Let’s face it. There are no bright lines when it comes to the standard for judicial dissolution of a close corporation on petition by a 50% shareholder alleging deadlock and internal dissension under §1104 of the Business Corporation Law. Instead, as I wrote some years ago in a NY State Bar Ass’n Journal article, the case law has developed incrementally and without discernable pattern, based on the peculiar facts and equities of each case. The court decisions, especially at the appellate level where it counts most, give us a result but little or no guidance for future cases.
Case in point: Matter of Poritzky (Dream Weaver Realty, Inc.), 2010 NY Slip Op 01486 (2d Dept Feb. 16, 2010), decided last month by the Brooklyn-based Appellate Division, Second Department. The court’s short decision, affirming the lower court’s order granting dissolution of a two-shareholder, 50-50 corporation, offers no factual analysis or anything to distinguish the case from others in which dissolution was denied, and contains but a few citations and standard quotes to the effect that determination of fault is not material when deadlock and dissension exists.
It turns out, however, that lurking in the case record, beneath the bland surface of the appellate court’s order, is a rarely seen issue that merits attention, namely, what happens when the two 50% shareholders agree to wind up the business and sell its assets, but can’t or won’t agree how to accomplish it? More specifically, under such circumstances is judicial dissolution and appointment of a liquidating receiver warranted without a hearing, even where the respondent shareholder offers some evidence (a) of bona fide negotiations and agreements with third-party buyers of the assets and (b) that private sale likely will produce substantially greater proceeds than a distress sale at public auction following dissolution?
Petitioner Herman Poritzky and respondent Stephen DeName, who had been working together since 1996 in Poritzky’s lending businesses, became 50-50 shareholders of Dream Weaver Realty, Inc. in July 2000. Dream Weaver was in the business of owning and developing real properties. The parties’ written shareholders’ agreement memorialized their equal stock ownership and positions as sole directors and officers, but little else.
Between 2001 and 2004, Dream Weaver acquired four properties, three of them income-producing improved properties and one unimproved lot. Around 2005, Poritzky and DeName had a falling out over management, record-keeping and finances of the several companies they co-owned. In 2007, Poritzky filed a lawsuit against DeName relating not to Dream Weaver but to two of their other businesses, alleging breach of fiduciary duty and seeking an accounting and damages. DeName counter sued for damages. By this time virtually all communications between the two were through their attorneys.
While this other action was still pending, in January 2009, Poritzky petitioned for judicial dissolution of Dream Weaver under BCL §1104 based on deadlock and internal dissension. Poritzky’s petition (read here) alleged that the two of them were “embroiled in litigation”; were no longer communicating directly; that DeName had stopped payments of interest due Poritzky for monies loaned by him to acquire one of Dream Weaver’s properties; that the board of directors had ceased to function; that their differences were “irreconcilable”; that all attempts to mediate the dispute had failed; and that even though Dream Weaver was solvent, liquidation of the corporation was the only feasible means to obtain a fair return on Poritzky’s investment.
DeName’s answer (read here) did not really contest the state of hostilities between the two co-owners. Rather, he contended that judicial dissolution was not warranted because the parties and their attorneys agreed and took action beginning in 2007 to wind up the company’s business affairs by selling its real properties. He further alleged that in late 2008 they agreed on terms of sale of two of the four properties to specific buyers, and also agreed on the marketing of the other two properties. DeName accused Poritzky of bad faith and “reneging” on these agreements to squeeze financial concessions from DeName in violation of fiduciary duty. DeName alleged that consummation of the private sales would result in net proceeds of $540,000, whereas the “forced sale” of the properties by a receiver unnecessarily would engender substantial fees and expenses and “will result in lower purchase prices being paid by the ultimate purchasers in the court proceedings than the amounts that have been offered by the existing prospective purchasers following arms length negotiations.”
In an unpublished decision and order dated April 21, 2009, Westchester County Supreme Court Justice Kenneth W. Rudolph (since retired) granted the dissolution petition. After reciting the parties’ contentions, the decision simply concluded that
petitioner has established, on the clear record before the Court and without necessity of a hearing, that the corporate affairs are rife with dissension and have ultimately resulted in a deadlock precluding the successful and profitable conduct of the corporation’s business.
The order also appointed a receiver under direction “to sell at public sale all of the property and assets of the corporation.”
DeName’s appeal brief to the Second Department (read here) argued that the “areas of disagreement relied on by the court below did not involve the conduct of the business which had been pursued by both sides, namely, the sale of Dream Weaver’s assets,” and that the lower court committed reversible error by failing to conduct a hearing on the issue of Poritzky’s alleged “bad faith refusal to pursue what had been agreed upon by the parties.” DeName’s brief principally relied on Matter of Hayes v. Festa, 202 AD2d 277 (1st Dept 1994), where a Manhattan appeals court panel denied dissolution notwithstanding the lack of communication between the two shareholders, based on the referee’s finding that “operation of the business continued, while negotiations on the division of assets came to a stalemate only because one side unilaterally ended negotiations and commenced this proceeding in the acknowledged hope of avoiding a more expensive buy-out of the other side.”
Poritzky’s opposing brief (read here) argued that the lower court properly exercised its discretion in granting dissolution without a hearing, quoting from Matter of Eklund Farm Machinery, Inc., 40 AD3d 1325 (3d Dept 2007), as follows:
[E]ven if petitioners were shown to have created dissension to obtain dissolution, Supreme Court could not conclude that it was in bad faith or that the parties’ differences were reconcilable. Given these circumstances, “the underlying reason for the dissension is of no moment” and a judicial remedy is appropriate.
As noted above, the Second Department’s affirmance of the dissolution order in Dream Weaver provides no additional analysis or insight.
So what lesson does Dream Weaver teach us? In my view, it tells us that absent some compelling explanation to the contrary supported by facts sufficient to require a hearing, which was missing in Dream Weaver, courts will presume that if a voluntary, private sale of the corporation’s assets outside of dissolution is achievable and in the collective best interests of the two owners, they will make it happen. Otherwise, an irreconcilable impasse over the winding up of the corporation’s business affairs is no less a viable ground for judicial dissolution than an impasse in the operation of the business as a going concern. It also tells us that the “mere” likelihood that a voluntary, private sale will maximize proceeds from sale of the corporation’s assets does not by itself permit an inference of bad faith on the part of the shareholder seeking dissolution.
My thanks to attorney Kenneth Gunshor, who represented the petitioner in Dream Weaver, for providing me with copies of the appellate briefs and record.