Minority Shareholder alleging oppressive acts by Majority Shareholder sues for judicial dissolution of ABC Co. under § 1104-a of the Business Corporation Law. Majority Shareholder elects to purchase Minority Shareholder’s shares under BCL § 1118, thereby converting the case to a valuation proceeding. After numerous adjournments, Minority Shareholder discharges his counsel and fails to appear at court conferences. The court marks the proceeding “off calendar” without prejudice to restore it by motion. Minority Shareholder never moves to restore. The buy-out never takes place.
Several years later, during which Minority Shareholder has had no involvement in ABC Co.’s business, up pops a new lawsuit by Minority Shareholder, not for dissolution but, rather, asserting individual and derivative claims against Majority Shareholder for taking excessive compensation and seeking damages for breach of shareholders’ agreement and to recover Minority Shareholders’ ongoing percentage of profits. Majority Shareholder opposes the new lawsuit, contending that Minority Shareholder ceased being a shareholder of ABC Co. upon the Majority Shareholder’s election to purchase years earlier in the dissolution case, and that Minority Shareholder’s sole remedy is to pursue the buy-out in that prior proceeding.
Is Minority Shareholder still a shareholder of ABC Co. with the right to assert shareholder claims in the new action, or is he limited to a buy-out remedy in the prior dissolution proceeding? Should the court grant Majority Shareholder’s dismissal motion based on the pendency of the prior dissolution proceeding?
For the answers, look no further than last month’s unpublished decision by Nassau County Commercial Division Justice Vito M. DeStefano in Radburn v Singh, Index No. 601902/14 [Sup Ct, Nassau County Aug. 18, 2014], in which the court held that the claims and relief sought in the two lawsuits were not the same, and that notwithstanding the election to purchase in the dissolution case, the plaintiff minority shareholder remained a shareholder with the right to seek enforcement of the shareholders’ agreement and other, common-law and statutory shareholder rights.
The case involves a company called MSN Air Services, Inc. founded in 2005 to provide air cargo/freight shipping services at JFK International Airport. The two owners, Roopnarine Singh and Edward Radburn, hold 55% and 45% stock interests, respectively. A 2006 shareholders’ agreement designates Singh as Director and President of MSN, and Radburn as the second Director and Vice President. It also “guaranteed” the both of them “as long as the Corporation is in existence” full time employment with salary and benefits in accordance with “industry standard,” and specified the division of net income and losses based on their stock ownership percentages.
The Dissolution Proceeding
In October 2009, Radburn filed in Queens County Supreme Court a petition for judicial dissolution of MSN alleging shareholder oppression by Singh, who responded by electing to purchase Radburn’s shares for fair value under the buy-out statute, BCL § 1118. In July 2010, the court issued an order staying the dissolution proceeding pending a valuation and scheduled a conference “to determine how and by whom the shares will be valued” (read order here).
Next to nothing happened in the following two years. The court conference was adjourned a dozen or so times, with no progress toward a valuation or buy-out. In July 2012, the day before a scheduled court conference, Radburn discharged his lawyer, prompting the court to schedule another conference some weeks later to give Radburn time to engage new counsel. Radburn failed to engage new counsel and failed to appear at the rescheduled conference. In a ruling from the bench in early August 2012 (read transcript here), the court ordered that, “[i]n light of the fact that petitioner has failed to appear as directed, the proceeding is marked off calendar without prejudice to restore the proceeding to the calendar upon motion on notice, with an affirmation from counsel stating that the matter is ready to proceed.”
Radburn’s Subsequent Lawsuit
Almost two years later, beginning in March 2014, Radburn sent Singh a demand to inspect MSN’s books and records, to which Singh replied that, based on the dissolution proceeding, Radburn was not a shareholder and had no inspection rights. The following month, Radburn filed a new complaint in Nassau County Supreme Court asserting individual and derivative claims on MSN’s behalf against Singh, accusing him of wrongfully denying Radburn’s right of inspection; of paying himself excessive compensation; and of breaching the shareholders’ agreement by not paying Radburn his “guaranteed” salary and his 45% share of MSN’s profits. Radburn’s complaint (read here) refers to the prior dissolution proceeding only insofar as mentioning that Singh “never purchased [Radburn’s] shares in MSN because the earlier dissolution proceeding was discontinued.”
When he filed his new lawsuit, Radburn also moved for a preliminary injunction seeking various restraints, among other interim relief, preventing Singh from transferring any MSN assets and from taking distributions without paying Radburn his 45% share. Singh opposed the motion and filed his own motion to dismiss the action primarily on the grounds that (a) the court’s order in the prior dissolution proceeding, “granting” the buy-out pursuant to Singh’s election to purchase, stripped Radburn of his shareholder status, (b) Radburn’s new lawsuit involves the same parties and the same claims as in the dissolution proceeding, which Singh characterized as still “pending”, and (c) Radburn’s sole remedy is to move to restore the dissolution proceeding.
Justice DeStefano’s Ruling
Justice DeStefano’s decision rejected each of Singh’s arguments for dismissal. Even assuming the dissolution proceeding can be considered pending, he wrote, “the Queens [dissolution] proceeding does not involve the same parties nor does it involve the same causes of action.” He amplified:
The Queens action was a proceeding seeking dissolution of MSN, an accounting, and the appointment of a receiver. The instant action, in contrast, seeks money damages against the majority shareholder, brought by Radburn, both individually and derivatively, and does not seek the dissolution of MSN nor the value of Radburn’s 45% shareholder’s interest in MSN.
Justice DeStefano also rejected Singh’s contention that Radburn no longer was a shareholder of MSN, stating that “at this juncture, [Radburn] is still a 45% shareholder of MSN and the value of [his] shares has not yet been determined notwithstanding [Singh’s] 2009 election to purchase,” and that “[i]n the absence of any evidence indicating that [Radburn] sold or transferred his shares, he is still a shareholder.”
Singh’s laches argument met a similar fate. Singh’s allegation, that Radburn unfairly was trying to take advantage of MSN’s increased value in the five years since he commenced the dissolution proceeding, Justice DeStefano observed, was “irrelevant” since Radburn’s new lawsuit neither sought dissolution nor to recover the value of his shares.
Justice DeStefano accordingly denied Singh’s motion to dismiss the action, and granted Radburn’s preliminary injunction motion based on Radburn’s “unrefuted affidavit indicating numerous violations of the Shareholders’ Agreement.”
The Takeaway. From the outside looking in, it’s impossible to know what led Radburn to abandon the dissolution case after it converted to a valuation following Singh’s election to purchase. Likewise, I can’t possibly speculate why Singh seemingly went along with the lapse of the valuation proceeding when, presumably, it was in his best interest to complete the buy-out. Did Singh believe Radburn would simply walk away, never to be heard from again? Singh’s professed belief, that upon electing to purchase, Radburn lost his shareholder status, has no basis in any case law I’ve seen. Knowing only what is in the public record, and acknowledging that there may have been other factors at play of which I have no knowledge, I can only suggest that, instead of going along with marking the dissolution case off the calendar when Radburn failed to appear, Singh might have been better off insisting on going forward with a valuation hearing with or without Radburn’s participation and seeking an appropriate judgment enforcing the buy-out at the judicially determined fair value.
Update January 21, 2016: Some strange and conflicting turns of events took place since this post was written over a year ago. On January 8, 2016, Justice DeStefano granted Radburn’s motion to appoint a receiver for MSN upon a finding that under Singh’s management MSN’s assets “are in danger of being looted” bolstered by Singh’s failure to comply with his discovery obligations which also prompted his lawyer to withdraw as counsel (read here). Then, 12 days later, the Appellate Division, Second Department affirmed an April 2015 order by a Queens County judge in the dissolution proceeding, granting MSN’s application to restore the case to the calendar for a valuation hearing for a § 1118 buyout of Radburn (read here). It’ll be interesting to see if the buyout proceeds while the company’s in receivership.
Update June 18, 2016: In a decision dated June 9, 2016 (read here), Justice DeStefano denied Singh’s motion for reconsideration of the prior order appointing a receiver, finding that he failed to demonstrate how the restoration of the dissolution proceeding “impacts the preservation of the business and assets of MSN Air Services, Inc. pending the ultimate disposition of the instant litigation.” A footnote in the court’s decision also underscores the oddity (my word, not the court’s) that neither party thus far has sought joinder of the Queens County dissolution proceeding with Radburn’s subsequent Nassau County lawsuit.
Update June 7, 2019: The saga continues in the form of a legal malpractice lawsuit brought earlier this year by Singh and MSN against his lawyers in the dissolution case, alleging that they failed to advise Singh that the shareholder agreement was still in effect after the case was marked off the calendar in August 2012. The lawsuit also blames counsel for delay in pursuing and concluding the right of election. Had they not done so, allegedly, Singh and MSN would have avoided the subsequent Nassau County case which resulted in a settlement costing them $750,000. In April of this year, a Queens County judge denied the defendant lawyers’ motion to dismiss the complaint. You can read the decision here.