The adjudication of corporate dissolution cases can and often does present any number of complex, fact-intensive issues that, if placed in the procedural context of an ordinary, plenary action, necessarily would occupy the parties in protracted pre-trial discovery proceedings including document exchange and depositions.
Dissolution cases in New York, however, are not ordinary lawsuits initiated by summons and complaint followed by discovery and trial. Rather, the governing statutes mandate that the dissolution request be brought in the form of a so-called “special proceeding” initiated by petition and order to show cause followed usually within 4 to 6 weeks by a hearing based on the papers, akin to the manner in which a summary judgment motion is determined. That is, the procedural rules for special proceedings laid out in Article 4 of the Civil Practice Law and Rules contemplate a potential summary disposition of the case at the initial hearing without the benefit (or detriment, depending on one’s point of view) of discovery. CPLR Section 408 specifically requires leave of court before a party may serve a disclosure demand.
I have seen first hand and from afar many instances in which lawyers ignore the constraints on discovery in dissolution proceedings, or assume the court will rubber stamp applications for leave to serve discovery demands. This is a mistake, as illustrated by a recent, unpublished decision by Nassau County Commercial Division Justice Timothy S. Driscoll in Matter of Kaufman (L.I. Yellow Cab Corp.), Short Form Order, Index No. 001486-09 (Sup Ct Nassau County Sept. 15, 2010).
Kaufman involves a taxi business started in 1963 based in Hicksville on Long Island, initially owned and operated by brothers William and Stephen Kaufman. Years later Stephen’s son, Keith, and a non-family member also became shareholders. In 2009, William as a 30% shareholder sued for judicial dissolution under Section 1104-a of the Business Corporation Law, claiming oppressive action involving Keith’s alleged misappropriation of company assets, nonpayment of sales tax and falsification of lease agreements with drivers.
The respondent shareholders elected to purchase William’s shares under BCL Section 1118, thereby converting the proceeding to a valuation contest. William’s counsel subsequently served a notice to take Keith’s deposition which the respondents moved to quash on procedural and substantive grounds. Procedurally, respondents argued that the deposition notice was invalid for failure to seek and obtain the court’s leave prior to serving the notice as required by CPLR 408. Substantively, they argued lack of adequate justification in that the sole issue for trial was the fair value of Williams’ shares; that there already had been an exchange of experts’ valuation reports and production to William of all relevant financial information; and that William was actively involved in running the business.
William countered that Keith’s deposition was necessary because the valuation report produced by respondents’ expert was “without basis in reality” based on a recent third-party offer for a portion of the business; that Keith has “intimate knowledge regarding the income and expenses” of the company; that Keith had recently purchased a $1 million home; that Keith’s testimony will provide information relevant to the impact of his alleged misconduct on fair value; and that, as to the procedural objection, William’s counsel had advised the court at a recent conference of his intention to attempt to depose Keith.
Justice Driscoll’s analysis notes that the “case law interpreting [CPLR 408] is somewhat sparse,” but that guidance can be found in the Appellate Division, Second Department’s ruling in Gargano v. V. C. & J. Construction Corp., 148 AD2d 492 (2d Dept 1989), where the court permitted document discovery in a special proceeding to fix an attorney’s lien, but denied leave to take the deposition of the attorney-petitioner, observing that “the granting of discovery is generally looked upon with disfavor in summary proceedings.”
Justice Driscoll’s ruling skips over the respondents’ procedural objection to reach the substantive issue. “Guided by Gargano,” Justice Driscoll writes, “the Court concludes that Petitioner has not demonstrated the requisite need for the proposed deposition of Keith Kaufman.” He then offers the following reasons:
The Court reaches its conclusion in light of the facts that 1) discovery is generally looked upon with disfavor in summary proceedings; 2) the parties have exchanged Valuation Reports; and 3) the parties will have the opportunity to present witnesses, and conduct cross examination of adverse witnesses, at the trial of this matter, regarding the fair value of Petitioner’s interest in the Corporations. Accordingly, the Court grants Respondents’ motion to vacate the Notice of Deposition of Keith Kaufman.
Neither Gargano, Kaufman nor any other case I’ve come across stands for the proposition that pre-trial discovery can never be had in corporate dissolution cases. Frequently, in hotly contested dissolution matters that cannot be resolved summarily upon the initial hearing of the petition, both sides desire document and testimonial discovery of the other, thereby making it relatively easy to get the court’s permission. Rather, the main takeaway from Kaufman should be an understanding, particularly when only one side desires pre-trial discovery, that the proponent of discovery must be prepared to satisfy the court that the additional delay and expense attendant to depositions and the like are outweighed by a legitimate need to obtain relevant information without which the proponent’s ability to prepare for trial will suffer meaningful prejudice.
One final note. In dissolution cases involving limited liability companies, the LLC Law does not contain a similar requirement mandating use of the special proceeding form, and the courts have permitted LLC members to utilize either a plenary action or special proceeding. (See my prior post on the subject here.) The need for discovery therefore is a factor to consider in deciding which form to use for LLC dissolution.