Strict procedural rules apply to corporate dissolution proceedings in New York, a difficult truth learned the hard way by a five-time rejected, would-be dissolution petitioner in a recent decision by Bronx County Supreme Court Justice Ruben Franco in Corner Furniture Discount Ctr., Inc. v Sapirstein, 2019 NY Slip Op 32245(U) [Sup Ct Bronx County June 14, 2019]. Four other decisions in a related case compounded the loss, as we shall see below.
The Underlying Facts
In the 1980s, Stechler and Sapirstein formed a retail furniture business. In the 2000s, Stechler’s son joined. The business expanded into four corporations. The two named plaintiffs – Corner Furniture Discount Center, Inc. and 2901 Furniture Outlet, Inc. (the “Furniture Entities”) – were operating entities. Two non-parties – Rongar Realty of N.Y., Inc. and 2926 Realty Corp. (the “Realty Entities”) – were real estate holding companies.
In 2018, the Stechlers removed Sapirstein as officer and director of the businesses and barred him from decision making based on their discovery of his alleged embezzlement of funds over many years. The Furniture Entities – but not the Realty Entities – sued Sapirstein alleging claims for breach of fiduciary duty, fraud, conversion, and faithless servant, referring to him as an “admitted thief.”
The Answer and Dissolution Counterclaim
Sapirstein filed an answer, responding to the claims against him by the Furniture Entities, and also alleging counterclaims against all four entities – the Furniture Entities and the Realty Companies – including for dissolution based on “oppression” and “waste” under Section 1104-a of the Business Corporation Law (the “BCL”).
The Dismissal Motion
The four entities filed a motion to dismiss Sapirstein’s dissolution counterclaim as procedurally defective and non-compliant with BCL 1105 and 1106. Section 1105 requires a party suing to dissolve a corporation to file a “petition for dissolution.” Section 1106 requires a party suing to dissolve to file the petition by “order to show cause.” Section 1106 contains very specific procedures the court and petitioner must follow once the order to show cause is filed:
- the order to show cause must require the corporation and all interested persons to show cause not less than four weeks after the granting of the order, why the corporation should not be dissolved;
- the court may order the corporation, officers, and directors to produce to the court a schedule of pertinent information, including corporate assets and liabilities, and the name and address of each shareholder, creditor, and claimant;
- the petitioner must publish the order to show cause at least once in each of the three weeks prior to the return date of the order to show cause in a newspaper of general circulation in the county where the corporation’s principal office is located;
- the petitioner must serve the order to show cause upon the state tax commission, the corporation, and each person named in the petition, or in any schedule of shareholders, creditors, or claimants at least ten days prior to the return date of the order to show cause, or if served by mail, at least 20 days before the return date; and
- the petitioner shall file the order to show cause and the petition with the clerk of the county where the office of the corporation is located within ten days after the order is entered, and shall file the schedule of information required by the court, if any, 10 days thereafter.
The Belated Order to Show Cause and Petition
Sapirstein’s dissolution counterclaim followed none of these procedures.
When Sapirstein filed his opposition to the dismissal motion, however, he did an unorthodox procedural maneuver: he attempted to belatedly file, mid-lawsuit, after he had already filed his answer and counterclaims, an order to show cause, petition, and declaration for dissolution.
In reply, the plaintiffs argued that Sapirstein’s belated filing of an order to show cause – which the clerk of the court refused to even process – was insufficient to correct his original procedural defects.
In his decision, Justice Franco noted that a “proponent of dissolution must comply with Business Corporation Law 1105 and 1106” and “[t]here must be strict compliance with the procedures set forth” in the statutes. The court cited, among other decisions, In re WTB Properties, Inc., 291 AD2d 566 [2d Dept 2002]. In WTB, the appellate court held that the lower court erred in ordering dissolution before the petitioner satisfied the requirements of BCL 1106, although it also held that the lower court did have the discretion to allow the petitioner to “amend the petition and comply with the statutory requirements.”
In Corner Furniture, could the court have allowed Sapirstein to amend or correct his answer to allege dissolution in compliance with the statutory requirements? Possibly. Sapirstein’s naming of the Realty Companies as “additional defendants on the counterclaims” was technically correct as a matter of New York civil procedure – Section 3019 (d) of the Civil Practice Law and Rules allows a defendant to join a non-party to a counterclaim “whereupon he or she shall become a defendant.”
But Sapirstein did not amend his pleading as an answer / petition. Instead, he awkwardly attempted to file a second pleading without leave of court in the midst of an ongoing lawsuit. As Justice Franco held, “Sapirstein’s efforts to correct his defective first counterclaim with a Petition and declaration in support, fail as they do not comply with Business Corporation Law §§ 1105 and 1106. Absent from Sapirstein’s submission are an Order to Show Cause, a Verified Petition, and proof of publication. Sapirstein fails to plead a cause of action in compliance with the dictates of Business Corporation Law §§ 1105 and 1106″(citations omitted).
As a result, the court held that it “acquired no jurisdiction” over Sapirstein’s dissolution claim, and dismissed the claim in its entirety.
Sapirstein’s Separate Dissolution Proceeding
While this was going on, Sapirstein also brought his own separate proceeding in Bronx County Supreme Court for judicial dissolution of the businesses. His petition in that proceeding was a virtual carbon copy of the one he filed in Corner Furniture just nine days earlier.
Did his petition fare any better than in Corner Furniture? Not quite. In a series of decisions, the court repeatedly refused to sign his order to show cause for various procedural defects:
- First, the court declined to sign the order to show cause for failure to include the affidavit and exhibits upon which it was based.
- Second, the court declined to sign it because the order to show cause “provide[d] insufficient basis for [the] relief sought.”
- Third, the court declined to sign it “for failure to comply with the notice requirement of 22 NYCRR 202[.7] (f),” which requires the movant to show that a “good faith effort has been made to notify the party against whom the temporary restraining order is sought of the time, date and place that the application will be made in a manner sufficient to permit the party an opportunity to appear in response to the application.”
- Fourth, the court declined to sign the order to show cause again for failure to comply with the prior notice requirement of 22 NYCRR 202.7 (f).
Only until Sapirstein filed his fifth proposed order to show cause did the court finally grant the application – and only to the extent of ordering an appearance on the same day as this article’s publication.
In a sixth decision, the court reassigned the proceeding to Justice Franco, the same justice who dismissed Sapirstein’s dissolution counterclaim in Corner Furniture.
If there is any lesson to be learned from Corner Furniture, it is this: although it may be tempting, when sued, to allege corporate dissolution as a counterclaim, where strict statutory requirements are involved, the safest approach is to file a separate dissolution proceeding. If they ought to be decided together, one can move to join the two cases. Moreover, when filing a dissolution proceeding, follow the statutes, including BCL 1105 and 1106, and any potentially applicable court rules, to the letter. The consequence can be an expensive, resounding loss on procedural grounds.