Long Island’s dense population and surfeit of privately owned businesses small, medium, and large assure the Commercial Division judges of the Nassau County Supreme Court more than their fair share of disputes between business co-owners. What’s amazing is the range of business divorce cases heard by that court, from AriZona Iced Tea involving a multi-billion dollar, internationally known brand to the smallest mom-and-pop shops where you wonder how the fight can be worth the legal bills.
One thing in common between the high-stakes AriZona Iced Tea case and, on the other end of the spectrum, the pending fight between two co-owners of the Gusto Latino Bar & Restaurant, a neighborhood watering hole located in Hempstead, New York, is that both cases took about five years to resolve. There the similarity ends. And, again, you have to wonder how the Gusto Latino case, in which the invested dollar amounts cited in the court’s decision wouldn’t even qualify as a rounding error in the AriZona Iced Tea case, possibly has justified five years of litigation expense.
So why am I writing about it? Not because there’s anything particularly compelling about its facts or the parties’ claims. Essentially it’s a garden variety case where parties go into business together without a shareholders’ agreement after which there’s a falling out and one side claims the other either is not a shareholder or, at most, holds a minority interest. We’ve all seen dozens of similar cases.
Rather, the Gusto Latino case is noteworthy because of the novel remedy devised by the presiding judge. For those who read this blog regularly, you’ve already guessed correctly that when I mention a novel remedy in a Nassau County Commercial Division business divorce case, chances are I’m referring to a decision by that court’s senior member, Justice Stephen A. Bucaria, who, as I’ve noted before, is not afraid to think outside the box when it comes to creative solutions to intractable shareholder disputes.
Before discussing the remedy, let me give you some necessary background to Justice Bucaria’s unreported decision last month in Carrillos v Gomez, Short Form Order, Index No. 023142/10 [Sup Ct Nassau County Aug. 28, 2015]. In early 2010, Suyapa Gomez retained a lawyer to help her acquire a bar/restaurant at a certain location in Hempstead, but the deal fell through. The lawyer then introduced Gomez to another client of his named Reina Carrillos, following which, at least according to the lawyer, the two of them in June 2010 agreed to form a “business relationship” to lease and operate what eventually became known as the Gusto Latino Bar & Restaurant at a different Hempstead location.
The 10-year lease was put in the name of a pre-existing corporation formed by Gomez called Arlington Bodden Corp. Carrillos and Gomez issued checks to the landlord for $20,000 and $2,500, respectively. According to the lawyer, Carrillos and Gomez verbally agreed that each would own 50% of the shares.
In July 2010, Carrillos with the lawyer’s assistance applied for a liquor license and filed a subchapter S election, both of which listed Carrillos and Gomez as 50/50 shareholders. In the subsequent litigation, Gomez asserted that the applications were prepared by the lawyer without her knowledge and in violation of his professional obligation, i.e., that he had favored one client’s interests over those of another.
Subsequently, according to the lawyer, because Carrillos was unable to contribute as much capital as originally planned, the co-owners agreed to reallocate the shares 60% to Gomez and 40% to Carrillos. The lawyer prepared a written shareholders’ agreement to that effect, in which some of the shares were to be held by nominees of each, but the agreement never was signed.
The business relationship between Gomez and Carrillo soured as soon as the business opened in November 2010. In an email to the lawyer on November 12, 2010, Gomez stated that she did not want to “continue partnership” with Carrillos; that she had given Carrillos the “option to buy or sell” but that Carrillos did not want to do either; and that Gomez had elected to buy Carrillos’ shares. Two weeks later, Gomez tendered a $25,890.21 check to Carrillos as repayment of her investment in the business. (The court’s decision doesn’t say, but presumably Carrillos did not cash the check.) Within a few days afterward, Gomez excluded Carrillos from the business premises.
In December 2010, Carrillos filed suit seeking primarily a judgment declaring her to be a 50% shareholder in Arlington Bodden Corp. In January 2011, Carrillos sought a preliminary injunction against Gomez restraining her from wasting assets, from impeding Carrillos from performing her duties as a shareholder, and directing financial disclosure. Gomez’s opposing affidavit stated that Carrillos held at most a 40% stock interest. In a June 2011 decision (read here), Justice Bucaria denied injunctive relief, finding that Carrillos failed to establish a likelihood of success with respect to her claim that the venture was to be owned and operated on a 50/50 basis.
It appears the parties spent the better part of the next two years in discovery proceedings. In March 2013, Carrillos filed a note of issue with a jury demand, which Gomez successfully moved to strike on the ground that the complaint sought equitable relief.
Justice Bucaria’s October 2014 decision striking the jury demand (read here) contains the nudge toward a buy-out to which I refer in this post’s title. It was triggered by Carrillos’ cross-motion for the appointment of a forensic accountant to examine the corporation’s financial records. Here’s what the judge wrote, invoking as he often has an analogy to partnership law from the Court of Appeals’ 1988 decision in Gramercy Equities Corp. v Dumont, from which he quotes:
“Courts are generally loath to intercede in squabbles between partners that result in piece-meal adjudications, preferring that partners either settle their own differences amicably or dissolve and finally conclude their affairs by a full accounting.” The same reluctance to intercede absent dissolution applies to disputes between shareholders of a close corporation. Thus, the availability of an accounting must be incident to the dissolution of Arlington Bodden, or a buyout of plaintiff’s interest. In either scenario, the valuation of the company is a vital consideration.” [Citation omitted.]
Keep in mind, the judge wrote these words almost four years after the case was filed and over three years after his June 2011 decision gravely discounting Carrillos’ chances of prevailing on her quest to establish her 50% stock ownership. Could the message — You folks need to resolve this with a buy-out — have been any louder and clearer?
Apparently the message fell on deaf ears. Certainly Carrillos did not subsequently petition for dissolution of the corporation, which might have triggered a statutory election by Gomez to buy out Carrillos’ shares in whatever percentage. Instead, the parties filed dueling motions for summary judgment in which they continued to take extreme positions, with Gomez arguing that Carrillos owns no shares and Carrillos continuing to insist that she owns 50%.
In his ruling last month, Justice Bucaria surprised no one by finding as a matter of law, based in large part on the evidence provided by the transactional lawyer who represented both parties in 2010, and consistent with his preliminary injunction decision, that Carrillos owns only 40% of the corporation’s shares. The judge also cited the undisputed facts showing that Carrillos contributed over $25,000 cash to the venture “and also provided valuable consideration by lending her name to the liquor license application.”
Having disposed of Carrillos’ declaratory judgment claim, and having deflated Carrillos’ accounting claim in his October 2014 decision, Justice Bucaria could have ordered the case closed, leaving both sides dissatisfied after a long-fought, expensive battle which, because they continued to co-own the business, virtually guaranteed future dissension and litigation. He did not.
Instead, Justice Bucaria ordered Gomez as majority shareholder to buy out Carrillos’ minority interest at fair value. He did it in the decision’s final paragraph which is reproduced in full as follows:
Accordingly, plaintiff Reina Carrillos’ motion for summary judgment is granted only to the extent that the court issues a declaratory judgment that plaintiff is the owner of 40% of the stock of Arlington Bodden Corp. The court further determines that defendant Gomez’ email of November 12, 2010 operated as an irrevocable election to purchase plaintiff’s shares at fair value (See Business Corporation Law § 1118[b]). A valuation hearing shall be held on a date to be scheduled by the court. Because the parties ceased operating together so soon after their association was formed, there is no need for an accounting as to the affairs of Arlington Bodden or any adjustment in the value of plaintiff’s shares.
This is not an e-filed case, so I haven’t seen the legal briefs and I can’t say whether one or both of the parties argued to the court that it did or did not have authority to compel a buy-out in the absence of a formal petition to dissolve the corporation under BCL § 1104-a, which is the normal statutory prerequisite to a § 1118 buy-out election.
The great majority of business divorce cases involving a business with going-concern value end with a buy-out, more often than not by way of settlement but sometimes under court compulsion. The compulsory buy-out ordered by Justice Bucaria in Carrillos v Gomez can be appreciated both for its novelty and practicality after almost five years of litigation that failed to achieve the equitable business separation that both sides desire.