In a garden variety lawsuit, say, for money damages based on breach of contract, the rules of procedure governing civil litigation allow what we lawyers call notice pleading. That is, the party bringing the suit can file a short form of complaint that alleges barely enough to put the defendant on notice of the claim, e.g., identifies the contract and the parties, alleges the nature of the breaching conduct, and makes some general statement of damages. The detailed facts in support of the claim can be fleshed out later by way of pretrial disclosure.
The rules are different for corporate dissolution lawsuits. A shareholder who applies for dissolution thinking he or she can gain traction with a skeletal pleading that alleges broad statements of wrongdoing or dysfunction bereft of underlying, detailed facts, is in for a rude surprise. Case in point: Matter of Comparato (Affiliated Agency, Inc.), Short Form Order, Index No. 021033-10 (Sup Ct Nassau County Jan. 26, 2011), in which Nassau County Commercial Division Justice Timothy S. Driscoll recently dismissed a minority shareholder’s application for judicial dissolution for lack of specifics.
I’ve posted before about the distinctive procedures for bringing dissolution applications (read here, here and here). Briefly, an applicant for judicial dissolution based on minority shareholder oppression or deadlock must commence a form of fast-track lawsuit called a “special proceeding.” Instead of the normal summons and bare complaint followed by lengthy discovery and eventually a trial, the party initiating a special proceeding must file a “petition” by “order to show cause” that will be scheduled for a hearing usually within four to six weeks. On the initial hearing or “return” date, the judge usually will hear oral argument by the opposing lawyers and — here’s the important part — it can decide whether to grant or deny the petition based solely on the facts contained in the parties’ papers. Generally speaking, only if the court finds that the material facts are disputed will it schedule a later trial.
In the Comparato case, a one-third shareholder of an insurance agency filed a petition by order to show cause in November 2010 seeking to dissolve the agency under Section 1104-a of the Business Corporation Law based on oppressive and fraudulent conduct by the other two co-equal shareholders. As quoted in Justice Driscoll’s decision, the petition’s allegations of wrongdoing consisted entirely of the following:
The [respondents] are guilty of illegal and fraudulent conduct with respect to trust funds over which [they] have control by nature of the corporation’s business and have frustrated the petitioner’s efforts to correct and cease this conduct.
That this petition is further being brought on the grounds that the [respondents] have engaged in oppressive actions towards the petitioner. Specifically, the [respondents] have made decisions material to the interest of the petitioner’s rights and entitlements to profits in violation of the agreed upon practice of the Corporation.
The petitioner submits that liquidation is necessary to prevent further fraudulent conduct and is reasonably necessary for the protection of the rights and interests of the petitioner.
The petitioner apparently did not offer a supplemental affidavit of his own or submit documents to bolster his allegations. The petitioner’s attorney submitted an affirmation restating but not really amplifying the petition’s allegations that respondents were mismanaging premium collections. The respondent shareholders submitted opposing affidavits to which they attached a copy of the shareholders’ agreement and various correspondence indicating that the petitioner filed for dissolution after unsuccessfully making a buyout demand in excess of the buyout price to which he was entitled following his permanent disability. The attached correspondence also reflected the respondents’ pre-litigation attempts to draw out details concerning the petitioner’s accusations of mismanagement, to which the petitioner merely responded that the specifics were “well known” by respondents.
After summarizing the applicable statutes and case law, Justice Driscoll’s decision dismissing the petition focuses on its lack of factual allegations. Here’s what he writes:
The Court concludes that the Petition fails to allege facts that would warrant dissolution of the Corporation pursuant to BCL 1104-a. The Petition makes general, conclusory allegations completely lacking in specifics regarding the allegedly improper conduct of the Respondents. Given the paucity of the allegations in the Petition, Petitioner has also failed to meet his burden to warrant the appointment of a receiver. In light of the foregoing, the Court dismisses the Petition.
I’ve no clue whether the petitioner in Comparato could have offered additional facts to salvage his petition, either in regard to the allegedly improper handling of premiums or the allegedly improper allocation of profits. What I can say is that Comparato underscores the absolute necessity to load the petition with all the facts at one’s disposal, including documentary evidence to back up any claims of financial unfairness or impropriety. If you don’t, be prepared for a first-round knockout like the one handed the Comparato petitioner.