When three gentlemen in their mid-eighties, one of whom is in a nursing home with failing health and onset dementia, are the key players in a disputed shareholder buy-out transaction, what are the odds they’ll all be around to give evidence in a lawsuit brought four years later?
If you answered slim or none, you’d be right in the case of Gourary v Laster, 2016 NY Slip Op 04287 [1st Dept June 12, 2018], where the absence of testimony by the two deceased principals and the deceased lawyer for one of them doomed a lawsuit on behalf of the estate of an enfeebled 50% shareholder who, about six months before he died, sold for $5.75 million his 50% stake in a realty holding company to the other 50% shareholder’s son-in-law who, less than a year later, sold the company’s realty to a third party for $32 million.
The case involves a corporation named 121-131 West 25th St. Corp. that was co-owned equally by Paul Gourary and Oliver Laster since the 1940’s when the corporation acquired a 12-story commercial building in Manhattan’s Chelsea district. In 2005, after the ailing Gourary was admitted to a nursing home, Laster’s son-in-law, Scott Macomber, expressed an interest in acquiring either a 50% interest in the realty or buying Gourary’s 50% stock interest.
In mid-2006, Macomber and Gourary completed a stock transfer for $5.75 million. Gourary was represented in the transaction by another octogenarian, Paul Green, an attorney and accomplished real estate investor in his own right, who also served as company counsel and was longtime friends with its two owners.
In early 2007, about one month after Gourary died and five months after Laster died, Macomber and his wife, who inherited Laster’s 50% interest, agreed to a sale of the Chelsea building to an unrelated third-party for $32 million. The sale closed in January 2008.
Attorney Green died in early 2009. Thus, by the time Gourary’s son, on behalf of his father’s estate, filed suit in late 2010, three of the four key witnesses to the transaction (other than Macomber) were gone.
In his suit, Gourary’s son essentially claimed that Laster, Macomber, and Green together schemed to take advantage of Gourary’s failing health and mental state by deceiving him into selling his 50% interest at a price far below its value, and that in furtherance of the scheme Macomber obtained a “biased” low-ball, $12.3 million appraisal of the Chelsea building when they knew it was worth several times that in what was then a rising Manhattan real estate market.
According to the suit, the scheme was further designed to reduce Laster’s potential estate taxes and to enable Macomber and Laster’s daughter (Macomber’s wife), who would inherit her father’s 50% stock interest, to “flip” the building at a huge profit, which they in fact did when they sold it to a third party for $32 million shortly after Laster and Gourary passed away.
The Court Dismisses the Claims Against Green
The lawsuit proceeded in fits and starts over the next six years, leading up to a January 2016 decision and order by Manhattan Commercial Division Justice Saliann Scarpulla in which she granted a summary judgment motion dismissing claims against the Green estate for legal malpractice, breach of fiduciary duty, fraudulent concealment, and civil conspiracy. Among other allegations, the Gourary estate claimed that Green’s representation of Gourary was conflicted because he surreptitiously represented Macomber’s and Laster’s interests in the stock sale, and that because of the conflict Green failed to protect Gourary’s interests, for example, by obtaining an independent appraisal of the Chelsea building.
The Green estate contended that Gourary was of “sound mind” at the time of the transaction; that Gourary and his wife both understood the difficulty of finding an outside buyer for his 50% interest; that Green did not represent Macomber and Laster in the transaction; and that, without Gourary and Green available to testify, the Gourary estate could not prove loss causation, i.e., that Gourary would have sought another buyer or held out for a higher price from Macomber but for Green’s alleged misconduct.
Justice Scarpulla’s decision agreed with the Green estate’s position in critical part, stating that while the “evidence here depicts a transaction that, to the objective observer, may raise a concern as to the transaction’s fairness,” the Gourary estate failed to submit evidence adequate to support its claims:
Unfortunately, the key players to the subject transaction passed away before they could provide any probative evidence. Thus, neither Gourary’s instructions to Green nor his motivation for executing the transaction will ever be known. Similarly, there is no competent evidence reflecting any advice Green gave to Gourary concerning the transaction. Most importantly, there is simply no competent, probative evidence that a trier of fact could rely upon to determine that any negligence on the part of Green was a proximate cause of Gourary’s failure to receive a higher price for his share of the corporation. . . . [¶] The evidence presented, as set forth above, could potentially lead to a reasonable inference that Green represented both Macomber and Gourary during parts of the transaction. However, as the Green defendants properly argue, no evidence exists to demonstrate that . . . any alleged conflict of interest was a proximate cause of Gourary’s failure to sell his share of the corporation for more than $5.75 million.
The Gourary estate appealed. In a December 2016 order, the Appellate Division, First Department, affirmed Justice Scarpulla’s ruling, finding that the Gourary estate failed to raise a triable issue of fact showing that Green represented Macomber and Gourary dually in connection with the negotiations for the sale of Gourary’s shares; that “there are no questions here about the nature of the advice Green provided Gourary” because “[t[he nature of that advice is simply unknown”; and likewise, whether Green took any steps “to protect Gourary as a client with diminished capacity . . . cannot be known or reasonably inferred from the record.”
The Court Dismisses the Remaining Claims Against the Laster Estate and Macomber
The appellate court’s ringing endorsement of the decision throwing out the claims against the Green estate set the stage for a subsequent dismissal motion by the Laster estate and Macomber, which Justice Scarpulla granted in an October 2017 decision and order.
Her decision turned on the combined effects of the “law of the case” and imputation doctrines. Here’s what she wrote:
The First Department [in its December 2016 decision] has already found that “[t]he Green defendants established prima facie . . . that the sale was consistent with Gourary’s objectives”; [t]here [was] no evidence that Green represented Macomber and Gourary dually in connection with the negotiations for the sale of Gourary’s share of the corporation”; and that Green’s structuring of the transaction favored Guorary’s interests over those of Macomber. [¶] . . . Gourary cannot avoid imputation by claiming the adverse interest exception . . . nor by speculating . . . that Green may have acquired the information confidentially, as Laster’s attorney. . . . Green’s knowledge concerning the transaction, including that the offer allegedly was substantially below market value, must be imputed to Gourary.
In short, the claims against Laster and his son-in-law, essentially based on the alleged fraudulent concealment from Gourary of the fair market value of his interest, could not survive dismissal under the prior appellate ruling because Gourary, by imputation, knew whatever Green knew which included the “lowball” appraisal and Laster’s alleged plan to avoid estate taxes by having Macomber purchase Guorary’s interest cheaply.
Not one to give up easily after seven years of litigation, Guorary’s son appealed yet again to the First Department, but with the same outcome: an affirmance of Justice Scarpulla’s decision. As the court wrote:
While Laster, as Gourary’s business partner, owed Gourary a fiduciary duty which was independent of his duties to the corporation, it does not follow that Laster breached that duty and caused damages by failing to question the price Macomber paid for Gourary’s interest in the corporation. As noted, it is law of the case that the transaction, including the sale price, was consistent with Gourary’s intention. Further, there is no indication that Laster was in exclusive possession of essential information regarding the transaction’s sale price, and it was not his responsibility to ensure that Gourary properly evaluated corporate assets before settling on a price. [Citations omitted.]
Earning even more credit for tenacity if not success, while the second appeal was pending, Gourary’s son filed a motion in the lower court for reconsideration of Justice Scarpulla’s decision dismissing the claims against the Laster estate and Macomber. Primarily he argued that any information Green may have learned from Laster might be confidential if that information was obtained through his representation of Laster and, therefore, the court erred in finding that Green’s knowledge is imputed to Guorary. In a decision issued last March, Justice Scarpulla denied the motion, calling it a rehash of the same arguments previously addressed and rejected in her October 2017 decision.
Absent a grant of leave to appeal to the Court of Appeals, it appears that the Guorary estate’s lawsuit has reached the end of the road after almost eight years of litigation and over twelve years since the disputed stock sale.
Was the stock sale, as Justice Scarpulla put it, a fair one from the perspective of an “objective observer”? It’s hard to argue that it was, not only given the extreme disparity between the price paid to Gourary for his 50% interest and the almost threefold price paid by the property buyer, but also given the timing of the third-party sale so soon after the deaths of Gourary and Laster and the seemingly close working and personal relationships Green had with Laster and Macomber.
Likely most lawyers representing a seller in a similar situation at the least would get an independent appraisal and/or build price protection into the stock transfer agreement in the event of a post-closing sale of the building within a reasonable time period. But it’s impossible for any outside observer to pass judgment on the advice given and actions taken by Green, Laster, Gourary, or Guorary’s family members under circumstances that forever will remain unknown and unknowable due to the passing of the participants.
Update July 18, 2018: Along the same lines as the Gourary case, another new decision popped up yesterday, in Witty v Wallace (read here), involving a shareholder derivative suit brought by the wife of a deceased shareholder of a real estate holding company who, after her husband died, sued his co-owner and law partner allegedly for entering into a below-market lease with the building tenant before her husband died. Suffolk County Commercial Division Justice Elizabeth Emerson dismissed the case based in large part on the unrefuted testimony of the surviving co-owner.
We’ve all seen signs in storefront windows, “Buy Now, Pay Later!” Perhaps the morbid lesson of cases like Gourary and Witty is, “Sue Now, Die Later!”