Vlasic classic story of a second-generation family business dispute. Over four decades ago, the three Adelstein brothers started a pickle distribution business in Brooklyn. The brothers jointly made all business decisions including salary, hiring and firing of employees. In 1995, brothers Sydney and Jack brought their sons Steven and Larry, respectively, into the business.
In 2006, the business was incorporated as Finest Food Distributing Co. Sydney and Jack transferred their one-third stakes to their sons, leaving brother Joel co-owning the business with his two nephews. In 2007, Joel was sidelined by health problems leaving his nephews in charge of all operations. According to Joel, when he later returned to work, and after he turned down the nephews’ buyout offer, they initiated a squeeze-out by excluding him from company decision-making and withholding distributions.
In February 2009, the nephews terminated Joel’s employment prompting Joel to file a lawsuit against them for breach of contract, breach of fiduciary duty and unjust enrichment. In January 2010, Nassau County Commercial Division Justice Timothy S. Driscoll granted the nephews’ motion to dismiss the complaint, holding that Joel’s employment was terminable at will, that they owed him no fiduciary duty as an employee, and that his remaining claims of malfeasance must be brought derivatively on the corporation’s behalf. Adelstein v. Finest Food Distributing Co. N.Y. Inc., 2010 NY Slip Op 30149(U) (Sup Ct Nassau County Jan. 13, 2010).
Two months later, Joel commenced a dissolution proceeding in Queens County under Section 1104-a of the Business Corporation Law alleging minority shareholder oppression. The nephews made a two-part motion to dismiss the petition on the grounds, first, that the nephews were “necessary parties” whom the petition failed to name as respondents and, second, that the dismissal of Joel’s prior action barred the dissolution proceeding under principles of res judicata (claim preclusion) and collateral estoppel (issue preclusion).
The decision by Queens County Commercial Division Justice Orin R. Kitzes in Matter of Adelstein (Finest Food Distributing Co. N.Y. Inc.), 2010 NY Slip Op 31719(U) (Sup Ct Queens County June 15, 2010), rejected both of the nephews’ contentions and ordered a hearing to resolve the disputed factual issues as to whether the nephews “have been guilty of oppressive action or whether the assets of the corporations are being wasted, looted or diverted.”
The necessary-party issue was easily resolved as a matter of law. BCL Article 11 contains no express requirement that the petition name as a respondent each of the corporation’s shareholders. The statutory notice provisions are contained in BCL Section 1106, subsection (a) of which states that upon presentation of the petition, “the court shall make an order requiring the corporation and all persons interested in the corporation to show cause” why the corporation should not be dissolved. Section 1106(c) merely requires initial service of the papers “upon the state tax commission and the corporation and upon each person named in the petition.” Justice Kitzes’ decision also cites Matter of Finando, 226 AD2d 634 (2d Dept 1996), in which the appellate court rejected the argument made by an out-of-state shareholder that, because the petition did not name her as a respondent, the court lacked jurisdiction over a necessary party.
I have seen many petitions that name the other shareholders as respondents, and many that do not. At least in the case of a deadlock dissolution petition brought by a 50% shareholder under BCL Section 1104, it’s my view that the better practice is to name the other 50% shareholder as a respondent, if nothing else, to deflect respondent’s possible use of the corporation’s funds for legal defense costs. The circumstances under which it may make more or less sense to name and serve other shareholders as respondents in shareholder oppression cases are too varied to generalize.
Res Judicata/Collateral Estoppel
The second prong of the nephews’ dismissal application required the court to determine the extent to which, if any, Joel’s dissolution petition improperly sought to relitigate claims and/or factual issues deemed determined or actually decided in the prior, dismissed lawsuit. This, in turn, required Justice Kitzes to examine the interplay between minority shareholder oppression and the at-will employment doctrine involved in the prior lawsuit.
The issue has generated a fair amount of case law over the years, starting most prominently with Ingle v. Glamore Motor Sales, Inc., 73 NY2d 183 (1989), where the court indicated that a minority shareholder, whose at-will status negated any claim for fiduciary breach arising from termination of employment, nonetheless could seek recourse for oppression under BCL Section 1104-a. (Read here my prior post discussing Ingle.) A more recent example, to the same effect, is Ambar v. Devington Technologies, Ltd., 2009 NY Slip Op 32373(U) (Sup Ct NY County Oct. 13, 2009), where the court refused to dismiss a petition for involuntary corporate dissolution brought by a minority shareholder whose employment was terminated by the controlling shareholders, notwithstanding at-will employment provisions in their shareholders’ agreement. (Read here my post on Ambar.)
Justice Kitzes’ ruling in Finest cites no case law but reflects the same underlying principle in rejecting the nephews’ argument for dismissal of their uncle’s petition based on the dismissal of his prior Nassau County action. Here’s what he wrote:
The acts underlying the breach claims and the alleged oppressive acts that form the dissolution claim are substantially similar. However, the analysis of these acts is substantially different in an action regarding an employee’s claims and one regarding a shareholder. An employee’s rights and obligations toward his or her employer are substantially different than those a shareholder has toward a corporation in which ownership interests exist. This results in the law treating their relationships very differently in every issue that arises in their respective relationships. Accordingly, the Nassau Action which dealt with petitioner’s rights as an employee in no way decided the instant cause of action which involves petitioner’s rights as a one third owner of the corporation.
It’s not unusual, when respondents move to dismiss an oppression petition, also to ask the court to extend the 90-day statutory window to elect to purchase the petitioner’s shares for fair value under BCL Section 1118. In Finest, the nephews requested an additional 60 days from the date of the court’s decision. Justice Kitzes granted the request but only for 30 days in accordance with the parties’ stipulation made in advance of the decision.