Novikov v Oceana Holdings Corp., 506282/13, 11/3/2014 (Carolyn E. Demarest, J)

By Timothy Broschardt | Staff Writer

Order to show cause; BCL § 624 right of inspection; common law right of inspection; discovery; 22 NYCRR § 130-1.1(a) frivolous conduct

Petitioner filed an Order to Show Cause under BCL §624 against Respondent, seeking inspection of Respondent’s shareholder and board of directors meeting minutes, financial statements, tax returns, and tenant leases from 2010 through 2014. Petitioner is a 20% shareholder in Respondent’s real estate management LLC. Petitioner alleges that Respondents mismanaged the corporation’s affairs due to conflicts of interest, including paying themselves unreasonable compensation and failing to lease the property at fair and reasonable rates. At the time of this action, all three of the shareholders, other than Petitioner, are blood-related and are members of the three-member board of directors.

In 1999 and again in 2009, Petitioner sought judicial intervention to obtain access to Respondent’s records. Both causes of action were dismissed on procedural grounds. In 2013, Petitioner served a demand for the aforementioned documents on Respondent. Soon afterwards, Respondent converted from an S-corporation to an LLC. Respondent informed Petitioner it would provide its 2012 (most recent) tax return, but would not provide any of the other requested documents. Petitioner then commenced this action. Shortly thereafter, Petitioner received a heavily redacted copy of Respondent’s 2012 tax return and an offer to allow Petitioner to inspect Respondent’s stockholder list and 2013 stockholder meeting minutes.

Respondent cross-moves for sanctions on Petitioner pursuant to 22 NYCRR § 130-1.1(a) for frivolous legal action, alleging Petitioner (1) lacks good faith and proper purpose and (2) engaged in duplicative, harassing litigation,.

Proper purpose can be established by alleging facts that indicate misconduct by Respondent. The Court finds that Petitioner did have proper purpose, as he tendered evidence that the wife of one of the directors owns stock in two of Respondent’s tenants, while another director was a managing member of a tenant indebted to Respondent. Financial records also indicated a debt nearly equal to Respondent corporation’s total assets, as well as other evidence of conflicts of interest and unfaithful management.  Accordingly, Respondent’s cross-claim for sanctions is, dismissed in its entirety.

The Court holds that Petitioner had both a statutory right under BCL § 624(f), which allows a court to compel production of any documents it deems appropriate, and a common law right to inspect corporate books and records, provided that the request is made in good faith and for a proper purpose.  Since the Court found that the investigation at issue is proper under BCL § 624 and since Respondent has not raised any valid issue of fact demonstrating improper purpose, the Court granted the petition.

In regard to Respondent’s second ground for sanctions, the Court determines that the 1999 action had an entirely different basis, while the 2009 action was dismissed due to Petitioner’s failure make his demands before the board prior to commencing the action as required by BCL §626(c). Neither claim was adjudicated on the merits. Therefore, the court finds that the instant action is not duplicative, harassing, nor precluded.

The Court finds that Petitioner has good reason to request the documents at issue and orders Respondent to produce: tax returns, profit and loss statements not included in tax returns, leases, employment and commission agreements, and documents establishing the terms of Respondent corporation’s debts for the years between 2010 and 2014. The Court did not mandate access to the general ledger, determining that that is too broad of a disclosure to require at this time.

Novikov v Oceana Holdings Corp., 506282/13, 11/3/2014 (Carolyn E. Demarest, J)

Order to show cause; BCL § 624 right of inspection; common law right of inspection; discovery; 22 NYCRR § 130-1.1(a) frivolous conduct

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