Isn’t it fascinating when opposing lawyers take essentially the same set of facts and compose competing narratives that could not be more alien to one another? Take, for instance, the following excerpts from the briefs in an appeal decided last week involving one brother’s fight with the estate of his deceased brother over the former’s claimed 25% ownership of companies that, at least on paper, were owned 100% by the deceased brother:
From the surviving brother Patrick’s brief :
The evidentiary proof . . . revealed a course of dealing between Patrick and his older brother, wherein assets of the various corporate entities were used interchangeably and for the benefit of the family businesses as a whole, and that it was understood that Patrick was entitled to a 25% share of each of these entities. . . . It was only when John Sr. became ill that his wife, son and daughter sought to deny Patrick his rightful ownership interest in the family business . . .. [Italics added.]
From John Sr.’s estate’s brief:
Patrick’s claims . . . are founded on his alleged perceptions, understandings and beliefs based on some ambiguous, non-specific statements attributed to his deceased older brother . . .. Patrick, who was essentially a mechanic, was made a rich man by virtue of his older brother’s largesse and business acumen, so he enjoyed his good fortune and did not question John Sr.’s management and control of the various companies. Then, after John Sr.’s voice was stilled by illness and eventual death, Patrick took the position that he had not been given enough. [Italics added.]
So which was it? Patrick the trusting, younger brother victimized by his deceased older brother’s surviving family members, or Patrick the freeloader, taking opportunistic advantage of his older brother’s passing to wrest an even bigger piece of the family enterprise?
Last week’s decision by the Appellate Division, Second Department, in Quadrozzi v. Estate of Quadrozzi, 2012 NY Slip Op 06593 (2d Dept Oct. 3, 2012), sided with Patrick in affirming the lower court’s post-trial ruling imposing a constructive trust on a 25% ownership interest in the disputed companies and directing an accounting of any distributions made to John Sr., his estate and heirs. The case merits attention as a good illustration of the courts’ equitable power to recognize undocumented stock interests in close corporations to avoid unjust enrichment, particularly in the setting of a family-owned business where courts are more likely to find a confidential relationship among the parties.
The story begins in 1964, when John Quadrozzi, Sr. (51%) and his brother William Quadrozzi (49%) started a concrete and cement supply business called Quadrozzi Concrete Corporation (“QCC”). They subsequently formed a half dozen affiliated companies in support of QCC’s business (collectively with QCC, the “Original Quadrozzi Companies”). William retired in 1981, at which point John Sr. acquired William’s shares in the Original Quadrozzi Companies and gifted 25% to their younger brother, Patrick, who handled operations while John Sr. headed financial and administrative matters.
In 1990, John Sr. purchased out of bankruptcy the assets of two concrete companies that were customers of one of the Original Quadrozzi Companies. The assets were transferred to a series of newly formed companies of which John Sr. was listed as sole stockholder (the “Certified Acquisition Companies”) pursuant to a bankruptcy court order that effectively prohibited for seven years the ownership by others absent approval of federal law enforcement agencies. The purchase price was financed with a $5 million bank loan secured by the personal guarantees of John Sr. and Patrick and by mortgages against assets of QCC and some of the other Original Quadrozzi Companies. Another $2 million was satisfied by forgiveness of debt owed by the bankrupt companies to one of the Original Quadrozzi Companies. The operations and administration of the Certified Acquisition Companies thereafter were integrated into those of the Original Quadrozzi Companies.
In 1997, John Sr. acquired for $3.5 million a grain terminal site located on the Brooklyn waterfront, known as Gowanus Industrial Park (“Gowanus”) for use as an offloading and storage site. The assets were placed in a new company of which John Sr. was listed as sole shareholder. The purchase price was financed with a $1.5 million mortgage on the Gowanus property which was guaranteed by one of the Original Quadrozzi Companies, $500,000 from John Sr.’s IRA, and a little over $1 million of funds transferred to John Sr. from the Original Quadrozzi Companies.
In 2003, John Sr. became ill and his wife petitioned for guardianship. Her petition listed John Sr. as sole owner of the Certified Acquisition Companies and Gowanus. John Sr. died the following year.
In 2005, Patrick brought suit asserting direct and derivative claims against the estate, in which he also sought the imposition of a constructive trust on 25% of the shares of the Certified Acquisition Companies and Gowanus.
The Trial Court’s Decision
The case went to non-jury trial before Queens County Commercial Division Justice Marguerite A. Grays who entered judgment in Patrick’s favor based on her finding that there was an implied agreement whereby John Sr. would initially hold sole ownership of the Certified Acquisition Companies but that Patrick would have an actual interest in return for helping finance the purchase with the resources of the Original Quadrozzi Companies and his personal guarantee, and as evidenced by the brothers’ and the various companies’ course of dealings in the years prior to John Sr.’s death.
Justice Grays also determined that John Sr. diverted corporate opportunity and breached fiduciary duty by acquiring and operating the Gowanus property through a corporation he solely owned, and that John Sr.’s practice of using assets, resources and personnel of the other jointly-owned companies interchangeably led Patrick to believe that he had an ownership interest in the disputed corporations.
The Contentions on Appeal
The Estate appealed. Its appeal brief (read here) argued that the trial court’s finding of an implied promise supporting a constructive trust was “distilled from the ethereal” and that, in any event, Patrick’s claim, first asserted in 2005 challenging acquisitions in 1990 and 1997, was barred by the statute of limitations. The Estate contended, among other arguments, that Patrick was fully aware of the bankruptcy court’s order restricting ownership of the Certified Acquisition Companies; that the money John Sr. received to purchase the disputed companies from the Original Quadrozzi Companies became John Sr.’s money when deposited into his personal account; that Patrick failed to offer sufficient evidence of any promise of co-ownership; and that Patrick had received without objection (prior to John Sr.’s death) many years of Form K-1s evidencing his ownership in the other companies but not the Certified Acquisition Companies and Gowanus.
Patrick’s opposing brief (read here) argued that the proof at trial satisfied the elements of a constructive trust based on evidence of the confidential or fiduciary relationship between the siblings; that Patrick’s loan guarantee and the use of assets he indirectly co-owned to finance the acquisitions supported an implied promise by John Sr. that the acquisitions were for the benefit of both brothers; that the manner in which the “Quadrozzi empire” was managed resulted in “joint ventures” in all the family businesses; that John Sr. was “unjustly enriched”; and that Patrick timely brought suit in 2005 because the limitations period did not commence running until 2003 when John Sr.’s wife filed a guardianship petition disavowing any ownership interest by Patrick in the disputed companies.
The Appellate Court’s Decision
The appellate court’s unanimous decision last week affirmed the trial court’s judgment in Patrick’s favor. First, it agreed with Patrick that his claim was not untimely. As to the Certified Acqusition Companies purchased in 1990, the court held that the applicable six-year statute of limitations did not begin to run until 2003 when John Sr.’s wife, in the context of the guardianship proceeding she commenced on her husband’s behalf, repudiated Patrick’s 25% ownership interest in those companies. As to Gowanus, acquired in 1997, the court held that the estate was estopped from raising a limitations defense “since a fiduciary relationship existed between Patrick and John Sr., who concealed from Patrick the fact that Patrick did not have a recorded 25% ownership interest in Gowanus, a fact that John Sr. was duty bound to disclose.”
Next, turning to the constructive trust claim, the appellate court held that the trial court’s determination was warranted by the facts, explaining as follows:
Here, the Supreme Court properly concluded that Patrick satisfied the elements for the imposition of a constructive trust in his favor with respect to a 25% ownership interest in the Certified Acquisition Companies and Gowanus. As relatives sharing a business relationship over several decades, Patrick and John Sr. shared a confidential relationship. Moreover, the Supreme Court’s finding that John Sr. made implied promises to Patrick that the Certified Acquisition Companies and Gowanus were being acquired on behalf of both of them in accordance with their history of joint ownership of QCC and the original Quadrozzi companies was warranted by the facts. In reliance on those implied promises, Patrick, among other things, personally guaranteed a $5,000,000 loan to purchase the Certified Acquisition Companies, allowed the debt owed to one of the original Quadrozzi companies to be used as a credit towards the purchase price of the Certified Acquisition Companies, agreed to mortgage the real property owned by another corporation in which he had an ownership interest in order to secure cash for the purchase of Gowanus, and allowed funds from QCC and another one of the original Quadrozzi companies to pay off the mortgage on Gowanus so that he could acquire Gowanus free of any encumbrances. As a result, the defendants, as John Sr.’s heirs, would be unjustly enriched if permitted to remain in possession of 100% of the shares of the Certified Acquisition Companies and Gowanus as part of John Sr.’s estate. [Citations omitted.]
Over 60 years ago, in Latham v. Father Divine, 299 NY 22 (1949), the New York Court of Appeals observed that a constructive trust “will be erected whenever necessary to satisfy the demands of justice” and that “its applicability is limited only by the inventiveness of men who find new ways to enrich themselves unjustly by grasping what should not belong to them”. Quadrozzi teaches that the constructive trust doctrine is alive and well, and that it can be a powerful weapon in disputes involving closely held business entities that, all too often, fail to maintain proper records of stock ownership, and particularly with family-owned businesses where informality often reigns.
My thanks to Cheryl Korman at Rivkin Radler, LLP, counsel for Patrick in the Quadrozzi case, for providing copies of the appellate briefs.