An “anomalous situation” is how Nassau County Commercial Division Justice Vito M. DeStefano described what happened in a deadlock dissolution case involving the owners of the Catalina Beach Club in Atlantic Beach, New York (pictured).
As summed up by the judge in his decision last month in Carasso v Pauline J. Perahia Revocable Trust, Decision and Order, Index No. 606702/14 [Sup Ct Nassau County Dec. 28, 2015], the anomaly boiled down to this:
Petitioners and Respondents have changed their initial positions regarding dissolution in that the Petitioners, who initially sought dissolution, now move to discontinue the dissolution proceeding; and, the Respondents, who initially opposed dissolution by filing objections in law, now oppose discontinuance of the dissolution proceeding and, in fact, seek dissolution.
What caused the flip-flop by the two ownership factions who, at the time the dissolution proceeding began, each held 50% voting control? I suppose you could call it the fickle finger of fate. Less than three months after the dissolution proceeding began, one of the respondent shareholder-directors died, after which the shares she controlled through a trust were purchased in a private sale by the petitioners, thereby giving the petitioners majority control and relegating the remaining respondents to minority shareholder status. No more 50/50 ownership. No more deadlock.
The Catalina Beach Club is the story of two families — the Sevy family and the Carasso family — whose members founded it in 1946 and have operated it ever since as a seasonal, members-only beach club. The ownership structure consisted of two corporations owned 50/50 by the two families, one to hold title to the realty and the other to operate the club. The realty company’s by-laws provide for four directors. The operating company’s by-laws provide for three directors but it was undisputed that both boards historically were populated by four directors, two from each family.
By late 2014, relations between the two families deteriorated over accusations by the Sevy family that the club’s long-time manager — a member of the Carasso family — had taken unauthorized compensation for a number of years. The manager resigned after a board meeting predictably deadlocked 2-2 over motions by the Carasso directors to reappoint her manager and by the Sevy directors to commence legal proceedings against her.
The Dissolution Proceeding
In December 2014, the Carasso faction petitioned for judicial dissolution of the two corporations under all three prongs of § 1104 (a) of the Business Corporation Law, alleging shareholder deadlock, director deadlock, and internal dissension. Their petition (read here) also requested immediate appointment of a receiver to take over the club’s management and prepare it for the 2015 summer season.
In February 2015, two of the three named Sevy respondents filed an answer asserting a series of “objections in law” in which they contested the grounds for dissolution and the need for a receiver, and accused the Carasso faction of “bad faith” by seeking to dissolve a “functioning, profitable business” in order to force a “fire sale” of the club’s assets “so Petitioners can buy them cheaply” (read answer here). The third named respondent, holding a 16 2/3% stock interest, did not appear in the proceeding.
Death of a Shareholder
In early March 2015, a member of the respondent Sevy family, who, through her trust, controlled 16 2/3% of the corporate shares and was a member of the two boards, died. At a subsequent off-the-record court conference on March 12, counsel for both sides “agreed” to dissolution but not as to appointment of a receiver, with the Sevy faction’s counsel requesting appointment of a particular individual as receiver, and the Carasso faction’s counsel withdrawing that branch of their petition for receivership.
At a second court conference later that same month, counsel for the Sevy faction presented a written third-party offer to purchase the beach club for $10 million. Meanwhile, the Carasso faction ratcheted things up by holding board meetings at which, over the opposition of the remaining Sevy family director, they reappointed the former manager for the 2015 season and ratified and approved all prior compensation paid to her. As you might suspect, the board’s composition and the validity of the votes came under fire by the Sevy faction which, notwithstanding the operating company’s by-law provision for a three-member board, contended that the board’s historical four-member composition remained operative.
The Discontinuance Motion
In early May 2015, either under the impression or in the hope that the Carasso faction was in agreement to sell the beach club, either to the identified third-party bidder or to market it for sale should that bidder fall away, the Sevy faction’s counsel provided to the Carassos’ counsel a proposed stipulation to that effect. Instead, about a week later, the Carrasos filed a motion to dismiss their own dissolution petition under BCL § 1116, which provides that a “proceeding for the dissolution of a corporation may be discontinued at any stage when it is established that the cause for dissolution did not exist or no longer exists.”
The Carassos argued in support of their motion that deadlock no longer existed due to the action of the operating company’s three-member board in reappointing the former manager and approving her past compensation (read their brief here).
In mid-June 2015, opposition to the discontinuance motion was filed on behalf of only one of the Sevy respondents — the sister of the deceased family member — in which she argued, first, that the petitioners were bound by their “stipulation” at the March 12 court conference to dissolve the corporations, which was made after the other sister’s death and second, that deadlock still existed at the board level due to the “decades-old agreement among the Carasso Family and Sevy Family shareholders for a Board equally divided among the Carasso Family and the Sevy Family shareholders” (read the opposing brief here).
And what of the position of the shareholder-trust of the deceased Sevy sister? Interestingly, the same day the surviving sister’s counsel, who had also represented the deceased sister’s trust, filed her papers opposing discontinuance, the daughters of the deceased sister, as co-trustees of their mother’s trust, terminated counsel and filed an appearance as attorneys pro se.
Surely this was a harbinger of what occurred next, in July 2015, when counsel for the Carassos filed reply papers announcing that various Carasso family members earlier that month purchased for an undisclosed sum the 16 2/3% stock interest in both corporations held by the trust of the deceased Sevy sister. In short, the Carassos argued, the change in ownership giving them two-thirds majority voting control mooted any possibility of deadlock (read the reply brief here).
The Court’s Decision
Justice DeStefano’s determination of the motion addressed three issues:
- Was there an enforceable stipulation to dissolve the corporations?
- Did any of the pleaded grounds for dissolution under BCL § 1104 (a) still exist?
- Is the answer to the preceding question affected by the discrepancy between the historical four-member board and the operating company’s three-member by-law provision?
There was no enforceable stipulation to dissolve, Justice DeStefano concluded. Counsel’s off-the-record “agreement” to dissolve at the March 12 court conference was neither confirmed in a signed writing nor reduced to the form of an order and entered, as required by § 2104 of the Civil Practice Law and Rules.
As to the several grounds for dissolution pleaded in the petition, Justice DeStefano found that none of them still (if ever) existed due to the changed circumstances:
- The board reinstated the former manager, thus there was no director deadlock under BCL § 1104 (a) (1) “with respect to the management of the beach club.” Justice DeStefano also noted the statement in the Sevy respondents’ original answer opposing dissolution, that the beach club “has been functioning, and continues to function.”
- The change in share ownership, giving the Carasso family members two-thirds voting control, rendered unwarranted dissolution under BCL § 1104 (a) (2) based on shareholder deadlock.
- Dissolution based on internal dissension also was unwarranted, given that “there is no evidence that the dissension among these shareholders has had any appreciable impact on the management or profitability of the Corporations” and dissolution therefore “would not, in this court’s view, be ‘beneficial to the shareholders'” under BCL § 1104 (a) (3).
Finally, Justice DeStefano rejected the remaining respondent’s argument that the historical arrangement and practice of the two families, giving each two seats on a four-member board of the operating company, rendered “illegal” the recent actions of the Carasso-dominated, three-member board and therefore demonstrated ongoing board deadlock. The company by-laws provided for a three-member board and any legally enforceable change to the board’s composition, Justice DeStefano held, must “strictly” comply with the formalities set forth in BCL § 702 for increasing or decreasing the number of directors.
Justice DeStefano’s order granting the discontinuance likely was a bitter pill to swallow for the remaining Sevy family respondent, now relegated to minority shareholder status, given the earlier prospects following her sister’s death of a consensual dissolution and sale of the beach club in an arm’s-length, market transaction. I also imagine that the decision by her nieces, as co-trustees of her late sister’s trust, to sell the trust’s shares to the Carassos, for her was a most unwelcome breach in the Sevy family fabric.