Resolving ownership disputes with a buyout at auction has a tempting simplicity. The buyout gives the owners the divorce they need. And the auction—particularly a blind auction, in which no owner is aware of the other’s bid—arguably leaves little room for dispute over the value of the company. For these reasons, it is easy to see why a court charged with overseeing the dissolution of a 50/50 closely-held company might prefer an auction giving each owner the chance to buy out his or her co-owner.
But auctions also bring the potential for abuse and distrust. They put the better-heeled owner in a position of power, and one owner may have a better understanding of the company’s value than the other. They also require a degree of good faith by either side. Count Victor Lustig leveraged the opacity of the blind auction process to sell the Eiffel Tower twice; feuding business owners have reason to be wary.
Upon the court-ordered dissolution of a corporation, BCL 1111(c) provides that the court may, “in its discretion” provide for the distribution of the corporation’s property. A recent case out of the Appellate Division, Second Department, ANO, Inc. v Goldberg, considers whether that discretion allows the court to direct a blind auction buyout (2023 NY Slip Op 02508 [2d Dept May 10, 2023]).
ANO and the Deadlock Causing Dissolution
ANO is the latest chapter in a fifteen-year legal battle between Ari Yemini and Oded Goldberg concerning ANO Inc., which is an acronym for Ari N Oded. The Company owns a 66% ownership interest in Candlewood Holdings, Inc., which in turn owns a 90% interest in a company that owns and operates a commercial property in Massachusetts. After years of contentious litigation and several trips to the Appellate Division, Second Department, the parties ultimately established that ANO is owned 50% by Yemini and 50% by Goldberg Commodities, Inc.—Goldberg’s wholly-owned company. Those interested in the many twists and turns the litigation took to get there can peruse Peter Mahler’s 2009 (!) posts here and here regarding the parties’ early disputes as to the ownership of ANO.
After the parties established the ownership of ANO, Yemini in 2015 petitioned for dissolution of ANO pursuant to BCL 1104, based on its inability to elect directors and deadlock between Yemini and Goldberg. The deadlock was crippling ANO, Yemini argued, because he and Goldberg would not agree on how to vote ANO’s 66% interest in Candlewood’s election of directors, threatening ANO’s control of Candlewood.
By Order dated February 2, 2016, Nassau County Justice Stephen A. Bucaria granted Yemini’s petition for dissolution of ANO. Justice Bucaria found that “Yemini and Goldberg have a fundamental and intractable dispute as to the means, methods, and finances of ANO.” The Court directed Yemini to settle an order providing for the dissolution of ANO, and it declined to include in its order a provision addressing the disposition of ANO’s property.
Two years later, in December 2018, the Second Department affirmed Justice Bucaria’s order granting the dissolution of ANO. The Second Department held that “the record amply demonstrates sufficient dissention among the parties, resulting in a deadlock, so as to warrant dissolution.” The Court further held that Justice Bucaria “providently exercised [his] discretion in not providing for the distribution of property of ANO upon dissolution of ANO under the instant circumstances.”
The Post-Deadlock Sealed-Bid Auction
After the Second Department’s affirmance, the parties resumed proceedings before Justice Bucaria to address the disposition of ANO’s property—i.e., its ownership interest in Candlewood.
Here’s where things get interesting:
By Order dated March 16, 2020, Justice Bucaria set forth a comprehensive procedure for a closed auction of ANO’s interest in Candlewood (the “Sale Order”). The Sale Order provided that after resolution of some preliminary issues, the parties would gather at the Courthouse and present to the Receiver sealed bids for the other party’s interest in ANO:
At the Auction, which shall be held at the Courthouse and be stenographically recorded, each bidding party shall present a sealed bid to the Temporary Receiver, who shall simultaneously open the bids and record the amounts bid on the record. Each party’s bid shall solely consist of the single dollar amount equal to the amount that party is willing to pay for that 50% of ANO’s shares owned by the other party. The Temporary Receiver shall state, on the record, the amount of each party’s bid, and shall declare the winning bidder.
Goldberg promptly moved to vacate the Sale Order. Apparently due to confusion with respect to Court operations during the early days of the COVID-19 pandemic, Goldberg prior to the Sale Order did not state his objection to the private auction process.
Goldberg’s motion to vacate highlighted a major dispute between the parties with respect to the private sale: the treatment of a $600,000 mortgage personally guaranteed by Yemini. The Sale Order required that if Goldberg was the winning bidder, he would be required to remove Yemini as a personal guarantor of that mortgage. Goldberg objected to that term, arguing that he should not be required to both post the winning bid and remove Yemini from a mortgage that he willingly guaranteed.
By order dated October 7, 2020, the Court denied Goldberg’s motion to vacate. Not that it mattered by then: a few weeks earlier on September 14, 2020, the auction was held, and Goldberg did not present a bid. Yemini was declared the winner.
Second Department Orders Public Sale over Disputed Auction
Goldberg appealed the Sale Order. Relying principally on Sternberg v. Osman, in which the Second Department reversed an order directing one 50% shareholder to purchase the other’s shares in a case brought under BCL 1104 (181 AD 2d 899 ), Goldberg argued that because he did not consent to the auction (or at least, to the key terms of the auction), the Court was required to direct the liquidation of ANO at a public sale.
Yemini in response set forth the history of Goldberg’s apparent participation in the drafting of the Sale Order, arguing that Goldberg, through that participation, waived his right to object to the private auction.
The Second Department reversed the Sale Order. The Court held that absent an agreement between the parties, the winding up of ANO must be governed by BCL 1005(a)(2):
Business Corporation Law § 1005(a)(2) states that after dissolution “[t]he corporation shall proceed to wind up its affairs, with power to fulfill or discharge its contracts, collect its assets, sell its assets for cash at public or private sale, discharge or pay its liabilities, and do all other acts appropriate to liquidate its business.” “When the parties cannot reach an agreement amongst themselves with respect to the sale of the corporation’s assets either to one another or to a third party, ‘the only authorized disposition of corporate assets is liquidation at a public sale’ ” . . . Thus, since the parties were not able to reach a full agreement as to the terms of the private sale, the Supreme Court did not have the authority to authorize the sealed-bid auction.
The Second Department vacated the Sale Order and remanded the case to the trial court, presumably so that the trial court could oversee liquidation of ANO at a public sale.
While the Second Department highlighted Goldberg’s objections to the private auction directed by the Sale Order—including the treatment of Yemini’s guarantee on the mortgage—the Court gave no direction as to how that guarantee will be treated in a public sale. Absent further litigation on the issue, Yemini will remain a guarantor even after the sale of ANO’s interest in Candlewood.
Post-Dissolution Alternative Remedies
It is common in Business Divorce litigation to see a partial owner of a company seek to forestall liquidation by buying out the other owner(s) of the dissolved company. Many times, the parties in dissolution proceedings expressly ask for a court-ordered buyout. Perhaps counterintuitively, the availability of that buyout turns on the grounds for dissolution:
- The Court of Appeals has instructed in Matter of Kemp & Beatley that when dissolution is granted under BCL 1104-a, notwithstanding the respondent’s earlier failure to elect under BCL 1118 to purchase the petitioner’s shares, “[e]very order of dissolution . . . must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder’s stock at fair value” (64 NY2d 63 ).
- In the LLC context, the Second Department is the vanguard of the now well-worn principle that “in certain circumstances, a buyout may be an appropriate equitable remedy upon the dissolution of an LLC” (Mizrahi v Cohen, 104 AD3d 917, 920 [2d Dept 2013]).
- If dissolution of a corporation is granted under BCL 1104, however, ANO tells us that the Court has no authority to order a private buyout; the dissolution must be completed by liquidation at a public sale.
I suppose there’s some logic for imposing a more restrictive stance on post-dissolution buyouts in dissolution proceedings under BCL 1104 than in proceedings under BCL 1104-a, since a deadlock-based dissolution proceeding does not require a finding of “fault” by either owner. But it seems strange to discuss, as ANO does, post-dissolution buyouts in terms of authority. Why would a Court have authority to direct a post-dissolution buyout in a BCL 1104-a case, but not in a BCL 1104 case? And BCL 1005—the dissolution statute cited by the Court in ANO—expressly contemplates liquidation by “private sale.”
ANO’s requirement that, absent agreement, a company dissolved under BCL 1104 must be liquidated through public sale may produce some interesting auctions. For instance, consider the asset to be sold in ANO: a 66% interest in a closely-held company that owns a 90% interest in another closely-held company. It’s hard to imagine much of a market for that asset. In the end, the public sale directed by the Second Department may look a lot like the private auction already held.
In all events, ANO reminds litigants considering a BCL 1104 proceeding that deadlock-based dissolution is not a path to a buyout; petitioners should be ready to see dissolution of the deadlocked corporation all the way through a public sale.