Sections 706 (d) and 716 (c) of the Business Corporation Law (the “BCL”) both contain a “for cause” standard for judicial removal of corporate directors and officers. Complaints with claims for judicial corporate director and officer removal are common. Decisions actually ordering removal are rare. Very rare. Over the past two decades, there have been less than a dozen appeals court decisions to even cite BCL 706 or 716, and not one involved actual removal on the merits of an officer or director.

The closest to reach the merits of a removal claim, Colucci v Canastra (130 AD3d 1268 [3d Dept 2015]), ruled that four shareholders of a corporation that owned and operated a golf course “submitted prima facie evidence” warranting a trial whether “there was cause for defendant’s removal due to his use of Hillcrest’s profits to pay for clubhouse operations that only benefitted him.”

Last month, in Gam v Dvir (___ AD3d ___, 2024 NY Slip Op 00181 [2d Dept Jan. 17, 2024]), a Brooklyn-based appeals court became the first in a generation to consider the merits of a lower court’s decision ordering judicial removal of a corporate officer or director.

The Battle of the Bagel Shop

In a busy shopping center at the northwest corner of Little Neck Road and Horace Harding Expressway in Little Neck, New York, sits Slim’s Bagels & Bialys, Inc. (“Slim’s”). Slim’s became ground zero for a bitter partnership struggle between two 50% shareholders, Gam and Dvir, over their ownership and operation of what was by all accounts a thriving bagel shop.

In her complaint, Gam alleged that she and Dvir formed Slim’s together, with Gam operating it successfully for several years as the “working partner” until she moved abroad. Then their “positions inverted” and Dvir became the “working partner.”

According to the complaint, Dvir eventually physically locked Gam out of the business, refused to pay Gam’s salary or business income, misappropriated all of Slim’s income for himself, refused to provide Gam access to books and records, diverted assets to two separate foodservice establishments Dvir owned in Manhattan, and used Slim’s funds to pay for personal credit card expenses.

The Summary Judgment Decision and Trial

Post-discovery, Queens County Commercial Division Justice Leonard Livote issued a Short Form Order dismissing portions of the complaint under the statute of limitations, finding triable issues of fact on the remaining claims, including on the Seventh Cause of Action for removal of Dvir as an officer of Slim’s under BCL 716 (c).

The case proceeded to a four-day trial, with a jury trying the legal claims, the Court trying the equitable claims. The jury returned a verdict in favor of Gam and against Dvir for $141,099 on a single derivative claim for unjust enrichment, an amount equaling certain checks Dvir issued to himself from Slim’s account. That’s a lot of bagels.

The Post-Trial Decision and Judgment

Post-verdict, the Court issued a Memorandum decision resolving Gam’s BCL 716 removal claim and a separate claim for attorneys’ fees under BCL 626.

Turning to removal, Justice Livote acknowledged that officer removal in the close corporation context may defeat reasonable investment-backed expectations because “‘[i]n his capacity as an officer or employee’” of the entity, a shareholder often “‘looks to his salary for the principal return on his capital investment, because earnings of a close corporation, as is well known, are distributed in major part in salaries, bonuses and retirement benefits.’”

But Justice Livote concluded that Dvir only had himself to blame for his predicament:

In the instant case, removal of Dvir as an officer for cause will severely impact the value of his investment. However, it was Dvir’s own actions that have resulted in this situation. Accordingly, the plaintiff has proven cause for Dvir to be removed and it is an appropriate remedy under the circumstances.

The Court concluded that Dvir “is removed as an officer of Slim’s Bagels and Bialys, Inc.” The Court also granted Gam a sizable attorneys’ fee award for her success on the derivative claim, all of which was incorporated into a final Judgment, from which both sides appealed.

The Appeal

In her cross-appellant’s brief, Dvir argued that the jury already “sanctioned” him enough with the “requirement that he return the fruits of his conduct.” Dvir complained that there was “no evidence” in the record to show that if he “continues as an officer of the corporation he will in any way continue to harm” the business. “Under these circumstances,” Dvir argued, “the penalty of indefinite removal is simply punitive. And it will cause great hardship” by causing Dvir to “lose a principal source of income for the indefinite future.” In lieu of permanent removal, Dvir suggested a temporary suspension from officership terminating when “the appeal is decided.”

In his cross-respondent’s brief, Gam argued:

[T]here is nothing in BCL § 716 (c) or case law that requires the trial court to consider the benefit to the corporation when removing an officer or the prior good conduct of the corporate officer; there is nothing requiring the trial court to limit removal to a temporary period; and there is nothing that requires a plaintiff to provide evidence that a defendant will continue to harm the corporation if he continues as an officer. The statute merely provides the words “for cause” and otherwise leaves it to a trial court’s discretion.

The Appellate Division sided with Gam. The Court held, “Contrary to the defendant’s contention, the record supports the Supreme Court’s determination to remove him as a corporate officer of Slim’s.”

Unfortunately, in a missed opportunity, the Court’s analysis consisted of just a single sentence: “Here, Gam established that she was a 50% shareholder of Slim’s and that there was cause for the defendant’s removal based upon his wrongful taking of Slim’s funds for his sole benefit.”

The Flexible Standards for Judicial Removal

For business divorce practitioners, we are often forced to divine the current state of the law, and to formulate arguments based upon that understanding, from just a few short sentences in a handful of relevant cases. It’s worse in the area of judicial officer and director removal, where the case law is so sparse we are forced to discern meaning from just a few words in a pair of cases.

Under Colucci, “use of [the entity]’s profits” by a corporate fiduciary in a manner “that only benefitted him” may constitute “cause” for judicial removal.

Under Gam, a corporate fiduciary’s “wrongful taking of [the entity]’s funds for his sole benefit” may constitute cause for judicial removal.

Generalizing from this pair of cases, it seems safe to conclude that financial self-dealing or misappropriation by an officer of director may be sufficient “cause” for judicial removal. Outside of that scenario, it remains open to interpretation, and subject to the creative and skillful advocacy of petitioner/plaintiff’s counsel, to persuade a court what might constitute “cause” for removal under BCL 706 and 716.

It seems that the Legislature, when it employed the broad statutory phrase “for cause,” intended to capture an extremely broad range of behavior. The judicial removal statutes are even broader than BCL 721, which bans indemnification of officers and directors for acts “committed in bad faith,” the result of “active and deliberate dishonesty,” or for which the officer or director “personally gained in fact a financial profit or other advantage to which he was not legally entitled.”

In short, the Legislature knew how to be specific when it wanted to be. In BCL 706 and 716, it chose to be vague, leaving courts broad discretion to determine whether, under a particular set of facts, there is “cause” for officer or director removal.