Fernandes v Matrix Model Staffing, Inc.
2022 NY Slip Op 31317(U)April 20, 2022
Supreme Court, New York County
Docket Number: Index No. 160294/2021
Judge: Frank Nervo
Cases posted with a "30000" identifier, i.e., 2013 NY Slip
Op 30001(U), are republished from various New YorkState and local government sources, including the New
York State Unified Court System's eCourts Service.
This opinion is uncorrected and not selected for officialpublication.

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SUPREME COURT OF THE STATE OF NEW YORKNEW YORK COUNTYPRESENT:PART

HON. FRANK NERVO

Justice---------------------------------------------------------------------------------X

INDEX NO.

160294/2021

MOTION DATE

11/30/2021,
02/22/2022

ALVIN CLAYTON FERNANDES
Plaintiff,

MOTION SEQ. NO.

-vMATRIX MODEL STAFFING, INC.,

04002 003

DECISION + ORDER ON
MOTION

Defendant.
---------------------------------------------------------------------------------XThe following e-filed documents, listed by NYSCEF document number (Motion 002) 9, 10, 11, 12, 13, 15
were read on this motion to/for

DISSOLUTION.

The following e-filed documents, listed by NYSCEF document number (Motion 003) 16, 17, 18, 19, 20,21, 22, 23, 29, 30, 31, 32, 33
were read on this motion to/for

DISMISS.

Petitioner, by order to show cause, seeks dissolution of the respondent
corporation pursuant to Business Corporation Law § 1104 (motion sequence002).1 In lieu of filing an answer or opposition to the petition and order to showcause, respondent has filed a motion to dismiss the petition pursuant to CPLR§§ 3211(a)(1) and (7). The Court consolidates motion sequences 002 and 003 forthe purposes of disposition.

1 Motion sequence 001, a prior order to show cause, was declined due to counsel’s non-compliance with Judiciary Law § 470, with leave to renew.
160294/2021 CLAYTON FERNANDES, ALVIN vs. MATRIX MODEL STAFFING, INC.
Motion No. 002 003[* 1]

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MOTION TO DISMISS
As with all motions to dismiss under CPLR § 3211, the complaint should
be liberally construed, the facts presumed to be true, and the pleading accorded
the benefit of every possible favorable inference (see e.g. Leon v. Martinez, 84NY2d 83 [1994]). “Under CPLR § 3211(a)(1), a dismissal is warranted only if thedocumentary evidence submitted conclusively establishes a defense to theasserted claims as a matter of law” (id.; citing Heaney v. Purdy, 29 NY2d 157[1971]).

To the extent that the motion seeks dismissal under § 3211(a)(7), it islikewise afforded the benefits of liberal construction, a presumption of truth,and any favorable inference (id.; Anderson v. Edmiston & Co., 131 AD3d 416, 417[1st Dept 2015]; Askin v. Department of Educ. of City of N.Y., 110 AD3d 621, 622 [1stDept 2013]). The motion must be denied if from the four corners of thepleadings “factual allegations are discerned which taken together manifest any
cause of action cognizable at law” (Polonetsky v. Better Homes Depot, 97 NY2d 46,54 [2001]). A complaint should not be dismissed so long as, “when theplaintiff’s allegations are given the benefit of every possible inference, a causeof action exists,” and a plaintiff may cure potential deficiencies in its pleading
through affidavits and other evidence (R.H. Sanbar Proj., Inc. v. Gruzen

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Partnership, 148 AD2d 316, 318 [1st Dept 1989]). However, bare legal conclusions
and factual allegations which are inherently incredible or contradicted bydocumentary evidence are not presumed to be true (Mark Hampton, Inc. v.
Bergreen, 173 AD2d 220 [1st Dept 1991]).

Here, respondent first contends that petitioner lacks standing to bringthis action as petitioner has failed to establish his shares are voting shares under
BCL § 1104-a. As relevant here, BCL § 1104-a provides holders of 20% or more of
voting shares of a closely held corporation may seek judicial dissolution.
Respondent’s argument conflates the burden of proof; it is respondent whobears the burden on a CPLR § 3211 motion to establish, via documentary
evidence, that petitioner’s shares are non-voting. Respondent has failed toproffer any proof of this contention. Furthermore, and notably upon a cursory
reading of respondent’s papers, respondent does not argue that petitioner does
not hold voting shares or is not otherwise entitled to vote in an election of
directors – respondent only claims that petitioner has not proffered proof of
those shares in the petition. Respondent cites no authority for the proposition
that where a voting shareholder’s status is not contested the failure to annex
proof of the voting shares is fatal to a dissolution action. Accordingly,
respondent’s claim of lack of standing is palpably devoid of merit.
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Next, respondent contends that petitioner has failed to plead the specialcircumstances and oppressive acts necessary for dissolution. BCL § 1104-a(a)(1)provides for dissolution on the grounds that “[t]he directors or those in controlof the corporation have been guilty of illegal, fraudulent or oppressive actions
toward the complaining shareholders”. It is well established that oppressive
conduct is measured by the complaining shareholder’s ‘reasonable expectations’and that oppression arises when objectively reasonable expectations central to ashareholder’s decision to join the venture are substantially defeated (Matter ofKemp & Beatley, 64 NY2d 63, 73 [1984]).

Here, petitioner alleges that, inter alia, respondent, through its director
Willard and without petitioner’s consent, designated petitioner as the personresponsible for collecting and paying employment taxes for respondent
corporation. Petitioner further alleges that respondent, again acting through its
director Willard, failed to pay appropriate employment taxes, resulting in over
$200,000.00 in penalties being assessed against petitioner, personally, by theInternal Revenue Service (IRS). Finally, petitioner avers, and respondent does
not deny, that petitioner was never responsible for collecting, accounting, orpaying employment taxes for respondent’s employees. Notably, no affidavit
from Willard or respondent is submitted on this motion.
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Failing to pay tax liabilities is corporate mismanagement which defeats apetitioner’s reasonable expectations sufficient to constitute oppression (In reMiescher, 288 AD2d 129 [1st Dept 2001]). It is beyond argument that ashareholder, who is not responsible for payroll and accounting, has an
objectively reasonable expectation that the corporation will not designate theshareholder as the responsible party for payroll withholdings in IRS filings.
The designation of the shareholder, without their consent, in IRS filings as theresponsible party for payroll taxes and the corporation’s subsequent failure toproperly withhold payroll taxes – resulting in several hundred-thousand dollars
of tax penalties being levied against the shareholder – is oppressive, if notfraudulent or criminal behavior. To the extent that respondent argues
petitioner rejected an involved role at respondent corporation as militating
against dissolution, such argument further supports a finding that respondent’s
designation of petitioner, a non-involved shareholder, as the responsible party
for its IRS payroll withholdings defeats the shareholder’s objectively reasonable
expectations. Consequently, respondent’s argument that the petition fails to
plead requisite oppression for dissolution is entirely without merit.
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DISSOLUTION BY ORDER TO SHOW CAUSE
Turning to the petition for dissolution, and as discussed supra, BCL §1104-a provides for a right of judicial dissolution where holders of 20% or moreof the outstanding shares of a closely held corporation seek to dissolve thecorporation under certain special circumstances. “The specified circumstancesare (1) where the directors or those in control of the corporation have beenguilty of illegal, fraudulent or oppressive actions toward the complaining
shareholders; or (2) where the property or assets of the corporation are beinglooted, wasted or diverted for noncorporate purposes by the controlling faction”(Fedele v. Seybert, 250 AD2d 519 [1st Dept 1998]; see also BCL § 1104-a). In
determining whether involuntary dissolution is appropriate, the Court must
consider whether dissolution is the only feasible means that petitioner willreasonably expect a fair return on investment and whether dissolution isreasonably necessary to protect the rights and interests of shareholders orpetitioner (BCL §§ 1104-a[b][1] and [2] ). Notwithstanding a petition todissolve a corporation, BCL § 1118 provides the non-petitioning shareholders “anabsolute right to avoid the dissolution proceedings and any possibility of thecompany’s liquidation by electing to purchase petitioner’s shares at their fairvalue and upon terms and conditions approved by the Court” (Matter of Pace
Photographers [Rosen],71 NY2d 737, 744-745 [1988]; see also Fedele v. Seybert, 250

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AD2d 519 [1st Dept 1998]). However, the election of a shareholder’s absoluteright to avoid dissolution under BCL § 1118(a) via purchase of petitioner’s sharesmust be effectuated within 90 days of filing the petition. An election after the90 days is subject to the Court’s discretion (see BCL § 1118[a]).

Here, as an initial matter, the only shareholder of respondent, other thanpetitioner, is the current director of respondent and owner of 80% of therespondent’s shares, Willard, who has not elected to purchase petitioner’s 20%
stake. Furthermore, respondent’s opposition to dissolution and in support ofthe motion to dismiss this action is wholly silent on the issue of any buy-back.
Consequently, respondent Matrix cannot avoid dissolution via BCL § 1118 at
this time; Willard having not elected to exercise her rights under § 1118.

Turning to the merits of the petition for dissolution, as discussed supra,
the failure to pay a corporation’s tax liabilities is corporate mismanagement anddefeats a petitioning shareholder’s reasonable expectations regarding theirinvestment sufficient to constitute oppression under BCL § 1104-a (In reMiescher, 288 AD2d 129). Here, petitioner alleges the respondent corporation’s
failure to properly withhold its employees’ taxes, and respondent improperly
informing the IRS that petitioner was responsible for payroll/accounting and160294/2021 CLAYTON FERNANDES, ALVIN vs. MATRIX MODEL STAFFING, INC.
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employee tax withholding, has resulted in the IRS levying more than$200,000.00 in tax penalties against petitioner, in his individual capacity.
Respondent has not answered the petition nor has respondent disputed that it,
through Willard and without petitioner’s consent: filed documents with theIRS naming petitioner as the responsible designee for payroll tax withholdings;
and failed to withhold taxes from its employees’ pay. As discussed supra, anobjectively reasonable shareholder would not expect the corporation to namethe shareholder as responsible for tax liabilities of the corporation’s employees
without the shareholder’s consent. Such improper designation, resulting inhundreds of thousands of dollars of tax liabilities against the individual
shareholder, likely frustrates the shareholder’s reasonable expectations central
to a shareholder’s decision to join the venture (Matter of Kemp & Beatley, 64
NY2d at 73).

Consequently, the petition alleges a demonstrated risk to petitioner’srights – chiefly continued future tax and other financial liabilities arising from
respondent’s oppressive conduct. It is, therefore, “incumbent upon the parties
seeking to forestall dissolution to demonstrate to the court the existence of anadequate, alternative remedy” (id. at 74). Respondent has failed to offer
alternative remedies. Respondent’s concern that dissolution will result in its 170
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employees being terminated is largely contradicted by respondent Matrix’s
failure to offer any alternatives to dissolution. “A court has broad latitude in
fashioning alternative relief, but when … there has been a complete
deterioration of relations between the parties, a court should not hesitate toorder dissolution” (id.).

However, the Court is mindful of BCL § 1109, generally which requires ahearing establishing the underlying facts prior to a finding of dissolution. As
discussed, supra, respondent has not denied the allegations of the petition, nor
has respondent offered any alternative remedy to dissolution. While neitherrespondent corporation nor its director, Willard, has submitted an affidavit
raising a question of fact, respondent has, nevertheless, questioned the need fordissolution (see e.g. Matter of Steinberg, 249 AD2d 551 [2d Dept 1998] reversing
trial court’s granting of dissolution petition, finding hearing required wherequestions of fact regarding merits of petition and appropriate remedy raised incompeting affidavits). Accordingly, the matter is referred to a referee to hearand report on the issue of dissolution.
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Accordingly, it is
ORDERED that respondent’s motion to dismiss (motion sequence 003) isdenied in its entirety; and it is further

ORDERED that the petition (motion sequence 002), is referred to a referee tohear and report, as below; and it is further

ORDERED that a Judicial Hearing Officer (“JHO”) or Special Referee shall bedesignated to hear and report to this court on the following individual issues offact, which are hereby submitted to the JHO/Special Referee for such purpose:
1. Establishing the underlying facts of the petition for dissolution,
the merits of the petition, and the appropriate remedy (see e.g.
Matter of Steinberg, 249 AD2d 551 [2d Dept 1998]; Matter ofKournianos, 175 AD2d 129 [2d Dept 1991]; BCL § 1109)
and it is further

ORDERED that the powers of the JHO/Special Referee shall not be limited
beyond the limitations set forth in the CPLR: and it is further

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ORDERED that this matter is hereby referred to the Special Referee Clerk(Room 119, 646-386-3028 or spref@nycourts.gov) for placement at the earliest
possible date upon the calendar of the Special Referees Part (Part SRP), which,in accordance with the Rules of that Part (which are posted on the website ofthis court at www.nycourts.gov/supctmanh at the “References” link), shallassign this matter at the initial appearance to an available JHO/Special Referee
to hear and report as specified above; and it is further

ORDERED that counsel shall immediately consult one another and counsel forplaintiff/petitioner shall, within 15 days from the date of this Order, submit to
the Special Referee Clerk by fax (212-401-9186) or e-mail an Information Sheet(accessible at the “References” link on the court’s website) containing all theinformation called for therein and that, as soon as practical thereafter, theSpecial Referee Clerk shall advise counsel for the parties of the date fixed forthe appearance of the matter upon the calendar of the Special Referees Part; andit is further

ORDERED that on the initial appearance in the Special Referees Part theparties shall appear for a pre-hearing conference before the assigned
JHO/Special Referee and the date for the hearing shall be fixed at that
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conference; the parties need not appear at the conference with all witnesses andevidence; and it is further

ORDERED that, except as otherwise directed by the assigned JHO/SpecialReferee for good cause shown, the trial of the issue(s) specified above shallproceed from day to day until completion and counsel must arrange theirschedules and those of their witnesses accordingly; and it is further

ORDERED that counsel shall file memoranda or other documents directed tothe assigned JHO/Special Referee in accordance with the Uniform Rules of theJudicial Hearing Officers and the Special Referees (available at the“References” link on the court’s website) by filing same with the New YorkState Courts Electronic Filing System (see Rule 2 of the Uniform Rules); and it
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ORDERED that any motion to confirm or disaffirm the Report of theJHO/Special Referee shall be made within the time and in the manner specified
in CPLR 4403 and Section 202.44 of the Uniform Rules for the Trial Courts.
THIS CONSTITUTES THE DECISION AND ORDER, AND ORDER OF REFERENCE OF THE COURT.

4/20/2022
DATE
CHECK ONE:$SIG$
FRANK NERVO, J.S.C.
CASE DISPOSEDGRANTEDXDENIEDNON-FINAL DISPOSITIONGRANTED IN PARTAPPLICATION:SETTLE ORDERSUBMIT ORDERCHECK IF APPROPRIATE:INCLUDES TRANSFER/REASSIGNFIDUCIARY APPOINTMENT

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