Court Opinion

ID: 5871987
Source: CourtListenerOpinion
Date Created: 2022-01-13 01:49:26.082741+00
Date Added: 2024-06-11T08:44:44.618959
License: Public Domain

Asch, J.
(dissenting). This proceeding seeks the judicial dissolution of Arkwright Mfg., Inc., a domestic corporation, pursuant to sections 1104 and 1104-a of the Business Corporation Law and the common law of the State of New York.
Arkwright is a privately held corporation which is owned by two groups of shareholders. Fifty per cent of the stock of Arkwright is owned by respondent Arthur Olshan. The other *34450% is owned by petitioner Dubonnet Scarfs, Inc. (Dubonnet), a New York corporation. Petitioner Fred Thomases, who is in his late seventies, and his wife, petitioner Florence Thomases, each own 50% of the issued and outstanding capital stock of Dubonnet. Florence Thomases owns her stock in Dubonnet in part as nominee for her husband and in part as nominee for Harry Gordon.
The proceeding was necessitated by the urgent need of Fred Thomases and Gordon to convert their interests in Arkwright to cash. They are presently engaged in the final stages of approval of reorganization plans in connection with their personal bankruptcy proceedings. The Thomases seek to liquidate their Arkwright interest to satisfy the creditors’ demands in the bankruptcy reorganization plan. If this is not done, other property belonging to them would be sold for that purpose.
The verified petition makes it clear that it is essential to the Thomases-Gordon group of shareholders to convert their interests in the corporations into cash. In addition, evidence submitted in support of the petition establishes that the corporations currently have substantial cash and other liquid assets which respondent Olshan could use, as an alternative to dissolution, to purchase the interests of petitioners in the corporations. Robert Wiener, a certified public accountant retained to analyze the value of Thomases’ assets, has concluded that the Arkwright group has close to $2,000,000 in cash and cash equivalents. These liquid assets are being held in interest-bearing certificates of deposit and are not being used in the operation of the business. In addition, the companies allegedly have more than $1,000,000 in near liquid receivables.
Despite these facts, Olshan has refused to have the corporations purchase petitioners’ interests at fair value. He has also refused to agree to the dissolution of the corporations so as to enable petitioners to realize value from their interests. Clearly, the petition adequately alleges that two factions of shareholders are divided concerning the fundamental questions of whether the corporations should be dissolved and what should be done with their substantial liquid assets. Plainly, also, it is alleged that dissolution would be beneficial to shareholders under the circumstances of this case. These allegations, if proven, would warrant dissolution under subdivision (a) of section 1104 of the Business Corporation Law.
The petition also seeks dissolution pursuant to section 1104-a of the Business Corporation Law and the common law of New York by reason of Olshan’s alleged oppressive and fraudulent *345conduct and his breach of fiduciary duty. In or about September, 1981, Olshan and Fred Thomases discussed the purchase of Dubonnet’s 50% record ownership interest in Arkwright and Florence Thomases’ 50% record ownership interest in Wright, an affiliated corporation under common ownership, including the fair value of the corporations. At that time, Olshan advised Fred Thomases that the book value of the Arkwright group was $4,000,000, which included a loan of $1,500,000 of doubtful collectability due from certain corporations owned by or affiliated with Brucol Industries, Inc., which itself has filed for reorganization under the Bankruptcy Code. Fred Thomases subsequently learned that the $4,000,000 book value figure did not, in fact, include the indebtedness from Brucol, and that the $4,000,000 book value figure had been otherwise understated. He now allegedly believes that the fair value of the Arkwright group at the time of these discussions in September, 1981, and today, was and is approximately $6,000,000. In short, petitioners assert that Olshan, who was then running the day-to-day operations of the companies, materially understated the value of the Arkwright group to Fred Thomases. Such conduct, if true, allege petitioners, was oppressive and fraudulent and constituted a breach of fiduciary duty.
On the return date of the petition, respondents moved to dismiss. Without allowing petitioners to conduct discovery and without ordering an evidentiary hearing, the court below denied the petition and granted respondents’ motion to dismiss. This summary dismissal was in error.
Petitioners are entitled to judicial dissolution pursuant to section 1104 (subd [a], par [3]) of the Business Corporation Law because there is internal dissension and two or more factions of the shareholders are so divided that dissolution would be beneficial to the shareholders. Thus, section 1104 (subd [a], par [3]) provides that
“the holders of one-half of all outstanding shares of a corporation entitled to vote in an election of directors may present a petition for dissolution on * * * the * * * ground * * *
“(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.”
While section 103 of the General Corporation Law (the predecessor to Business Corporation Law, § 1104, subd [a]) authorized dissolution when the directors were divided “respecting the management of [the corporation’s] affairs” (similar to Business *346Corporation Law, § 1104, subd [a], par [1]) and when the stockholders could “not elect a board of directors” (similar to Business Corporation Law, § 1104, subd [a], par [2]), the Business Corporation Law added a new ground. Thus, section 1104 (subd [a], par [3]) of the Business Corporation Law authorizes judicial dissolution upon a showing that there is shareholder dissension as to matters other than the inability to elect a board of directors, as long as dissolution would be beneficial to the shareholders. It is not limited by its terms to dissension respecting “the management of the corporation’s affairs,” as held by Special Term.
The continued making of a profit by the corporation is not a complete bar to its dissolution (Business Corporation Law, § 1111, subd [b], par [3]).
A cause of action, therefore, for dissolution pursuant to section 1104 (subd [a], par [3]) of the Business Corporation Law was stated by petitioners. The petition sufficiently alleged internal dissension on the use of corporate assets (the certificates of deposit). There also was evidence that money was available to buy out petitioner Dubonnet. This would be without respondent corporation Arkwright actually going out of business (cf. Business Corporation Law, § 1118). As Dubonnet is simply the alter ego of the Thomases, it would be beneficial to the shareholder that the buyout take place. At the very least, a hearing should have been held on the petition’s allegations. This is the usual procedure in Business Corporation Law dissolution matters where there are contested facts (see Matter of Myers v Gold, 77 AD2d 652).
The respondent Arkwright’s, and Olshan’s objections to dissolution created questions of fact, and Special Term erred in dismissing the petition simply on the papers and affidavits submitted (see Matter of Wollman v Littman, 35 AD2d 935). Even under the former law, section 103 of the General Corporation Law (with more narrow grounds, and restrictions on dissolution), evidentiary hearings were generally required on benefit to the stockholders from dissolution (see Matter of Seamerlin Operating Co. [Searing — Merlino], 307 NY 407, 417).
Even if reversal was not indicated under subdivision (a) of section 1104 of the Business Corporation Law, another ground asserted in the petition was section 1104-a of the Business Corporation Law, which reads in relevant part:
“(a) The holders of twenty percent or more of all outstanding shares of a corporation * * * may present a petition for dissolution on one or more of the following grounds:
*347“(1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders”.
The petition tracked the statute. Thus, it alleged that Olshan was trying to “freeze out” the passive “partner,” the Thomases, and prevent them from getting the fruits of their investment, and obtaining the cash to fund reorganization in family bankruptcy. This is a ground for section 1104-a relief (see Matter of Kemp & Beatley [Gardstein], 64 NY2d 63; Matter of Topper v Park Sheraton Pharmacy, 107 Misc 2d 25). Certainly there was a factual question with respect to Olshan’s alleged fraud (or oppressive conduct) raised by his refusal to allow dissolution of the corporation, or buyout, when the Thomases were in such financial trouble.
The matter of what is “oppressive conduct” is normally a factual determination (see Matter of Topper v Park Sheraton Pharmacy, supra). Relief to Olshan and buying out the Dubonnet interest at a fair price was available, if desired by him (see Business Corporation Law, § 1118; Matter of Kemp & Beatley [Gardstein], supra; Matter of Delinko, 85 AD2d 561).
It was not proper for Special Term to dismiss the petition without a hearing. I would therefore reverse, on the law, reinstate the petition and remand for such a hearing.
Murphy, P. J., Sullivan and Kassal, JJ., concur with Ross, J.; Asch, J., dissents in an opinion.
Order and judgment (one paper), Supreme Court, New York County, entered on May 1, 1984, affirmed. Respondent shall recover of appellants $75 costs and disbursements of this appeal.