A trio of recent decisions by Nassau County Commercial Division Justice Stephen A. Bucaria (photo right) in Abatemarco v Abatemarco, Index No. 6455/13, presents a smorgasbord of noteworthy issues in a dispute between two brothers over a buy-out gone wrong involving their 50/50 interests in an advertising firm and the separate realty company that owns the building housing the advertising firm’s office.
No single issue in the case is a headline grabber, but all together they present a compelling illustration of the serial problems that can arise when the buy-out agreement doesn’t spell out with adequate precision the valuation parameters, and also doesn’t adequately address the buy-out’s effect on the landlord-tenant relationship between the two companies.
The Companies. Brothers Robert and Andrew Abatemarco were 50/50 shareholders in Robelan Displays, Inc., which produces indoor advertising displays, and 50/50 partners in Anthony Realty which owns the building in Hempstead, New York, rented by Robelan under an oral lease at $16,000 per month.
The Buy-Out Agreement. On March 29, 2012, the brothers entered into a buy-out agreement for Robert’s purchase of Andrew’s Robelan shares for $300,000. The agreement, which closed the same date, also gave Robert a one-year option to purchase Andrew’s 50% interest in Anthony Realty at a price to be determined by a named appraiser from whom Robert was required to order an appraisal within four months of the closing, i.e., by July 29, 2012. The agreement dated the realty closing on March 29, 2013 (the last date to exercise the option), time being of the essence. The agreement further directed the realty appraiser to disregard Robelan’s leasehold interest and to “use comparables in an area within his professional judgment.” Finally, the agreement provided that if Robert’s option was not exercised, the property was to be listed for sale with a broker and be sold as soon as practicable.
Robert’s Option Exercise. One year to the day after the closing, Robert served notice that he was exercising his option to purchase Andrew’s interest in Anthony Realty for $995,000 representing 50% of the appraised value of $1,990,000. The appraisal, which was not ordered by Robert until March 5, 2013 — long after the four-month period specified in the agreement — valued the property as of March 11, 2013. On April 25, 2013, Andrew rejected Robert’s exercise of his option.
Robert’s Suit. Robert subsequently filed suit against Andrew seeking specific performance of the realty buy-out, damages for breach of the agreement, and to recover 50% of rents paid by Robelan subsequent to Andrew’s rejection of the option exercise. Andrew counterclaimed for breach of fiduciary duty and fraudulent concealment based on Robert’s nondisclosure of third-party offers for the realty allegedly received by Robert in Fall 2012 ranging from $2.1 million to $2.9 million. Andrew also counterclaimed to require that the property be listed with a broker for sale upon Robert’s failure to exercise his option.
The Court’s First Ruling. Apparently, following his rejection of the option, Andrew gave notice of the termination of Robelan’s tenancy, which prompted an initial legal skirmish brought on by Robert’s motion to preliminarily enjoin Andrew from evicting Robelan from its offices or collecting rent. Justice Bucaria granted the motion in a decision dated August 9, 2013 (read here), to the extent of enjoining Andrew from evicting Robelan for non-payment of rent or for holding over after the termination of its month-to-month tenancy. The decision also enjoined Andrew from collecting rent other than by way of counterclaim in the action, conditioned on Robelan paying 50% of the rent in escrow.
The Court’s Second Ruling. Next up was Robert’s motion for summary judgment, which Justice Bucaria granted in a decision dated April 17, 2014 (read here), to the extent of declaring that Andrew is obligated to sell his partnership interest in Anthony Realty to Robert for fair market value. Justice Bucaria found:
- Robert’s agreement to purchase Andrew’s interest in Anthony Realty “constituted notice of dissolution of the partnership,” therefore Robert had no fiduciary duty to notify Andrew of the alleged third-party purchase offers in Fall 2012.
- The agreement did not state that time was of the essence with regard to the ordering of the appraisal. “Nevertheless,” the judge wrote, “he who seeks equity must do equity.”
- While Robert’s failure to order the appraisal in a timely fashion does not preclude him from obtaining specific performance, “he must do equity by paying Andrew fair market value for his interest in the property.”
The Court’s Third Ruling. The brothers continued to feud over the buy-out price, prompting Robert to file a motion to clarify the court’s summary judgment ruling by declaring that Andrew is obligated to sell his 50% partnership interest at the previously appraised value of $995,000, valued as of March 11, 2013. In opposition, Andrew contended that the appraiser used an invalid valuation date and failed to utilize an income approach to value the property. Justice Bucaria’s decision, dated June 23, 2014 (read here), observed that the appraised value “is presumably less than the value of the property as of July 29, 2012, when the appraisal was due to be ordered,” and that “it was clearly the intent of the parties that the option price was to be fixed a significant time before the option was to be exercised.” Justice Bucaria then concluded:
While Robert’s failure to order the appraisal in a timely fashion does not preclude him from obtaining specific performance, Robert should not benefit from his delay in ordering the appraisal. Thus, Robert is required to do equity by paying Andrew fair market value for his interest in the partnership, determined as of the date the appraisal would reasonably have been prepared, had it been timely requested.
On that basis the court fixed a valuation date of August 29, 2012, i.e., one month after the date specified in the agreement for Robert to order the appraisal. Justice Bucaria also ruled that, if the parties cannot agree on a price, the court will conduct a hearing at which Robert will be required to show that he was ready, willing, and able to purchase the partnership interest at the price determined on the option exercise date. The decision further declared that Andrew is not entitled to any of the rents due from Robelan after he was required to convey his partnership interest.
So what went wrong? A bunch of things:
- The agreement failed to include a specific date as of which to value the realty. Putting a valuation date in a buy-sell or buy-out agreement where pricing is based on appraised value is an absolute necessity, precisely to avoid the kind of dispute seen in Abatemarco.
- From the court’s description of the agreement, it’s unclear whether the appraiser is restricted to use of a sales comparison approach, as was done by the designated appraiser, or can also consider using an income approach.
- Fixing the appraisal date 7 or 8 months in advance of the option exercise date is asking for trouble. The potential for unanticipated developments and price volatility in a period of such long duration presents risks and incentives on both sides to break the agreement.
- Prior to Robert’s buy-out of Andrew’s Robelan shares, the brothers’ interests were aligned as equal co-owners both of Robelan and its landlord, Anthony Realty. Not so afterward, at least pending Robert’s buy-out of Andrew’s partnership interest in Anthony Realty. The brothers should have acknowledged and addressed the changed circumstances by entering into a written lease for the interim period, which would have avoided at least some of the subsequent litigation.