The purported co-owner of an ice skating rink, who petitioned to dissolve the business claiming he was frozen out by his fellow shareholder, got a cold reception from a judge who dismissed the case for lack of standing primarily based on a prior bankruptcy reorganization plan that did not identify the petitioner as a shareholder. The decision earlier this month in Matter of Gleich (Iceland, Inc.), Short Form Order, Index No. 19767/10 (Sup. Ct. Nassau County Apr. 6, 2011), issued by Nassau County Acting Supreme Court Justice Thomas A. Adams, also invoked the evidentiary rule known as the Dead-Man’s Statute in rejecting the petitioner’s testimony concerning an alleged oral stock conveyance agreement by a deceased shareholder.
The corporation known as Iceland, Inc. was formed in 1991 to operate an ice skating rink in New Hyde Park on Long Island. At inception the shares were owned 47% by Jacqueline Haenel, 3% by petitioner Stephan Gleich, and the remaining 50% by two others. Gleich, an attorney, previously represented Mrs. Haenel’s husband in business matters and they became social friends as well.
The rink’s business floundered leading to a Chapter 11 bankruptcy filing in 1994. It was uncontested that Gleich performed considerable legal work for the company. Gleich claimed he did so as an “employee” of the company while Mr. Haenel characterized his role as Iceland’s “counsel” even though his retention was never approved by the bankruptcy trustee.
Gleich contended that, as consideration for his legal services which the Haenel’s could not otherwise afford, and for his contribution of half the $30,000 necessary to effectuate Iceland’s reorganization plus future legal fees, it was agreed among them that Gleich and Mr. Haenel would own Iceland 50/50 if they succeeded in saving the business.
The bankruptcy judge approved a reorganization plan on December 21, 1995, in which Mr. and Mrs. Haenel were identified as sole shareholders upon reorganization holding 19% and 81% interests, respectively. Gleich alleged that Mr. Haenel orally agreed that he and/or his wife would hold Gleich’s 50% interest in their names until such time as Gleich “would request issuance of the stock” to Gleich or his nominee. Gleich also alleged that Mr. Haenel was understood to be the “real” owner of Iceland and that Mrs. Haenel was given a majority interest solely for “liability” purposes.
Justice Adams’ decision does not recite any facts concerning what happened over the next 13 years after the reorganization. Presumably the stock ownership did not change in that period. The story picks up in late 2008, when Gleich allegedly received a $10,000 profit distribution shortly before Mr. Haenel allegedly “locked him out of Iceland’s management and control.” Mr. Haenel claimed the December 2008 payment to Gleich and prior payments to him were repayment of loan.
Mrs. Haenel died in July 2009, leaving her shares to Mr. Haenel who thereupon claimed 100% ownership of Iceland. In December 2009, Gleich sent Mr. Haenel a proposed memorandum of agreement formalizing Gleich’s 50% stock interest, which Mr. Haenel rejected in March 2010. Gleich subsequently filed a petition for involuntary dissolution of Iceland based on deadlock under Section 1104 of the Business Corporation Law, claiming to be the beneficial owner of a 50% stock interest. Mr. Haenel moved to dismiss the petition alleging that Gleich was not a shareholder and therefore had no standing to seek dissolution.
Justice Adams’ ruling grants the motion and dismisses the petition, writing as follows (citations omitted):
Here, the December 21, 1995 Second Amended Plan of Reorganization identifying Mr. and Mrs. Haenel as Iceland’s sole shareholders is sufficient to establish the respondents’ prima facie entitlement to dismissal of the petition on the ground that the petitioner lacks standing. Even liberally construing the facts in his favor and according the petitioner every favorable inference, he has failed to create a triable issue of fact warranting disclosure. More specifically, in addition to the restriction imposed by CPLR 4519 (i.e., the Dead Man’s statute) following Mrs. Haenel’s July 11, 2009 passing, the alleged oral agreement (which is reportedly to have been consummated on December 13, 1995 when the petitioner allegedly invested, rather than loaned, $15,000 to Mr. and Mrs. Haenel), is in direct contravention of the subsequent December 21, 1995 Second Amended Plan of Reorganization approved by the Bankruptcy Court and therefore unenforceable.
Let’s take a closer look at the two grounds for dismissal mentioned by Justice Adams. The court’s reliance on the plan of reorganization implicitly invokes the doctrine of judicial estoppel which, in general, prevents a party who asserts a factual position in one legal proceeding from taking an inconsistent position in subsequent litigation. In a previous post (read here) I wrote about the dismissal of a dissolution petition brought by a purported shareholder who failed to list his stock interest in the schedule of assets included with his prior personal bankruptcy filing. Gleich differs in that the petitioner was not the bankrupt debtor (although he was a 3% shareholder of record when Iceland’s bankruptcy petition was filed and presumably received legal notice of the proceedings), but the judicial estoppel doctrine does not require strict identity of the parties (see, e.g., All Terrain Properties, Inc. v. Hoy, 265 AD2d 87 [1st Dept 2000]). According to his own testimony, Gleich knowingly sought the benefit of the proposed reorganization plan and entered into an agreement with the Haenels shortly before its approval which necessarily contemplated ownership of the company’s shares following reorganization in a manner contrary to the disclosure statements made in the plan adopted by the bankruptcy court.
The other ground mentioned by Justice Adams is the Dead-Man’s Statute (CPLR 4519), which makes testimony by an interested witness “concerning a personal transaction or communication between the witness and [a] deceased person or mentally ill person” excludable “[u]pon the trial of an action or the hearing upon the merits of a special proceeding.” Under the rule, as applied by Justice Adams, the court may not consider as competent evidence Gleich’s testimony concerning the December 1995 oral agreement he made with the Haenels concerning his stock ownership insofar as Gleich alleges that Mrs. Haenel, who died in 2009 before the litigation commenced, agreed to convey to Gleich shares placed in her name.
John D. Rockefeller had a wise saying, “A friendship founded on business is a good deal better than a business founded on friendship.” Perhaps that’s the ultimate lesson of the Gleich case.
Update July 2, 2011: By Order dated June 21, 2011, Justice Adams denied Gleich’s motion to reargue the court’s April 6 decision.
Update July 5, 2012: The Appellate Division, Second Department, this date affirmed Justice Adams’ original order dismissing Gleich’s petition for lack of standing, and his subsequent order denying Gleich’s motion to reargue. Read the decision here.
Update January 18, 2013: Following the appellate court’s affirmance of the ruling dismissing the dissolution petition, Gleich brought a new lawsuit against Mr. Haenel seeking a declaration of his 50% ownership of the corporation and other relief. By Order dated January 7, 2013, Nassau County Commercial Division Justice Stephen A. Bucaria dismissed Gleich’s ownership claims based on the preclusion doctrines of res judicata and collateral estoppel. The court allowed Gleich to proceed only on his claim for unjust enrichment for the value of legal services he allegedly provided for the corporation.