They say this summer has been unusually cool in the Northeast, but it’s been a hot one for business divorce litigation, judging from the number of recent court decisions involving various and sundry disputes among co-owners of closely held businesses. So, once again, it’s time for my annual summertime post featuring a few, short summaries of recent decisions of interest in business divorce cases.
First, we’ll look at a decision by Justice Melvin Schweitzer in a battle between 50/50 ownership factions over control of an international translation services company with over 3,000 employees. Next up is Justice Carolyn Demarest’s ruling denying a change of venue in a corporate dissolution case. Last is a decision by Justice Marcy Friedman in which she addressed an interesting statute of limitations defense in a drawn-out dissolution case.
Shareholder of Parent Corporation Has Standing to Sue Derivatively to Remove Subsidiary’s Director But Not for Dissolution
Elting v Shawe, 2014 NY Slip Op 32126(U) [Sup Ct, NY County July 24, 2014]. It’s not everyday you encounter business divorce litigation on the scale of this case, involving a firm with over 3,000 employees and revenues over $350 million. The subject company is a closely held Delaware holding corporation owned 50/50 by two individuals who also comprise its two-director board, and its wholly owned New York subsidiary providing international translation services. One owner-director sued the other for alleged financial and management abuses, asserting direct and derivative claims seeking the defendant’s removal as an officer and director of the subsidiary under BCL §§ 706 (d) and 716 (c), and also seeking deadlock dissolution of the subsidiary under BCL § 1104 (a).
With respect to plaintiff’s removal claims, Manhattan Commercial Division Justice Melvin L. Schweitzer held that the plaintiff, who had no direct ownership of shares in the subsidiary, on the one hand lacked standing to sue directly under §§ 706 (d) and 716 (c), because those sections only authorize removal applications by the attorney general and persons holding at least 10% of the company’s outstanding shares, but on the other hand ruled that she had standing to assert such claims derivatively as a 50% owner of the parent company. Justice Schweitzer also denied the plaintiff’s standing to seek dissolution of the subsidiary under § 1104 (a), which authorizes a deadlock petition by a 50% shareholder, because the parent company owns 100% of the subsidiary’s shares. The decision notes a pending petition brought by the plaintiff in Delaware Chancery Court for judicial dissolution of the parent company. In a separate decision by Justice Schweitzer dated August 4, 2014 (read here), the court denied the plaintiff’s motion for a preliminary injunction barring the defendant from management of the subsidiary based on plaintiff’s failure to demonstrate irreparable injury.
Update August 17, 2015: The Delaware dissolution proceeding brought by Elting came to a climax last week when the court issued its post-trial decision ordering the appointment of a custodian to sell the company due to the shareholders’ deadlock. Read here my post about the Delaware court’s decision.
Venue in Dissolution Case Determined by County Designated in Corporation’s Certificate of Incorporation
Sicignano v Hymowitz, 2014 NY Slip Op 51100(U) [Sup Ct, Kings County July 21, 2014]. As previously noted here and here, under Section 1112 of the Business Corporation Law, a corporate dissolution proceeding must be filed in the “judicial district in which the office of the corporation is located” based not on the physical location of the corporation’s office but, rather, on the county designated as the corporation’s office location in its certificate of incorporation. In Sicignano, Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest denied a motion to change the venue of a dissolution proceeding filed in Brooklyn to Nassau County.
The plaintiffs, oddly, relied on Section 507 of the Civil Practice Law and Rules, governing venue in actions involving real property. The defendants countered that § 507 does not apply because the corporation only held a mortgage on realty in Brooklyn; that the corporation maintains an office in Manhattan, not Brooklyn; and that all the defendants reside in Nassau County. It’s unclear whether either side paid any attention to BCL § 1112, but Justice Demarest certainly did, ruling that the corporation’s certificate of incorporation designating Kings County (Brooklyn) as its office location is “conclusive” evidence of its residence under § 1112, and that there exist no adequate grounds for a discretionary change of venue.
Timely Commencement of Second Dissolution Action After Dismissal of First Avoids Statute of Limitations Defense
Weksler v Weksler, 2014 NY Slip Op 32024(U) [Sup Ct, NY County July 30, 2014]. Manhatttan Commercial Division Justice Marcy S. Friedman faced an unusual procedural question in this case commenced in 2011, involving application of the six-year statute of limitations in dissolution cases to alleged oppressive conduct that occurred a decade earlier. What made it unusual is that the petitioner initially filed for dissolution in 2007, i.e., within the statute of limitations period, but that action was dismissed for procedural defects in 2010 without prejudice to petitioner’s commencement of a new dissolution proceeding. The dismissal was affirmed on appeal in June 2011. Petitioner filed the corrected, second dissolution proceeding in October 2011.
In opposition to the respondents’ motion to dismiss as time-barred the second proceeding insofar as it relied on the alleged, decade-old conduct involving a disputed buyout, the petitioner argued that it was timely under Section 205 (a) of the Civil Practice Law and Rules, which preserves claims asserted in a first, dismissed action if the second action is commenced within six months of the dismissal, as occurred in Weksler. The respondents argued that § 205 (a) didn’t apply to save the claims for dissolution in the 2007 action since that action was not brought in compliance with the statutory requirements for commencement of a dissolution proceeding and therefore was void from inception. Justice Friedman disagreed, observing that the defects of the first-filed action were not of a non-curable, jurisdictional nature, and she therefore rejected the respondents’ statute of limitations defense.