Kurt Vonnegut observed in his novel Deadeye Dick that the word “egregious,” which “most people think means terrible or unheard of or unforgivable has a much more interesting story than that to tell. It means ‘outside the herd.'”
He’s right. The original Latin ēgregius did indeed translate as “standing outside the herd” in the non-judgmental sense of exceptional, and it wasn’t until the late 16th century that the word took on its modern, disapproving sense.
I’ll grant you it’s a bit of a leap from etymology to business divorce, but in the court decision I’m about to describe, the meaning of the word “egregious” took center stage in a minority shareholder’s lawsuit seeking common-law dissolution of a closely held corporation.
The court’s decision last month in Braun v Green, 2016 WL 4539488 [Sup Ct NY County Aug. 31, 2016], sprang from a dispute between fellow shareholders in a Florida corporation whose sole asset is a commercial realty development near Houston, Texas. The plaintiff 8% shareholder, Braun, sourced the investment opportunity and presented it to the defendant 92% shareholder, Green, who provided all of the needed capital.
After forming the corporation in 1994 and acquiring the property for about $2.5 million, Braun managed the property for the next 20 years through his separate management company. In those years the State of Texas commenced two partial condemnation proceedings that ultimately generated about $850,000, of which 8% was distributed to Braun pursuant to their shareholder agreement which defined condemnation proceeds as “Capital Proceeds” included within the defined “Cash Available for Distribution.”
Almost two years after Braun gave up management of the property in late 2013, the State of Texas settled a third condemnation proceeding, involving most but not all of the remaining property, for $13 million. According to Braun’s complaint (read here), contrary to prior practice Green refused to distribute Braun’s 8% share of the condemnation proceeds or any of the available cash from the property’s rental operations.
Green countered that retention of the condemnation proceeds and other monies was permissible under a provision in the shareholder agreement that allowed a reserve of otherwise distributable cash for future “capital improvements.”
Braun’s complaint asserted a potpourri of claims against Green for fraud, breach of contract, breach of fiduciary duty, and the like, along with a Ninth Cause of Action for common-law dissolution of the corporation.
The dissolution claim, stated in only two paragraphs, alleged that Green “acted for his own benefit and to [Braun’s] detriment”; that Green made distributions to himself but not Braun; that Green refused to provide Braun with access to company information; and that Green engaged in ongoing “erratic behavior” and “oppressive conduct” defeating Braun’s “reasonable expectations” and causing him “substantial damages.” The claim alternatively sought a compelled buy-out of Braun’s stock interest by judicial appraisal proceeding.
The court’s decision, by Manhattan Commercial Division Justice Anil Singh, dismissed all claims except for the two counts based on breach of the shareholder agreement. As to the Ninth Cause of Action for common-law dissolution, Justice Singh’s analysis began with the key quotation from an old but still leading New York case on the subject, Leibert v Clapp, 13 NY2d 313 , in which the state’s highest court wrote that common-law dissolution is available where:
the directors and majority shareholders ‘have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.”’
Notice no mention of the word “egregious” in that quotation. According to Justice Singh, the egregiousness standard is reflected in cases decided after the legislature’s creation in 1979 of the statutory dissolution proceeding for oppressed minority shareholders under Section 1104-a of the Business Corporation Law. Citing Fedele v Seybert, 250 AD2d 519 [1st Dept 1998], and other Appellate Division cases, Justice Singh states that since Section 1104-a’s enactment, common-law dissolution claims
have been sustained only in the most egregious circumstances, in which the majority was accused of systematic looting of corporate assets in flagrant disregard of the rights of the minority shareholders.
Justice Singh then applies this standard to the allegations of Braun’s complaint and finds them wanting, noting that they do not accuse Green of “looting the corporation, or that the corporation suffered any damage,” and that Braun’s claim “does not rise to the level of ‘egregious conduct’ that gives rise to a claim for dissolution.” As he further explains:
Braun’s claim is not based on any ‘egregious conduct’ by Green, but rather, on his belief that he would be personally better off if the company were dissolved and its assets distributed to the shareholders, rather than being invested in capital improvements. However, “neither sympathy nor a shareholder’s need for cash qualify as either a statutory or common-law ground for judicial dissolution.” Rather, the treatment of the majority shareholder toward the minority shareholder must be “egregious,’ i.e., a degree of wrongdoing that ‘go[es] far beyond charges of waste, misappropriation and illegal accumulations of surplus, which might be cured by a derivative action for injunctive relief and an accounting. . . .
Justice Singh sums up as follows:
It is clear that, in the rare cases in which courts have recognized a claim for common-law dissolution, the persons responsible for managing the corporate affairs have misused their position to divert to themselves a significant portion of the company’s assets. No such conduct is alleged here. Rather, the dispute is whether [the company] can retain and use the proceeds of the condemnation proceeding to develop its property, or if it is contractually obligated to distribute them to its shareholders.
Common-law dissolution requires egregious conduct requires significant diversion of corporate assets, seems to be the essential equation applied in Braun. If you’re interested in how other New York courts have handled common-law dissolution claims, you can check out some of my previous posts featuring such cases here, here, here, and here.
Finally, some of you may be wondering as I was, how a New York court can entertain a claim for judicial dissolution of a Florida corporation whose sole asset is Texas realty, particularly after the First Department’s decision last February in the Raharney Capital case holding that New York courts lack subject matter jurisdiction over dissolution of foreign business entities. I found no mention of the issue or Raharney in the parties’ briefs which were filed after the Raharney decision.
What I did find was a footnote in the complaint referring to a provision in the shareholder agreement stating that the agreement and the shareholders’ rights, obligations, and disputes are to be governed by New York law, and that New York courts shall have exclusive jurisdiction over any claims arising under the agreement. You can decide for yourself whether such language is sufficient to confer subject matter jurisdiction on the court or whether, in the original sense of egregious, the court’s decision stands outside the herd.