A rare petition for corporate dissolution at the behest of a director leads to a decision of apparent first impression upholding — but not exercising — the court’s authority to compel a shareholder to present his derivative claim for breach of fiduciary duty against the petitioning director. Matter of Deblinger (Leemar Leasing Corp.), 2010 NY Slip Op 32311(U) (Sup Ct Nassau County Aug. 19, 2010).
Deblinger involves a fight among three siblings, each of whom owns one-third of the shares in each of two corporations known as Leemar Leasing Corp. and Sani-Pine Products Co. Leemar was an automobile leasing firm formed in 1968 which also owned two rental properties. Sani-Pine, formed in 1954, sold disinfectants and cat litter, and also owned two rental properties. The petitioner, Cecile Deblinger, is the sole officer and director of both corporations.
The siblings held a shareholders meeting in late 2007 at which they agreed to liquidate the corporations. The meeting minutes stated that Cecile would offer the corporations’ real properties for sale and that, once a bona fide offer was received, any of the shareholders would have the right to purchase the property at that price.
The siblings’ accord soon suffered a breakdown. Jay Deblinger filed two lawsuits unsuccessfully seeking to stop the sale to a third party of one of the properties owned by Sani-Pine. Eventually Jay acquired the two Leemar properties for approximately $500,000, and the two Sani-Pine properties were sold to third parties for approximately $1.5 million.
Only $200,000 of the total proceeds were distributed to the shareholders. Cecile offered to distribute the balance conditioned upon getting releases from her two siblings, but they refused to do so leading to impasse.
In early 2010, as sole director Cecile petitioned under Section 1102 of the Business Corporation Law for judicial dissolution of the two corporations. This rarely used statute provides:
If a majority of the board adopts a resolution that finds that the assets of a corporation are not sufficient to discharge its liabilities or that a dissolution will be beneficial to the shareholders, it may present a petition for its dissolution.
Cecile’s petition also sought an order under BCL Section 1008(a) for an order requiring all creditors, including her brother Jay, to present their claims. That statute, which generally provides for judicial supervision of both voluntary and involuntary dissolution, in pertinent part authorizes the court to
make all such orders as it may deem proper in all matters in connection with the dissolution or the winding up of the affairs of the corporation, and in particular, and without limitation of the generality thereof, in respect of the following: ….
(2) The adequacy of the notice given to creditors and claimants and if it is determined to have been inadequate, the requirement of such further notice as the court may deem proper.
(3) The determination of the validity and amount or invalidity of any claims which have been presented to the corporation.
(4) The barring of all creditors and claimants who have not timely filed claims as provided in any such notice, or whose claims have been disallowed by the court, as against the corporation, its assets, directors, officers and shareholders.
(5) The determination and enforcement of the liability of any director, officer, shareholder or subscriber for shares, to the corporation or for the liabilities of the corporation.
The other sister, Jo Ann Deblinger, consented to dissolution and offered to sign a release provided her brother Jay also released Cecile from any liability. Jay consented to dissolution conditioned upon it being without prejudice to his claims against Cecile relating to her alleged self-dealing and mishandling of the corporations’ business affairs. Jay also opposed Cecile’s request for an order requiring him to present his claims in the dissolution proceeding, arguing that his claims were “personal” and therefore not covered by the above-quoted provisions of BCL 1008 concerning the presentation and determination of creditor claims against the corporation.
The decision by Nassau County Commercial Division Justice Stephen A. Bucaria first addresses and grants Cecile’s request for dissolution under BCL Section 1102. Justice Bucaria writes that “[b]ecause of the acrimony which has developed and the failure of any shareholder to object to dissolution, the court finds that dissolution will be beneficial to the shareholders.” After noting that the corporations do not appear to have any significant third-party liabilities, he also orders that the judgments to be entered “shall contain provisions that the property of the corporations shall be distributed to the shareholders according to their respective interests.”
Although essentially granted on consent, this is the only decision I have encountered dealing with a Section 1102 dissolution petition brought by a director — as opposed to a minority shareholder’s dissolution petition under BCL 1104-a for oppression or a 50% shareholder’s deadlock petition under BCL 1104. Why are they so rare? I suppose it’s because in most multi-shareholder close corporations, board representation by and large tracks stock ownership, so that when there is not a majority of shareholders favoring dissolution, there likely does not exist the requisite board majority to bring an 1102 petition. The exceptional Deblinger case is explained by the quirky, single-director boards of the subject corporations.
Justice Bucaria next addresses Cecile’s contested request that Jay be required to present in the dissolution proceeding his claims against her. Justice Bucaria acknowledges that the case precedents applying BCL Section 1008(a), such as Bryant Elbert Ford v. Pulmosan Safety Equipment Corp., 52 AD3d 710 (2d Dept 2008), involve outside creditors not affiliated with the corporation. “Nevertheless,” he opines,
pursuant to BCL 1008(a)(5), the court has jurisdiction to determine a claim against a director for breach of fiduciary duty owing to the corporation.
Jay argued that this portion of the statute, authorizing the court to determine claims against directors for violation of duties owed the corporation, did not apply because his claim against Cecile was “personal” rather than derivative on behalf of the corporations. Justice Bucaria disagrees, stating that Jay’s “allegations of mismanagement or diversion of assets to the director’s own enrichment, without more, give rise to only a derivative claim.” Justice Bucaria therefore concludes that the court “has discretion to supervise the liquidation of the two corporations and direct all claimants, including respondent [Jay], to present their claims.”
The decision ends with a twist, however, as Justice Bucaria declines to exercise jurisdiction over Jay’s claims “at this time” because “Jay’s breach of fiduciary claims have not been alleged in detail.” Cecile’s motion to require all creditors to present claims therefore is denied. Once the judgments of dissolution have been entered, Justice Bucaria adds, under BCL Section 1007(a) the corporations themselves (presumably still under Cecile’s sole control) may give publication notice to all creditors and claimants, including Jay, requiring them to present all claims within a bar date not less than six months from the date of publication.
In the final analysis, the legal maneuvering in Deblinger seems designed either to expedite or delay one or the other side’s access to the $1.8 million or so in sale proceeds being held as “hostage.” The decision’s outcome appears to represent a partial win for both sides, in that, on the one hand, the funds will be distributed pro rata to the shareholders in advance of a determination of Jay’s claims thereby leaving Cecile at risk and, on the other hand, even if Jay eventually succeeds on his claims which the court deemed to be derivative, only one-third of any recovery will redound to Jay’s benefit.
Update April 20, 2012: The Deblinger family saga continues. In late 2011, after the two corporations were formally dissolved and after final distributions were made, Jay filed a new, derivative lawsuit against Cecile alleging various breaches of fiduciary duty. In a decision dated April 11, 2012 (read here), Justice Bucaria dismissed most of the claims under the business judgment rule, leaving intact only a single claim challenging as excessive the compensation Cecile drew after the corporations ceased doing business.
Update June 7, 2013: Both sides appealed from portions of Justice Bucaria’s April 2012 order. By order dated June 5, 2013 (read here), the Appellate Division, Second Department, affirmed Justice Bucaria’s order in all respects.