Over two years ago I posted about a decision by Suffolk County Commercial Division Justice Emily Pines in a father vs. son corporate dissolution case called Matter of Wenger. I characterized Wenger as a classic illustration of the “ordinary” dissolution case in which “there are no knockout punches in the first round” and where the court orders an evidentiary hearing based on disputed issues of fact.
Two years, one fruitless summary judgment motion and a six-day trial later, Wenger has turned into anything but the ordinary dissolution case.
Justice Pines’ December 14, 2010, post-trial decision in Matter of Wenger (L.A. Wenger Contracting Co.), 2010 NY Slip Op 52236(U) (Sup Ct Suffolk County), contains two novel rulings. First, the court holds that the father/69% shareholder is estopped from denying his son’s position as 31% shareholder notwithstanding the failure of the Grantor Retained Annuity Trust (GRAT) under which shares were to be transferred to the son. Second, after finding that the son demonstrated oppression by his 87-year old father, in lieu of dissolution or compelled buyout the court orders that the multiple real properties and certain escrow funds held by the subject corporations be appraised and distributed such that the son winds up with 31% of the net value of the properties and cash.
The threshold issue in the case was the son David Wenger’s shareholder standing to seek dissolution of L.A. Wenger Contracting Co. (L.A. Wenger) and a series of affiliated companies. It was undisputed that, in 1996, the father, Louis Wenger, had his attorneys draw up documents to create a GRAT under which 31% of the company’s outstanding shares valued at $1.25 million would be transferred to the GRAT’s trustee and distributed to David over four years in exchange for four annual cash payments of $200,000 each. The transaction was reflected in the stock ledger, but share certificates never were delivered to the named trustee and David did not make the cash payments. Nonetheless, beginning in 1996 and continuously thereafter, all of the corporate tax returns for L.A. Wenger, and for the affiliates that were subsequently created to hold assets of L.A. Wenger, consistently identified Louis and David as the 69% and 31% shareholders, respectively. In addition, there were adjusting entries in the financials and deemed “distributions” of $800,000 reflected in the tax returns that apparently correlated to the GRAT payment schedule.
Prior to trial, Louis moved for summary judgment dismissing David’s petition on the ground he was not a shareholder. He supported his motion with expert testimony to the effect that the GRAT was never properly funded and therefore failed under Section 7-1.18 of the Estates, Powers & Trusts Law. In her ruling dated September 23, 2010, reported at 2010 NY Slip Op 32675(U), Justice Pines denied the motion, stating that “the Court is faced with issues that require a trial, which will likely involve both questions of fact and a battle of the experts.”
In her post-trial decision, and having had the benefit of the “battling” experts’ complete testimony, Justice Pines concludes that the GRAT “failed under state law, since it was never properly funded.” She nonetheless goes on to hold that Louis is “equitably estopped” from denying David’s 31% shareholder status, based primarily on the corporate tax returns. Here’s what she writes:
[B]oth Louis Wenger and the five corporations that are the subject of these combined lawsuits are equitably estopped from denying David Wenger’s position as a 31% shareholder. Nine years of corporate tax returns filed by the five corporations as well as corporate K-1’s given to David Wenger by those entities, many of which are beyond the reach of the IRS at this point, cannot be ignored. When combined with the clear intent set forth in Louis Wenger’s years of actions, the statements by Louis Wenger to sureties and lenders to the corporations, and the numerous correspondence, including that written after the parties were in dispute (Petitioner’s 165) cannot be ignored. All the corporations and their majority shareholder, Louis Wenger, acted for years as though and for their mutual advantage, David Wenger was a 31% share holder. The Court finds that he remains so to this date. The Court, therefore, agrees with Petitioner’s counsel that the validity of the GRAT at this point is irrelevant.
Next, Justice Pines holds that David “has met the requirements to demonstrate ‘oppressive conduct’ under BCL 1104-a” based on the father’s improper actions which began “as soon as David Wenger began to question Louis Wenger’s handling of the corporation’s finances,” including “demanding that he [David] turn over his interests in corporations holding over $10 million in assets for $10” and unilaterally transferring corporate assets to other relatives.
Now we come to the most interesting part: the remedy. The statutes governing judicial dissolution provide no express remedial authority for oppressive conduct other than dissolving the corporation and liquidating its assets (see BCL Section 1111). There is appellate case law, cited in Justice Pines’ decision, that expands the court’s remedial powers to include buyout of the minority shareholder on a voluntary or compelled basis. Justice Pines orders neither dissolution nor buyout. Instead, in an exercise of equitable discretion in the circumstances of a family dispute, she orders a distribution in kind to David, consisting of a portion of the subject companies’ realty plus whatever cash is required such that he receives 31% of the net value of the corporate assets, thereby leaving Louis as 100% shareholder of the going concern, reduced-asset companies. Here’s how Justice Pines explains it:
[T]his is a case, where dissolution does not appear to the Court to be in the best interests of the majority shareholder, who has reached 87 years of age, nor is it the only solution to provide the minority shareholder with his due, in view of the significant amount of real property held by the five subject corporations. Petitioner’s counsel has recommended an alternate remedy, which the Court adopts, in part. Under the circumstances, by appraising the net values of the real properties in question; transferring sufficient real property and cash from the escrow account holding the proceeds of the sale of 770 Railroad Avenue so that David Wenger or his designee receives 31% of the net value of such properties and cash, the Court finds that David Wenger’s claims will be satisfied without the need for the drastic remedy of dissolution. In order to accomplish such task, the Court is appointing Robert Lynn, Esq., by separate order, as a Temporary Receiver, with limited powers, to retain a real estate broker; and to obtain the net values of the real properties (taking into account all mortgages and liens) on the real properties currently held by the five corporations that are the subject of these proceedings. To this will be added the net value of the real property transferred without David Wenger’s consent to his sister located in Palm Beach, Florida and the amount of $50,000 removed by Louis Wenger from the proceeds of the sale of 770 Railroad Avenue. The Court determines the net value of the Florida property, based on appraisals placed into evidence by both parties to be $150,000 (Petitioner’s 186), since such was the appraised value at the time of the improper act of transfer. After calculating the 31% figure, the Temporary Receiver will have the authority to choose a property or properties, other than that located in Palm Beach, Florida and owned by David Wenger’s sister, to transfer to David Wenger or David Wenger’s designee, utilizing the remains of the escrow account, if necessary.
In the Old Testament story, Solomon pretended he would physically split the baby claimed by two women rather than allowing either one to win at the other’s expense, to trick them into revealing the true mother’s identity. Wenger has what I’ll call a reverse Solomonic twist, in which the judge actually splits the assets in order to preserve the companies rather than liquidate them. We can only hope it returns some measure of harmony to the Wenger family.
Update February 7, 2014: In a decision dated February 5, 2014 (read here), the Appellate Division, Second Department, modified the judgment entered upon Justice Pines’ post-trial decision by awarding David Wenger $232,500 additional representing 31% of a $750,000 settlement received by the company but diverted by Louis.