“We are poster-boys for why family members should not go into business together.”

So says respondent Paul Vaccari in his affidavit opposing the petition of his brothers Richard and Peter seeking to dissolve their jointly owned corporation that owns a five-story, mixed-use building in Manhattan’s Hell’s Kitchen, housing the operations of Piccinini Brothers, a third-generation wholesale butcher and purveyor of meat, poultry and game established by the brothers’ grandfather and great-uncle in the 1920’s.

The family-owned business at the center of Vaccari v Vaccari, 2018 NY Slip Op 30546(U) [Sup Ct NY County Mar. 28, 2018], decided last month by veteran Manhattan Commercial Division Justice Eileen Bransten, is a classic example of fraying family bonds in the successive ownership generations caused by divergent career interests and sibling sense of injustice over disparate treatment by their parents.

While Vaccari will not go down in the annals of business divorce litigation as a landmark case, it does add incrementally and usefully to the body of case law addressing the grounds available or not to establish minority shareholder oppression. Justice Bransten’s opinion also serves as an important reminder to counsel in dissolution proceedings of their summary nature and of the potentially high cost of noncompliance with the Commercial Division’s practice rules.

Background

By the 1960’s, ownership and control of Piccinini Brothers and the realty-holding corporation known as Ametal Realty Corp. were consolidated in the hands of the three siblings’ grandparents, Guido and Amelia Vaccari, whose son, Rudy — the siblings’ father — grew up in the family meat supply business and eventually took over its management and became co-owner with his father.

Rudy’s three sons also began working in the family business starting in the 1970’s, and were gifted equal minority interests in Ametal by their grandmother after Guido’s death in 1985, at which point Rudy owned 100% of Piccinini and, along with his wife, Marion, 62.5% of Ametal. By the early 2000’s, Rudy gifted all of his Piccinini shares equally to his three sons even while he continued to run the business as its president until around 2012.

In 2006, Peter left Piccinini to pursue a day-trader career and sold his shares to brothers Paul and Richard, making them 50/50 owners. In 2012, Paul bought Richard’s Piccinini shares for $575,000 in settlement of a lawsuit alleging Richard’s diversion of cash receipts, giving Paul 100% ownership of Piccinini.

Paul Gains Majority Ownership of Ametal

Even while the first lawsuit was being settled, the seeds of what blossomed into a dissolution contest five years later were being planted that same year when Rudy and Marion gifted their 62.5% Ametal stock interest to Paul, giving him a 75% ownership in the realty-holding company compared to the 12.5% held by each of his two brothers. According to Paul, his parents gifted the shares to him, and not to his brothers, “to create a corporate power balance that would ensure the continuity of Piccinini.”

In New York City, as anyone who lives there knows, real estate is king. In all likelihood, the five-story building owned by Ametal, located in a prime development area of Manhattan, has a market value far in excess of Piccinini’s business. Add to that the fact that Paul, once he became Ametal’s controlling shareholder and Piccinini’s sole owner, took on a potentially divided loyalty as both landlord and tenant, and you’ve got a sure-fire recipe for dissension on the part of Richard and Peter who have every incentive to force a sale of the real estate or a buy-out of their shares.

The Dissolution Lawsuit

In October 2017, Richard and Peter filed a petition to dissolve Ametal under section 1104-a of the Business Corporation Law (BCL) based on Paul’s allegedly oppressive actions. Specifically, according to the petition, despite written demands under BCL section 624 to provide them with access to books and records, Paul failed and refused “to keep them informed of any major decisions affecting Ametal’s interests as well as of the financial condition, assets, transactions, encumbrances, debts, and dealings of the Corporation.” The claimed information black-out justified the petitioners’ alleged “belief” that “Piccinini has failed to pay rent to Ametal for its occupancy” in the building.

The petition also included additional claims for an accounting, breach of fiduciary duty, unjust enrichment, conversion, and attorney’s fees. Richard and Peter also sought a broad array of injunctive relief against Paul pending the outcome of the proceeding.

Paul filed an answer to the petition and simultaneously moved to dismiss the petition for failure to state a valid claim and, alternatively, for summary judgment.

Justice Bransten’s Decision

Justice Bransten’s decision presented a four-part analysis of the issues, culminating in a wipe-out of Richard’s and Peter’s claims.

Denial of Injunctive Relief.  First, Justice Bransten denied the petitioners’ application for interim injunctive relief under BCL section 1115, finding that their demand to inspect Ametal’s books and records did not comply with BCL section 624 due to their failure to furnish the required affidavit of proper purpose; that their claims that Piccinini owed rent arrears could be adequately remedied by monetary damages; and that Paul had engaged a new accounting firm and taken other steps to bring the rents current and obtain financing for necessary building repairs.

Dismissal of Dissolution Cause of Action for Failure to State a Valid ClaimNext, Justice Bransten granted Paul’s cross-motion to dismiss the dissolution claim for failure to state a claim, holding that the petition’s allegations of Paul’s denial of access to company information, even assuming them to be true, did not rise to the level of oppressive conduct under the reasonable-expectations test established by the Court of Appeals in Matter of Kemp & Beatley. Here’s what she wrote:

Petitioners first allege that the Respondents’ refusal to grant books and records access constitutes minority shareholder oppression. This allegation fails to state a cause of action given that the Petitioners have admitted to receiving certain books and records in the Petition itself and that denial of books and records access is permissible where the requesting party fails to supply the corporation with the required affidavits. Failure to grant access to books and records does not, alone, constitute the type of shareholder oppression warranting corporate dissolution. [Citations omitted.]

Petitioners next allege that the Respondents’ failure to inform them of business decisions made in the ordinary course of business constitutes minority shareholder oppression. Relatedly, Petitioners’ final stated ground for minority shareholder oppression is Respondent Vaccari’s making of unilateral decisions which ultimately affect the corporation. While a majority shareholder has a “fiduciary obligation to treat all shareholders fairly and equally, to preserve corporate assets, and to fulfill their responsibilities of corporate management with scrupulous good faith,” absent an agreement, or directive, to include the minority shareholders in corporate decisions, the ultimate “decision-making power respecting corporate policy will be reposed in the holders of a majority interest in the corporation.” See Kemp and Beatley, 64 N.Y.2d at 69, 72. Thus, the failure to include the minority shareholders in decisions made during the ordinary course of business, and Respondent Vaccari’ s unilateral decisions which affect the corporation, do not give rise to a cause of action for minority shareholder oppression.

Dismissal of Individual, Accounting, and Fiduciary Breach Claims for Failure to State a Valid ClaimThe petition asserted both individual and derivative claims. Justice Bransten dismissed all individual claims, finding that the harm and any resulting damage as alleged was suffered directly by Ametal. She then proceeded to dismiss the derivative claims for an accounting and for breach of fiduciary duty, holding that the petition’s “conclusory” allegations failed to show how Paul caused any loss or damage to the real property. On the other hand, Justice Bransten ruled that the petition’s causes of action for unjust enrichment, conversion, and attorney’s fees under BCL section 626 (e) stated valid claims based on the allegations that Paul shortchanged Piccinini’s rental payments to Ametal.

Summary Judgment Dismissing the Surviving Claims.  The petitioners’ partial escape from total defeat literally lasted only five pages deeper into Justice Bransten’s opinion, which then dismissed those same claims under a summary judgment standard. Central to that result was the petitioners’ failure to submit a responsive statement of disputed material facts as required by Commercial Division Rule 19-a and Justice Bransten’s published individual rules, as a consequence of which the material facts included in Paul’s Rule 19-a statement, Justice Bransten wrote, “must be deemed to be admitted to in full.” Paul’s thusly uncontested evidence, showing that he had taken appropriate steps to bring Piccinini’s rent current, established that Ametal “has sustained no damages” requiring dismissal of the claims for unjust enrichment, etc.

The Takeaway

Richard and Peter filed for dissolution with none of the classic indicia of minority shareholder oppression:

  • They were not employed by Ametal, much less terminated from employment or deprived of their livelihood. Paul also took no salary for his management services.
  • They were not directors or officers of Ametal, or otherwise involved in its management.
  • They received each year their pro rata allocations of profit and loss.
  •  They never invested in the business, having been gifted their shares.

All they had going for them, allegedly, was Paul’s failure to provide them with requested company information, and an undocumented suspicion that he was withholding rents owed by Piccinini. While denial of information can contribute to a finding of oppressive conduct by the controlling shareholder when combined with other, weightier indicia such as those listed above, information denial standing alone is highly unlikely to establish grounds for dissolution given other, far less drastic means to gain access to information via a books and records proceeding under BCL section 624.

Finally, Commercial Division Rule 19-a must never be taken lightly when opposing a motion for summary judgment supported by the required statement of material facts. Justice Bransten’s enforcement of the rule in Vaccari is just the latest in a series of like-kind rulings by Justices of the Commercial Division. Here’s what’s required under Rule 19-a (b) through (d) from the party opposing the motion:

(b) In such a case, the papers opposing a motion for summary judgment shall include a correspondingly numbered paragraph responding to each numbered paragraph in the statement of the moving party and, if necessary, additional paragraphs containing a separate short and concise statement of the material facts as to which it is contended that there exists a genuine issue to be tried.

(c) Each numbered paragraph in the statement of material facts required to be served by the moving party will be deemed to be admitted for purposes of the motion unless specifically controverted by a correspondingly numbered paragraph in the statement required to be served by the opposing party.

(d) Each statement of material fact by the movant or opponent pursuant to subdivision (a) or (b), including each statement controverting any statement of material fact, must be followed by citation to evidence submitted in support of or in opposition to the motion.