Since the Second World War New York’s Suffolk County, occupying almost two-thirds of Long Island’s land mass, has experienced tremendous changes in population, demographics and in its economy.
In 1960, Suffolk’s population was half of its much smaller western neighbor Nassau County. By 1990 Suffolk’s population surpassed Nassau’s. According to 2012 census data Suffolk County has about 1.5 million residents compared to Nassau’s 1.3 million. Suffolk’s economy likewise evolved from mainly agriculture to a highly diverse base of manufacturing, construction, finance, farming, wholesale and retail business establishments, the total number of which surpassed Nassau County’s over the last fifteen years. The Hauppauge Industrial Park in western Suffolk, with over 1,300 companies employing over 55,000 Long Islanders, is the second largest industrial park in the country.
No wonder, then, that in 2002 court administrators added Suffolk to the growing list of counties in New York State with a specialized Commercial Division to handle increasingly complex business-related litigation. Starting with a single judge, today the Suffolk County Commercial Division, operating at the Supreme Court complex in Riverhead, has three judges including Presiding Justice Elizabeth H. Emerson, who has served in the Commercial Division from its inception; Justice Emily Pines, who joined the Commercial Division in 2007; and the Commercial Division’s most recent member, Justice Thomas F. Whelan.
The Commercial Division’s case eligibility criteria encompass involuntary dissolution of business entities as well as direct and derivative shareholder actions. I can’t cite empirical data, but based on my own observations as a member of a large, Long Island-based firm, and from my constant scouring of various online resources reporting new court decisions, I can say with confidence that the number of cases in Suffolk County involving business divorce and other types of disputes between business co-owners has increased significantly in the last decade.
Here’s a sampling of three recent decisions — one from each of the Suffolk Commercial Division’s judges — involving notable shareholder disputes:
Carvella v. Giuliano (Justice Emerson)
Carvella is an unreported post-trial ruling handed down last month by Justice Emerson in a case that spanned seven years including an interim sojourn in bankruptcy court. In 2009, a jury found for the plaintiff minority shareholder on the issue of liability based on the defendant majority shareholder’s breach of fiduciary duty and conversion of plaintiff’s shares in the subject corporation (ironically named Rock Solid Corp.). The defendant thereafter filed for bankruptcy, however the stay was lifted and the case proceeded with discovery on the issue of damages.
On the appointed day for the bench trial on damages, plaintiff’s counsel announced that plaintiff had no witnesses and no evidence to present, and requested that the court declare plaintiff to be the owner of 25% of the corporation’s shares and award the plaintiff attorney’s fees and punitive damages. Counsel for the corporation pointed out that 100% of the corporation’s shares are presently owned by individuals not named as parties to the action, who apparently paid fair value for the shares, and that the shares have a negative net worth because the corporation is deeply in debt.
Justice Emerson declined to award any damages based on the plaintiff’s failure to offer any proof. She also declined to grant plaintiff the requested declaratory relief, which was raised for the first time at the damages trial. The requested 25% stock award would be highly prejudicial to the defendants given the late stage of the proceedings, first, because the 2009 jury trial did not determine the percentage of shares owned by the plaintiff and, second, because the court had no jurisdiction over the present owners of 100% of the corporation’s shares. Finally, Justice Emerson discerned no legal theory enabling her to award the plaintiff attorney’s fees.
Abrams v. Allways Electric Corp. (Justice Pines)
Abrams was decided by Justice Pines last January in an unreported decision denying the defendant controlling shareholder’s motion for summary judgment based on the plaintiff’s alleged lack of shareholder standing to assert claims for breach of shareholders’ agreement, breach of fiduciary duty, conversion and fraud.
Plaintiff alleged that he was employed as an electrician by the subject corporation from 1987 through 2003, and that in 1998 the controlling shareholder agreed to give him a 5% stock interest in exchange for plaintiff receiving a straight salary without overtime compensation, and without sharing in profits until he contributed “sweat equity” equivalent to the value of 5% of the stock. Plaintiff alleged that he fulfilled his sweat equity contribution in 2000, but that the defendant never distributed his profit share and, after his employment with the firm terminated, refused to acknowledge that plaintiff owned any shares.
The defendant argued without success that the evidence demonstrated, as a matter of law, that plaintiff never became a shareholder. The contrary evidence included a 1998 shareholders’ agreement naming the plaintiff as shareholder, and a series of tax form K-1s reflecting that plaintiff was a 5% shareholder. “Although the Defendants submit various affidavits in an attempt to explain why Abrams was a signatory to the Agreement of Shareholders and why he was issued K-1s,” Justice Pines commented, “it is not the court’s function on a motion for summary judgment to assess credibility.”
Gulmi v. Gardner (Justice Whelan)
Justice Whelan’s recent decision in Gulmi v. Gardner, 2013 NY Slip Op 50651(U) (Sup Ct Suffolk County Apr. 5, 2013), involves a series of convoluted business transactions among investors in South American mining operations. The plaintiff filed a complaint in December 2012 alleging his 50% ownership of a corporation named Gulgard, Inc., seeking a declaration of his ownership of 17.5% of the shares in a second corporation named Iron Castle, ordering the defendants to transfer to Gulgard all shares they own in Iron Castle, and dissolving Gulgard based on deadlock. Plaintiff moved for a preliminary injunction and for partial summary judgment on his stock ownership claims.
The defendants argued that plaintiff lacked standing because he failed to truthfully disclose the value of his stock interest in Gulgard in a Chapter 7 bankruptcy petition he filed in January 2012 in which he valued his Gulgard shares at zero and failed to schedule the claims asserted in his subsequent lawsuit. Defendants argued that plaintiff had no standing or capacity to prosecute the claims which belong to the bankruptcy estate over which the bankruptcy trustee has exclusive control. The plaintiff countered that the trustee had abandoned any such claims upon the close of the bankruptcy proceeding in July 2012, which allegedly “reinvested” plaintiff with his ownership interests in the stock.
Justice Whelan agreed with the defendants that plaintiff lacked standing, stating that property included in a bankrupt’s estate
can be “abandoned” only where the trustee . . . knows of it and manifests an intent to abandon it, inasmuch as revesting depends upon the fact that it has been consciously rejected or relinquished as part of the estate. If an estate cause of action is not listed in the schedule of assets, it cannot be deemed to have been abandoned by the trustee, and such cause of action remains the property of the estate. [Citations omitted.]
Based on the “uncontradicted documentary evidence” of plaintiff’s failure to schedule his lawsuit claims in his bankruptcy proceeding, Justice Whelan denied plaintiff’s application for a preliminary injunction and for partial summary judgment, and granted reverse summary judgment for defendants dismissing plaintiff’s stock ownership claims.