State of New York

Supreme Court, Appellate Division

Third Judicial Department

Decided and Entered: July 16, 2015 519610 

________________________________

LORA COLUCCI et al.,

AppellantsRespondents,

v

MEMORANDUM AND ORDER

JEFFREY M. CANASTRA,

RespondentAppellant, 

et al., 

Defendants.

________________________________

Calendar Date: May 26, 2015

Before: Lahtinen, J.P., McCarthy, Rose and Clark, JJ.

__________

Thomas J. Rzepka, Rochester, for appellants-respondents.

Goldberger & Kremer, Albany (Brian S. Kremer of counsel),

for respondent-appellant.

__________

Clark, J.

Cross appeals from an order of the Supreme Court (Reilly

Jr., J.), entered December 6, 2013 in Schenectady County, which,

among other things, denied plaintiffs' motion for summary

judgment.

Defendant Hillcrest Golf and Country Club, Inc. is a

corporation that was formed in 1960 to own and operate a golf

course located in Schenectady County. Hillcrest owns the golf

course and rents an adjacent clubhouse where rounds of golf, cart

rentals and concessions are sold. In lieu of rent, Hillcrest

pays the operating expenses of the clubhouse, such as taxes,
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utilities and insurance. Until her death in 1992, Josephine

Palazini (hereinafter decedent) operated the clubhouse and owned

75 of the 100 outstanding shares of Hillcrest stock. Her

daughter, defendant Sherry Lee Smith, then took over the

operation of the clubhouse. Between 1993 and 2003, defendant

Jeffrey M. Canastra (hereinafter defendant), the president and a

board member of Hillcrest, entered into agreements with three of

decedent's heirs to purchase 45 shares of Hillcrest stock. In

2005, defendant assumed responsibility for the clubhouse and

created a corporation called Jefmelmat, Inc. to operate the

clubhouse. 

Plaintiffs, four Hillcrest shareholders, commenced this

shareholder derivative action in June 2008, seeking, among other

things, that defendant be compelled to prove his stock ownership

and to remove defendant as an officer, director and corporate

manager of Hillcrest. After defendant answered, plaintiffs moved

for summary judgment and defendant cross-moved for summary

judgment dismissing the complaint. Plaintiffs thereafter crossmoved to amend the complaint. As relevant here, Supreme Court

denied plaintiffs' motion for summary judgment and partially

denied defendant's cross motion for summary judgment, sanctioned

plaintiffs for frivolous conduct and granted plaintiffs leave to

amend the complaint. Plaintiffs appeal and defendant crossappeals.

Initially, we agree with Supreme Court that defendant

demonstrated entitlement to judgment as a matter of law on the

issue of his stock ownership. Defendant submitted uncontroverted

proof that decedent bequeathed 15 shares each to five people,

including Paul Nickel, Nancy Williams and Bruce Palazini. The

fact that such shares were transferred one day before letters

testamentary were issued did not invalidate the transfer because

the executor derives the power to dispose of the estate's

property from the will, not from the letters testamentary (see

Hartnett v Wandell, 60 NY 346, 349-350 [1875]). Defendant also

submitted evidence that Nickel, Williams and Palazini validly

transferred their shares to him, including three stock transfer

agreements and stock certificates that are endorsed from Williams

and Palazini to him. With regard to Nickel's shares, defendant

showed that, in addition to the transfer agreement, Nickel, who
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is deceased, bequeathed his Hillcrest stock to defendant in his

will. Thus, we agree that defendant met his prima facie burden. 

In turn, plaintiffs' proof that the transfers to defendant did

not comply with either the terms of the stock certificates or

Hillcrest's bylaws is insufficient to raise an issue of fact with

regard to defendant's ownership of the shares because compliance

with such terms is not required for a valid stock transfer (see

McNeil v Tenth Natl. Bank, 46 NY 325, 331 [1871]). 

We also agree with Supreme Court that questions of fact

preclude summary judgment on the issue of defendant's removal as

a director and officer. As relevant here, the holders of 10% of

the outstanding shares of a corporation may bring an action to

remove a director or officer for cause (see Business Corporation

Law §§ 706 [d]; 716 [c]). Plaintiffs submitted prima facie

evidence that there was cause for defendant's removal due to his

use of Hillcrest's profits to pay for clubhouse operations that

only benefitted him as the sole shareholder of Jefmelmat (see

Matter of Grace v Grace Inst., 19 NY2d 307, 313-314 [1967]). 

However, defendant raised an issue of fact through evidence that

he was continuing to operate the clubhouse in the same manner as

decedent and Smith had operated it before him. Specifically,

defendant proffered a lease that predated his management of the

clubhouse that provided that Hillcrest would pay the operating

expenses of the clubhouse in exchange for its use as the golf

course's clubhouse. Therefore, summary judgment was not

appropriate with respect to this claim.

Turning to defendant's contention that he is shielded from

liability by Hillcrest's certificate of incorporation, claims

against a corporation's directors and officers for misconduct are

subject to the provisions of the corporation's certificate of

incorporation, which may limit personal liability of the director

or officer except for, among other things, acts or omissions made

in bad faith (see Business Corporation Law § 402 [b]). Here,

summary judgment is barred by issues of fact as to whether

defendant acted in bad faith by using Hillcrest's profits to pay

for nearly all clubhouse expenses and keeping profits from

concessions for himself as the sole shareholder of Jefmelmat. 

With regard to defendant's contention that the complaint
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should have been dismissed due to plaintiffs' failure to make a

demand on the board or demonstrate futility (see Business

Corporation Law § 626 [c]), a party may amend a pleading at any

time with the court's permission, which "'shall be freely given'

absent prejudice or surprise resulting directly from the delay"

(McCaskey, Davies & Assoc. v New York City Health & Hosps. Corp.,

59 NY2d 755, 757 [1983], quoting CPLR 3025 [b]). Here, Supreme

Court granted plaintiffs leave to amend the complaint to allege

demand futility, a determination that is not disputed on appeal. 

To the extent that an amendment was sought to alleviate the

deficiency that defendant contests, denial of defendant's cross

motion for summary judgment dismissing the complaint for failure

to make a demand on the board or allege demand futility was

proper.

However, the matter must nonetheless be remitted to Supreme

Court for a hearing with regard to sanctions imposed upon

plaintiffs. A court may impose sanctions for a party's frivolous

conduct only after the party is afforded a "reasonable

opportunity to be heard" (22 NYCRR 130-1.1 [d]). As defendant

concedes, plaintiffs had no opportunity to be heard on the issue

of sanctions before they were imposed and, thus, we remit the

matter to Supreme Court so that plaintiffs may be heard in

accordance with 22 NYCRR 130-1.1 (d) (see Deeb v Tougher Indus.,

216 AD2d 667, 668 [1995]). 

Lahtinen, J.P., McCarthy and Rose, JJ., concur.
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ORDERED that the order is modified, on the law, without

cots, by reversing so much thereof as imposed a sanction in the

amount of $1,000 against plaintiffs; matter remitted to the

Supreme Court for further proceedings not inconsistent with this

Court's decision; and, as so modified, affirmed.

ENTER:

Robert D. Mayberger

Clerk of the Court