Litigated business breakups are often highly intense and emotional for the participants. The intensity and emotion multiply when the litigants are close family members.
If you add to the mix several years and more than ten rounds of motion practice, a successful judicial dissolution and winding up, an appeal, a remand, a motion for summary judgment, and another motion for summary judgment, lawyers and clients can become exceedingly close through the experience.
This week, we’re pleased to feature a story about two longtime favorite clients and the Homerian odyssey of litigation they endured, resulting in a recent victory in the form of total dismissal of what remained of a complaint filed by a son against his own father and stepmother for dissolution of a landscape and masonry supply business and accompanying damages claims related to six parcels of real property on which the business operated based upon a theory of “misappropriation of corporate opportunity.”
The Company, its Ownership Structure, and the Six Parcels of Real Estate
Joseph founded Jos. M. Troffa Landscape and Mason Supply, Inc. (the “Company”) as sole shareholder in the 1970s. Over time, Joseph grew the Company into a very successful business.
In the 1990s, Joseph gifted his son from his first marriage, Jonathan, shortly after he graduated high school, half the shares of the Company for no consideration.
The Company operated on six adjacent parcels of real estate in East Setauket, New York, five of which Joseph and his second wife, Laura, acquired over a period of decades through two real estate holding companies, NIMT Enterprises, LLC (“NIMT”) and L.J.T. Development Enterprises, Inc. (“LJT”).
The sixth parcel – a 1.78 piece of unimproved land known as the “Compost Yard” – Joseph acquired in his own name in March 2013. According to Joseph and Laura, Jonathan always knew and agreed that NIMT (of which Jonathan was a 1% member), LJT, and Joseph were to be the owners of the properties; it was only after lawyers got involved that Jonathan devised a scheme to sue Joseph, Laura, and their real estate companies in connection with those properties.
The Dissolution Petition, the Injunction Motion, and the Notice of Pendency
The litigation kicked off in June 2016, slightly more than three years after Joseph acquired the Compost Yard, when Jonathan filed a hybrid petition / complaint alleging four causes of action including: (i) dissolution based upon deadlock under Section 1104 of the Business Corporation Law (the “BCL”); (ii) breach of fiduciary duty / accounting; (iii) imposition of a constructive trust upon all six parcels of real estate; and (iv) quiet title to the Compost Yard.
In his order to show cause commencing the dissolution proceeding, Jonathan also moved for a temporary restraining order (“TRO”) and preliminary injunction.
Three days later, Jonathan filed a notice of pendency upon the Compost Yard.
Joseph opposed the TRO portion of the order to show cause. Ultimately, Suffolk County Commercial Division Justice Jerry Gargiulo declined to sign the order to show cause and Jonathan withdrew the injunction motion.
The Consent to Dissolution, the Attempted Withdrawal, and the Amended Complaint
In August 2016, Joseph called his son’s bluff and filed a “Verified Consent to Dissolution” agreeing to dissolve the Company based upon shareholder deadlock, and answering the remaining claims in the petition / complaint.
When it became obvious that the threat of dissolution lacked the leverage he desired, Jonathan abruptly changed course and announced that he no longer intended to dissolve, filing an amended complaint purporting to withdraw the first cause of action for judicial dissolution. The amended complaint alleged four claims: (i) breach of fiduciary duty / accounting; (ii) constructive trust; (iii) quiet title; and (iv) an exceedingly bare bones, alternative fourth cause of action labeled a “derivative action” under BCL § 626.
The Motions for Dissolution on Consent, to Dismiss, and to Withdraw
In September 2016, Joseph filed two motions.
First, Joseph moved to dissolve the Company on consent and to strike Jonathan’s amended complaint because Jonathan violated BCL § 1116‘s provision that withdrawal of a dissolution claim requires court permission and a showing that “the cause for dissolution did not exist or no longer exists.” You can read Joseph’s moving brief here.
Second, in the alternative to striking the amended complaint, Joseph separately moved to dismiss the amended complaint based upon a variety of pleading defects and the statute of limitations, which Joseph argued extended no longer than three years prior to commencement of suit, barring recovery for all six real estate transactions, including the Compost Yard. You can read Joseph’s moving brief here.
In October 2016, Jonathan cross-moved for permission to withdraw his dissolution claim under BCL § 1116.
The Dissolution, Dismissal, and Withdrawal Decision
In January 2017, Justice Gargiulo issued a decision and order in which the Court:
- Denied Joseph dissolution on consent on procedural grounds (i.e., failure to seek dissolution by order to show cause under BCL § 1106);
- Denied Jonathan leave to withdraw his dissolution claim as “academic” because the Court declined to sign his original order to show cause;
- Applied a three-year statute of limitations to Jonathan’s fiduciary duty claim and dismissed the claim for all events or transactions before June 27, 2013, more than three years before Jonathan filed suit;
- Dismissed Jonathan’s claim for constructive trust for failure to allege the essential element of a transfer made in reliance upon a promise;
- Dismissed Jonathan’s claim for quiet title because there was no bona fide dispute Joseph was the actual title owner of the Compost Yard; and
- Denied dismissal of the fourth cause of action brought derivatively, holding that Jonathan was excused from making a pre-suit demand upon the board.
For the remainder of the lawsuit, all that remained of Jonathan’s case was his fourth cause of action for “derivative action.”
The Separate Dissolution Proceeding
In February 2017, Joseph commenced a separate proceeding by order to show cause and petition to dissolve the Company under BCL § 1102 based upon a board resolution to dissolve and § 1104 based upon shareholder deadlock. You can read Joseph’s opening brief here.
The Reargument Motions and Decision
Around the same time Joseph filed his separate dissolution proceeding, Jonathan moved, and Joseph later cross-moved, to reargue Justice Gargiulo’s decision partially dismissing three of the four counts in Jonathan’s amended complaint. You can read Joseph’s brief opposing reargument here.
In May 2017, Justice Gargiulo issued a decision and order denying Jonathan reargument and granting Joseph reargument, holding:
- Jonathan failed to demonstrate that the Court overlooked or misapprehended any matters of law or fact when it dismissed his first, second, and third causes of action; and
- The Court misspoke when it dismissed only the “the first five real estate purchases,” clarifying on reargument that “all six real estate purchases,” including the Compost Yard transaction, which closed in March 2013, “are barred by the statute of limitations.”
The Amendment Motion and Decision
In June 2017, hoping to extend his statute of limitations from three years to six, Jonathan moved for leave to amend his amended complaint to allege several new causes of action, including fraud and accounting. Joseph opposed, arguing that the Court previously considered and rejected Jonathan’s proposed theories in the prior rounds of motion practice. You can read Joseph’s opposition brief here.
The Court ultimately issued a decision and order denying Jonathan leave to amend, finding the proposed new pleading “palpably insufficient as a matter of law.”
The Dissolution and Receivership Decision
In July 2017, Justice Gargiulo finally granted the relief Jonathan himself requested when he sued more than a year prior before abruptly switching positions, issuing an “Order and Judgment of Dissolution and Appointment of Receiver” dissolving the Company and appointing former Associate Justice of the Appellate Division – Second Department Joseph Covello to oversee the Company’s liquidation and winding up.
The Subpoena Quash Motion, Decision, and Appeal
After the Court serially dismissed most of the amended complaint, denied Jonathan leave to reargue, then denied Jonathan leave to amend, Jonathan served a series of subpoenas seeking to obtain disclosure of the Compost Yard purchase – the same transaction the Court previously dismissed as time barred.
In October 2018, Jonathan filed an appeal, and in November 2018, perfected his appeal, from the decision granting Joseph’s motion to quash. The appeal was fully briefed in March 2019. You can read the parties’ briefs here, here, and here.
The Notice of Pendency Extension Motion, the Cancellation Cross-Motion, and the Decision
In May 2019, while the appeal was pending, Jonathan moved by order to show cause to extend the notice of pendency upon the Compost Yard. Joseph cross-moved to cancel the notice of pendency. You can read Joseph’s opposition / cross-motion papers here.
The Court ultimately issued a decision and order denying Jonathan’s motion and granting Joseph’s cross-motion cancelling the notice of pendency.
The Completion of the Liquidation and Winding Up
In June 2019, Justice Covello’s receivership came to end when the Company’s liquidation was finally completed (yielding over half a million dollars in cash or in-kind distributions to the two former shareholders) and the Court issued an order discharging Justice Covello as receiver.
The Appellate Decision
In March 2021, after almost two years of waiting, the Appellate Division issued a decision and order reversing the motion court’s decision quashing the subpoenas Jonathan served seeking disclosure related to the Compost Yard.
The Court ruled that, insofar as Jonathan alleged his fourth cause of action derivatively under BCL § 626, his claim for damages was potentially timely under what it held to be the applicable six-year statute of limitations, CPLR § 213 (7).
The First Round of Summary Judgment Motions and Decision
In March 2022, after almost a year of post-remand disclosure proceedings, Jonathan moved for summary judgment on liability on his fourth cause of action, arguing that there was no triable issue of fact the Compost Yard was a “corporate opportunity” of the Company, and that Joseph’s alleged failure to offer the Company an opportunity to buy the land before buying it himself allegedly breached his fiduciary duties as a matter of law.
In April 2022, Joseph cross-moved for summary judgment dismissing the fourth cause of action under New York’s two-part factor test for determining whether an asset or transaction constitutes a “corporate opportunity.”
Joseph argued that owning land was never within the Company’s “line of business” because the Company, for its entire existence, leased and never owned land.
Joseph also argued that the Company had no “tangible expectancy” of owning the Compost Yard. Joseph included in his memorandum of law a short point requesting partial dismissal based upon the statute of limitations. You can read Joseph’s opposition / cross-moving brief here.
In August 2022, the Court issued a decision and order denying both sides summary judgment, finding triable issues of fact whether Jonathan acquiesced to Joseph’s acquisition of the Compost Yard in his own name, and whether the Compost Yard was a corporate opportunity of the Company. The Court declined to reach Joseph’s statute-of-limitations defense, finding that the defense was “not specified in the Notice of Cross Motion,” writing that the defense “may be renewed at trial.”
The Second Summary Judgment Motion and Decision
In September 2022, with the Court’s prior permission, Joseph filed a second motion for summary judgment, this time focusing entirely on the statute-of-limitations defense the Court declined to reach on the prior motion. Until that motion, the parties never litigated, and no court ever decided, the accrual date of Jonathan’s claim for damages based upon the Compost Yard transaction.
As Joseph explained in his moving papers, he entered into a contract of sale to buy the land in 2006, but he was unable to close until 2013 because of environmental contamination and a foreclosure proceeding against the prior owner, both of which clouded title, preventing the sale from closing for many years.
Joseph argued that the statute of limitations nonetheless accrued in 2006, when Joseph entered into the contract of sale and delivered the down payment for the property, so that the claim became untimely six years later, in 2012.
In opposition, Jonathan argued that the claim accrued in 2013, when the Compost Yard transaction closed. Jonathan also argued that the doctrine of equitable estoppel tolled the statute of limitations. You can read the parties’ briefs here, here, and here.
In January 2023, the Court held a lengthy oral argument. Then, in February 2023, the Court issued its final decision and order ruling that the alleged act of “misappropriation” of the Compost Yard first occurred, and claim thus accrued, in 2006, when Joseph executed the contract of sale in his own name rather than in the name of the Company. The Court wrote:
Defendants have demonstrated their entitlement to judgment as a matter of law. In support, the Defendants contend that the six-year statute of limitations has run on the fourth cause of action inasmuch as the corporate opportunity that was seized by Joseph accrued on December 7, 2006, the date that he signed the contract of sale for the Compost Yard. Thus, the statute of limitations expired on December 7, 2012. The Plaintiff commenced the action on June 27, 2016, four years after the expiration of the statute of limitations. Consequently, the Defendants satisfied their initial burden of establishing that the action had been commenced beyond six years after the accrual of the fourth cause of action and, thus, is subject to dismissal as time barred.
Conversely, wrote the Court, Jonathan failed to raise a triable issue of fact:
In opposition, the Plaintiff has failed to meet his burden of raising a triable issue of fact as to whether the statute of limitations was tolled or otherwise inapplicable, or whether he actually commenced the action within the applicable limitations period. The Plaintiff provides no legal authority to support his contention that the fourth cause of action accrued in 2013 at the closing. The Plaintiff did not raise a triable issue of fact as to the applicability of the doctrine of equitable estoppel, as he failed to present evidence of an affirmative act of misconduct or misrepresentation by the Defendants that occurred within the limitations period and prevented the Plaintiff from timely commencing this action.
“Accordingly,” ruled the Court, “the Defendant’s motion for summary judgment dismissing the fourth cause of action is granted and the action is dismissed.”
Conclusion of an Epic Journey
Looking back, it is almost impossible to believe how much litigation took place over a small piece of undeveloped, formerly contaminated real property. We could not be more pleased to have secured total victory for Joseph and Laura, two wonderful clients, both of whom had the fortitude to continue the difficult and expensive fight long after many other litigants would have knuckled under and settled. To their immense credit, neither ever raised their voice, complained, nor took their frustrations out on their attorneys. Victory could not have gone to two kinder people.