Motion for judicial dissolution of corporations; BCL § 1104-a; defenses of bad faith, unclean hands and equitable estoppel
By: Samantha Yu | Staff Writer
Gould Erectors & Rigging, Inc. (“Gould”), a domestic business commercial construction corporation, was wholly owned in 1970, by John P. Flach (father of respondent), who worked closely with Henry J. Digeser (father of petitioner). Flach Crane & Rigging Co., Inc. (“Flach Crane”) was formed by Flach to establish a separate corporation to insulate Gould’s assets from the potential risks associated with crane work.
Petitioner focused primarily on the day-to-day operations of Gould and because he is not a licensed crane operator, he focused on management issues at Flach Crane. The parties had close professional and personal relationships. Their companies became successful with the annual revenue of each company exceeding millions. This allowed the parties to receive compensation, sometimes exceeding $2 million per year, which they agreed to distribute equally. By 2007, the parties developed a succession plan to form a new corporation equally owned by the five sons of the parties, with respondent’s son, J.C., serving as president. However, J.C. died in September 2012, and respondent’s other son, Keith, was not suitable to lead the business. Their relationship deteriorated after J.C.’s death, and although the reasoning for the breakdown is in dispute, it is undisputed that each party wanted a “divorce” from each other. Petitioner was ultimately terminated as director and employee of both companies.
Petitioner alleges that he holds a minority interest comprising at least 20% of the shares of each Gould and Flach Crane with remaining interest owned by respondent. Petitioner seeks dissolution of the corporations under Business Corporation Law (“BCL”) § 1104-a, based upon allegations of oppressive conduct. BCL § 1104-a (a) authorizes a minority shareholder with at least 20% of the voting interest in a corporation to petition for judicial dissolution on one or more of the following grounds: (1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; (2) The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation. Petitioner argues that respondent’s actions constitute oppression and is guilty of converting and looting corporate assets.
Respondent disputes petitioner’s allegations of stock ownership, denies the claims of oppression and conversion, and that their actions were a result of petitioner’s bad-faith actions. Respondent also alleges that the petition is barred by the equitable doctrines of unclean hands and estoppel.
The term “oppressive actions” is conduct that substantially defeats the reasonable expectations of the minority shareholder such as the deprivation of a reasonable return on their investment, frustrated expectations of continued employment, share in the profits, or management of the corporation
The court held, based on the representations of ownership made on Gould’s federal tax returns, that petitioner is the owner of 24 of the 98 issued and outstanding shares. Additionally, the testimony from the signatory and minutes of the initial corporate meeting was enough to confirm ownership of 25 of the 100 issued and outstanding shares of Flach Crane.
The court also held that despite petitioner’s failure to adequately keep respondent informed of his transactions, respondent went too far by terminating all of his employment and ownership interest in retaliation. Furthermore, it was also relevant that both parties used corporate funds to personally benefit themselves in various ways. Thus, respondent failed to establish his defenses of bad faith, unclean hands or equitable estoppel.
Moreover, because respondent received compensation in various methods from Flach Crane, under the circumstances, petitioner had a reasonable expectation of receiving at least a proportionate share of profits from the company as well. As such, petitioner established shareholder oppression with respect to his minority interest in Flach Crane.
Accordingly, the court granted the petition to the limited extent of determining that the petitioner has established grounds for dissolution of Gould and Flach Crane BCL § 1104-a (a) (1).
Matter of Digeser v Flach, Index No. 2382/2013, 11/05/15 (Richard, J.).