Who doubts that pizza runs in the veins of New York City inhabitants? According to one recent study by the NYC Economic Development Corporation, the city’s five boroughs have almost 1,300 pizzerias. Which neighborhoods have the most? An EDC survey published last week gives top honors to the East Village in Manhattan, Ridgewood in Queens, and Williamsburgh in Brooklyn. Highest per capita concentration? Manhattan’s East Harlem and Lower East Side.
There have been many stories about the intense competition and even litigation among the city’s warring pizza purveyors, such as the lengthy court battle between the owners of the names “Famous Ray’s” and “Original Famous Ray’s.” With so many pizza businesses, it’s inevitable that some of them also fall victim to disputes among co-owners resulting in petitions for judicial dissolution.
Such is the case in Matter of DiMaria (JJM Pizza Corp.), 2011 NY Slip Op 33151(U) (Sup Ct Nassau County Nov. 28, 2011), involving a dispute between minority and majority shareholders of a small pizzeria chain located in northeast Queens known as Cascarino’s Brick Oven Pizza. In a decision last month by Nassau Commercial Division Justice Ira B. Warshawsky, the court ruled that the parties’ conflicting allegations concerning petitioner’s claim of oppression and respondents’ “unclean hands” defense prevent a summary determination of the petition. Justice Warshawsky also denied the petitioner’s request for appointment of a temporary receiver.
Cascarino’s operates its business through multiple entities. The petitioner, Joseph DiMaria, owns 20% of the shares in JJM Pizza Corp. and 30% of the shares in Bayside Pizza Corp. DiMaria also owns 25% of the shares in Cascarino Realty Corp. which owns the property on which the Bayside restaurant is situated. The remaining interests in the three entities are owned by brothers James and Vincent Coady. The Coadys and DiMaria are the directors and officers of the three entities.
DiMaria’s petition alleges that, when the businesses were founded, the principals agreed that he would play an active management role as a salaried employee. The petition alleges that, beginning in early 2010, the Coadys began a course of oppressive, dictatorial and improper conduct towards DiMaria such as locking him out of the Bayside location, terminating his employment, salary and health benefits, excluding him from all management decisions, failing to distribute profits, and denying him access to company information and bank accounts.
DiMaria filed a petition for judicial dissolution in May 2011. The petition was brought under §1104-a of the Business Corporation Law, which authorizes a court to dissolve a closely held business corporation upon application by a shareholder holding at least 20% of the corporation’s voting shares upon a showing of oppressive conduct or other improprieties by the controlling shareholders. DiMaria simultaneously applied for appointment of a temporary receiver and to compel the Coadys to turn over corporate books and records.
The Coadys’ defense of the petition centers on the fact that, about one year before DiMaria petitioned for dissolution, they initiated a lawsuit in the names of JJM and Bayside accusing DiMaria of misappropriating corporate funds and other breach of fiduciary duty including opening a nearby Italian restaurant that competes against JJM and Bayside and luring away key employees of JJM and Bayside. The suit remains pending in Nassau County Supreme Court (which may or may not explain why DiMaria’s subsequent dissolution petition was filed in Nassau County notwithstanding that each of the subject companies lists its “office” location in the records of the Secretary of State in Queens County which, under BCL §1112, normally would require filing of the petition in Queens County).
Justice Warshawsky’s analysis neatly sets forth the applicable legal principles accompanied by a wealth of case citations:
- “oppressive” conduct, not defined in the statute, means acts that substantially defeat the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise, to be determined on a case-by-case basis;
- a shareholder whose own acts result in the complained of oppression cannot seek dissolution under §1104-a on the basis of those very acts; and
- dissolution is a remedy of last resort, the appropriateness of which is vested in the sound discretion of the court.
Justice Warshawsky concludes that the application of these principles to the conflicting claims and proofs submitted in the parties’ affidavits precludes a summary determination of the petition, writing as follows (citations omitted):
Here, and upon the relatively barren, pre-discovery factual record presented, the Court agrees that factual issues exist with respect to the petitioner’s allegations and claims of improper and oppressive conduct. More specifically, and at this juncture, there are hotly disputed claims and credibility issues relating to the parties’ respective actions — including the petitioner’s own pre-petition conduct. In sum, “[t]he conflicting affidavits submitted by the parties raise questions of fact regarding the merits of the petition and the appropriate remedy,” if any, to be granted.
Justice Warshawsky also denies DiMaria’s request for the “drastic remedy of the appointment of a receiver,” which may only be granted to preserve corporate assets upon a “detailed evidentiary showing” of irreparable loss or waste to the corporation’s property. “The petition’s allegations that, inter alia, there is ‘reason to be concerned about the financial well being’ of the corporations,” Justice Warshawsky writes, “are unsubstantiated and conclusory in nature.”
The case in its current posture is fated for discovery proceedings and a later evidentiary hearing. From the fact that the decision comes well over 90 days after the filing of DiMaria’s petition, we can infer that the majority shareholders have not elected under BCL §1118 to purchase DiMaria’s shares for “fair value.” What would it look like if the Coadys, either on consent or by court order, were given permission to make the election now? I can only speculate that the companies’ claims against DiMaria in the prior-filed lawsuit would be factored by the Coadys’ valuation expert into the business appraisals and then asserted as an offset to the valuation award. DiMaria’s valuation expert likely would ignore such claims and, perhaps, make upward adjustments for the Coadys’ alleged diversions. Not a pretty affair. But absent a global resolution based on a buyout, chances are at least one slice of each pizza pie sold by Cascarino’s and DiMaria’s restaurants for some time to come will be earmarked for legal fees.