luccaro has shown a complete disregard for the rights of petitioners, going so far as to refuse recognition of their ownership interests altogether, offering sworn statements averring that he and he alone owns the Corporations."  Finding that the parties were "hopelessly deadlocked," and that Luccaro’s affidavits refusing to recognize the Rosenfelds’ shareholder rights evidenced a "high degree of hostility," Justice Bucaria ordered an accounting, the appointment of a receiver and the immediate dissolution of the two companies by public sale.  Justice Bucaria conditioned his order of dissolution, however, on giving the parties 30 days to agree to a private sale of the companies either among themselves or to a third party. 

The judicial dissolution statutes have no provision for awarding counsel fees to a successful petitioner.  In this case, Justice Bucaria awarded fees based on Luccaro’s unreasonable denials of the Rosenfelds’ stock interests in his response to their formal Notice to Admit which was served pursuant to Section 3123 of the Civil Practice Law and Rules.  The statute authorizes the court to award a party forced to prove the unreasonably denied admissions its "reasonable expenses incurred in making such proof, including reasonable attorney’s fees."  Justice Bucaria’s decision directed the determination of the fees as part of the accounting.

Putting aside its peculiar litigation tactics, the Rosenfeld case fits a familiar pattern among multi-family, second-generation business owners, particularly when one family remains active in running the business and the other doesn’t.  The bonds of friendship and trust that existed between the original partners may not exist between the descendants.  The active family owner has greater incentive to reinvest profits, and can feel under-compensated for his or her contributions to running and growing the business.  The inactive family owner has greater incentive to take out profits or sell the business, and may be resentful of the compensation drawn by the active owner.  The divergent interests of the two factions can fester over time and, absent a buyout agreement, will often lead to litigation.  If anyone’s to blame, it’s the first-generation founders of the business for failing to put in place a plan of succession and written shareholders’ agreement with provisions for buyout at a fair price on reasonable terms.