[Full disclosure: The author represented the prevailing shareholder in the dissolution proceeding and appeal discussed below.]
After the court orders dissolution of a corporation owned 50/50 by two deadlocked shareholders, and the business’s tangible assets have been distributed equally pursuant to agreement, may one shareholder demand an appraisal of the corporation’s good will associated with the divided assets for the purpose of compelling the other shareholder to make payment for any disparity?
A decision last week by the Brooklyn-based Appellate Division, Second Department, in Matter of Ravitz (Gerard Furst and Marjorie Ravitz, DPM, P.C.), 2009 NY Slip Op 06437 (2d Dept Sept. 8, 2009), holds that the court lacks statutory authority to order such a valuation proceeding.
Ravitz involves a long-established podiatric practice organized as a professional corporation with two equal shareholders. The practice operated out of three leased offices in Smithtown, Port Jefferson and Commack on Long Island. In November 2007, Dr. R filed a petition for judicial dissolution of the practice based on deadlock and internal dissension under Section 1104 of the Business Corporation Law. Dr. F opposed the petition. The court, by Nassau County Commercial Division Justice Ira B. Warshawsky, granted the petition and dissolved the corporation in a short form order dated February 11, 2008.
The two doctors then agreed to close down the Commack office immediately; that the practice would cease operations June 30, 2008; that Dr. R would take over the Smithtown lease, furnishings and equipment; and that Dr. F would take over the Port Jefferson lease, furnishings and equipment. They also agreed that neither one would use the practice’s trade name for their new, separate practices.
Dr. F maintained all along that he was entitled to additional compensation based on his claim that the Smithtown office being taken over by Dr. R generated more revenue than Dr. F’s Port Jefferson office and therefore enjoyed a disproportionate share of the company’s good will. Accordingly, in April 2008, Dr. F moved for an order pursuant to BCL 1008(a) directing an appraisal of the good will associated with each of the Smithtown and Port Jefferson offices, for the purpose of awarding a monetary adjustment for any disparity. Justice Warshawsky denied the motion by short form order dated June 13, 2008. Dr. F appealed.
Dr. F’s appeal contended that good will is a saleable asset that must be valued in connection with the winding up and liquidation of the corporation. Dr. R countered that there exists no statutory authority to order an appraisal and to compel payment by one shareholder to another in a judicial dissolution proceeding under BCL §1104, and that the only authorized disposition is for the corporation itself to sell its assets for cash at public or private auction. Alternatively, she contended there was insufficient factual basis to order an appraisal of good will, even assuming the court had authority to do so.
The Second Department never reached the alternative point. Rather, it agreed with the lower court that there was no authority for the requested appraisal in the absence of an agreement between the two doctors to value and distribute good will. Here’s what the court said:
When the parties cannot reach an agreement amongst themselves with respect to the sale of the corporation’s assets either to one another or to a third party, "the only authorized disposition of corporate assets is liquidation at a public sale" (Matter of Oak Street Mgmt., 307 AD2d at 320). Thus, the Supreme Court correctly determined that it did not have the authority to supervise postdissolution distribution of the corporation’s assets as requested by Furst (see Matter of Oak Street Mgmt., 307 AD2d 320; Matter of Sternberg [Osman], 181 AD2d 899).
The absence of an agreement by the parties to value and distribute good will in the event of dissolution precludes the inclusion of good will in the corporate assets to be distributed pursuant to Business Corporation Law § 1104. The failure of the parties to acknowledge and agree that good will is an asset of the corporation precludes the relief sought by Furst (see Dawson v White & Case, 88 NY2d 666, 671; Matter of Leslie & Penny for Penny Preville, 303 AD2d 508; Saltzstein v Payne, Wood & Littlejohn, 292 AD2d 585; Kaplan v Shachter & Co., 261 AD2d 440).
In my experience, most multi-member medical practices have written shareholder agreements with provisions for buyout and liquidation explicitly including or excluding good will in regard to valuation. As the court in Ravitz noted, the two doctors had no such agreement, hence Dr. F’s quest for what, in effect, amounted to a compulsory partial buyout fell flat in the absence of statutory authority for post-dissolution appraisal proceedings.
Update April 14, 2011: An interesting variation on the issues presented in the Ravitz case appears in Gaines v. Luongo (read here), a recent New Jersey appellate decision in which the court held that the clients of an accounting firm organized as a New Jersey LLC are not distributable assets of the dissolved firm. (HT: Jay McDaniel at the NJ Business Dissolution Journal)