“Marriage is tough, business relationships may be tougher.”
Wise words from someone who should know — Nassau County Supreme Court Justice Timothy S. Driscoll, who presided over matrimonial cases before joining the Commercial Division where he has adjudicated some of the thorniest business divorce cases such as the AriZona Iced Tea donnybrook.
The quoted words appear in an oral argument transcript in a case called Cardino v Feldman pending before Justice Driscoll involving a fight between 50-50 owners of a construction company operated by the defendant Feldman. It’s a factually and procedurally complex matter, the details of which I’ll spare readers in favor of focusing on the main takeaway from Justice Driscoll’s recent decision in the case, namely, that once a business owner asserts a claim for judicial dissolution under Section 1104-a of the Business Corporation Law — even if not pleaded in strict accordance with the statute — it’s very difficult to reverse course after the other shareholder timely elects to purchase the petitioner’s shares for fair value under BCL Section 1118.
Some brief background: Cardino and Feldman as 50-50 shareholders started a construction firm called Mana Construction Group, Ltd. in 2009. According to Cardino, in 2012 Feldman fraudulently induced him to approve an unnecessary multi-million dollar loan by Feldman to Mana at an “outrageous” interest rate and, starting in 2014, began misrepresenting that Mana was losing money and pressuring Cardino to give up some of his shares in furtherance of a squeeze-out that culminated with Feldman cutting off Cardino’s salary and forming a competing company.
In late 2015 Cardino filed an 11-count complaint asserting both individual and derivative claims against Feldman and Feldman’s newly formed company. The first through ninth and eleventh causes of action sought damages, declaratory and equitable relief for a panoply of business torts including fiduciary breach, fraud, fraudulent conveyance, conversion of corporate funds, and the like.
It was the complaint’s tenth cause of action, however, that took center stage in what followed. Denominated as a claim “For Dissolution of the Corporation” the tenth cause of action consisted in its entirety of the following three paragraphs:
159. Plaintiffs repeat and reallege each and every allegation made in the preceding paragraphs as if fully set forth at length herein.
160. By reason of the foregoing, Plaintiffs seek judicial dissolution of MANA pursuant to NY BCL § 1104 et. seq.
161. By reason of the foregoing, Plaintiffs have been damaged in an amount to be determined at trial, but which is estimated to be in excess of $2,000,000.00.
The complaint’s only other, indirect reference to dissolution appears in ¶ 2 which includes “§1104a, §1104” in its laundry list of BCL statutes upon which the plaintiff’s claims are based. That’s it. No more.
About a month after Cardino filed his complaint, Feldman gave notice of his election to purchase Cardino’s shares for fair value under BCL Section 1118, which authorizes an election when a dissolution petition is filed under BCL Section 1104-a for minority shareholder oppression or looting — but not under BCL Section 1104 for deadlock or internal dissension between 50-50 shareholders.
Cardino apparently neither anticipated nor appreciated Feldman’s buy-out election. The subsequent flurry of motions by both sides included Cardino’s motion to amend his complaint to eliminate his dissolution claim and thereby moot Feldman’s election, and Feldman’s motion to convert Cardino’s complaint to a petition under BCL Section 1104-a and to stay the dissolution proceeding pending a fair value determination and buy-out.
In a 12-page decision and order dated August 18, 2016, Justice Driscoll denied Cardino’s motion to abandon his own dissolution claim, granted Feldman’s motion to convert the complaint into a petition under BCL Section 1104-a and to stay the dissolution proceeding, and directed a hearing to determine the fair value of Cadino’s 50% shares in Mana.
The decision at pages 7-11 has an excellent summary of the applicable statutory and case law governing the interplay between BCL Sections 1104-a and 1118, after which Justice Driscoll pronounced his ruling as follows:
The Court is persuaded that the allegations in the Complaint, which include claims that Feldman engaged in improper conduct vis a vis Mana, are consistent with a shareholder oppression proceeding pursuant to BCL § 1104-a. Once Cardino sought dissolution of Mana pursuant to BCL § 1104-a, he triggered the option for Feldman to purchase his shares, and Feldman thereafter exercised that option by filing an election to purchase Mana’s shares pursuant to BCL § 1118. In light of that election, the Court stays the dissolution proceeding and will set the matter down for a hearing to determine the fair value of Plaintiff’s shares in Mana, to facilitate Feldman’s purchase of those shares as the parties are unable to agree on the value of the shares.
The lessons of Cardino are simple ones about which I’ve written many times before:
- First, practitioners who take on shareholder disputes of this sort must understand the manner in which BCL Sections 1104-a and 1118 interact. The assertion of a Section 1104-a claim automatically gives the respondent shareholders and the corporation the right to elect to purchase the complaining shareholder’s shares for fair value. The bare-boned dissolution claim in Cardino reads like it was thrown in as an afterthought, but still it sufficed to trigger Section 1118. It’s very simple: if you don’t want to give the other side a buy-out right, don’t invoke Section 1104-a.
- Second, the 50% shareholder who wants dissolution but without giving the other shareholder a buy-out option has the means to do so by pleading the dissolution claim solely under BCL Section 1104 based on deadlock or internal dissension or both. Call it a legislative oddity, but a Section 1104 petition does not trigger the Section 1118 right to elect. Also, if the pleading relies on both Sections 1104 and 1104-a, as it did in Cardino, the opposing side will still have the right to elect a buy-out under Section 1118.
- Third, a party who files a pleading seeking judicial dissolution under BCL Sections 1104 or 1104-a cannot unilaterally discontinue the dissolution claim, whether or not the other side has elected to purchase. That’s because BCL Section 1116 requires the court’s permission “at any stage” to discontinue a dissolution claim and further requires the party who sought dissolution to establish that the cause for dissolution “did not exist or no longer exists.” In other words, don’t take lightly the decision to file a dissolution claim if you think you may want to disown it later.
- Finally, practitioners should pay close attention to BCL Section 1106’s procedural requirements for commencing a dissolution proceeding, none of which was followed in Cardino. The statute mandates that the dissolution be commenced by petition and order to show cause in what New York practice calls a “special proceeding” rather than by traditional summons and complaint in an ordinary “action.” The mandated order to show cause, among other features, requires provision for publication notice of the proceeding. Failure to follow Section 1106’s mandates unnecessarily will cost the party seeking dissolution additional time and money.