New York Business Corporation Law (“BCL”) sections 1104[1] and 1104-a[2] permit shareholders holding a certain percentage of shares[3] in a corporation to petition for judicial dissolution of that corporation. On March 8, 2023, Judge Fidel E. Gomez of the Commercial Division resoundingly rejected the petition of one such shareholder, Daniel Ilich, because Ilich filed his petition without any attempt to meet the statutory requirements of dysfunction or oppressive behavior necessary for judicial dissolution under BCL section 1104 or 1104-a.[4] Judge Gomez further rejected Ilich’s claims for relief based on the terms of the shareholder agreement, because Ilich himself had waived the argument by his consistent performance of the agreement.[5]
Background
Daniel Ilich and his son, Richard Ilich, are each fifty percent shareholders in two companies, Drive Enterprises, Inc. (“Drive”), and Zuelette Realty Corp. (“Zuelette”). Drive and Zuelette each own one building in the Bronx, which Richard has managed since the 1980’s.[6] Daniel was previously the sole owner of both Drive and Zuelette, but in 1998 he and Richard executed shareholder agreements to provide Richard with fifty percent of the shares of both corporations in exchange for Richard personally securing loans backed by mortgages on the corporation’s properties.[7] The shareholder agreements for both Drive and Zuelette contain a whereas provision that conditions Richard’s ownership of the shares on his employment at each of the corporations.[8] Both Daniel and Richard agree that Richard has never been employed by either Drive or Zuelette.[9] Despite this provision, Daniel consistently treated Richard as a fifty percent shareholder of each corporation until the filing of his petition.[10]
Over time, relations between Richard and Daniel Ilich became fraught.[11] Richard initiated dissolution proceedings under BCL section 1104 and 1104-a for both Drive and Zuelette, alleging that Daniel hoarded the rental income from the corporations’ properties, threatened Richard with criminal prosecution for embezzlement, and refused to appear at a shareholder meeting.[12] While Richard’s petition was pending before Judge Fidel E. Gomez, Daniel filed the instant petition for dissolution under both BCL sections 1104 and 1104-a. Daniel also requested a judicial determination that Richard never owned any shares in Drive and Zuelette because he was never employed by either corporation.
Discussion
BCL sections 1104 and BCL 1104-a permit shareholders to seek judicial dissolution of a corporation for different but related reasons. BCL section 1104 permits shareholders holding one half of a corporation’s shares to seek judicial dissolution on the grounds that relations between controlling shareholders are so divided that dissolution would be beneficial to the shareholders.[13] To succeed on a petition for dissolution under BCL 1104, a petitioner must present evidence that “the disagreements which developed between directors, and the intensity of their discord becomes so great that efficient management becomes impossible.”[14] BCL section 1104-a provides an avenue for a smaller portion of shareholders—holding only twenty percent of all shares—to seek judicial dissolution of a closely held corporation on a finding that the controlling shareholders are engaged in illegal or oppressive actions against the petitioners, or are wasting or looting the corporation’s resources.[15] To succeed on a claim for 1104-a dissolution, petitioners must show that the controlling shareholders’ conduct “substantially defeats the reasonable expectations held by minority shareholders” upon entering the corporation and that, based on such conduct, liquidation is necessary for the protection of the rights and interests of the petitioning shareholders.[16]
In disposing of Daniel’s petition for dissolution of Drive and Zuelette under BCL sections 1104 and 1104-a, Judge Gomez pulled no punches.
Respondent’s motion seeking a judgement dissolving Drive and Zulette (sic) is denied. Significantly, respondent utterly fails to proffer any arguments in support of dissolution, fails to proffer any evidence relevant thereto and indeed, fails to establish how the evidence submitted supports such relief.[17]
Judge Gomez then inventoried the papers that Daniel submitted in support of his motion—the shareholder documents for Drive and Zuelette, deposition testimony from Richard about his work managing the corporations’ buildings, and an affidavit wherein Daniel averred that, to the extent Daniel agreed to a distribution of Drive or Zuelette’s dividends to Richard, he did so in error.[18] Judge Gomez concluded that the amassed papers were “woefully deficient” of any evidence to support judicial dissolution under either BCL section 1104 or 1104-a.[19] Specifically, Judge Gomez highlighted that Daniel has failed to establish “the requisite deadlock required by [BCL section 1104].”[20] Judge Gomez also found that Daniel’s “wholesale failure to specify and discuss” any of Richard’s conduct towards Daniel “precludes this Court from concluding that the conduct was oppressive,” a prerequisite for judicial dissolution under BCL section 1104-a.[21]
After abjectly dismantling Daniel’s petitions for judicial dissolution, Judge Gomez considered Daniel’s claims arising from the shareholder agreements and found them to be more substantive. Judge Gomez conceded that the language Daniel highlighted in the Drive and Zuelette shareholder agreement “is clear and seems to condition [Richard’s] ownership in Drive and Zulette’s (sic) stock on his employment with the same,”[22] and that, especially for transactions involving real property, “it is the duty of a court to enforce rather than reform the bargain struck.”[23] However, Judge Gomez concluded that Daniel’s argument failed for two independent reasons.
First, Judge Gomez found, based on the express language within the four corners of the contract, that Daniel’s argument failed. Judge Gomez noted that the conditional language appeared only in a whereas clause in the agreement; “everywhere else in the agreement where the grant of stock to [Richard] is mentioned, there is no language conditioning ownership on employment.”[24] Judge Gomez concluded this inconsistency in the contract language was fatal to Daniel’s argument, because “it is well settled” that language in a whereas clause “cannot create any right beyond those arising from the operative terms of the document.”[25]
Second, Judge Gomez found that “even if the stockholder agreements conditioned [Richard’s] ownership of Drive and Zuelette’s stock on his employment thereat,” Daniel had waived the right to claim full ownership through his own actions.[26] “The record is replete,” observed Judge Gomez, “ with evidence that Daniel waived” the right to enforce the employment provision of the shareholder agreement through his “protracted period of acquiescence of [Richard’s] ownership rights” between the signing of the agreements in 1998 and the filing of the instant petition.[27] The most “compelling proof of waiver” to Judge Gomez was the 2017 stipulation between the parties wherein Daniel agreed to pay Richard fifty percent of the proceeds arising from the sale of the building owned by Drive.[28] Judge Gomez found this stipulation to be “quite literally, the death knell of any arguments against waiver” because “[i]f [Daniel] actually believed that [Richard] owned no stock, then he should have never agreed to pay [Richard] half of Drive’s assets.”[29]
Conclusion
While Daniel’s petitions for judicial dissolution of Drive and Zuelette have been resolved, Richard’s petitions for dissolution are still under consideration. This case ultimately presents a key lesson for those looking to dissolve a corporation in the future: enmity alone is not sufficient to dissolve a corporation. Petitions for dissolution have to be supported with sufficient evidence of either inability to do business or oppressive behavior in order to succeed in the commercial division. Conversely, those looking to enforce contractual rights in shareholder agreements should be forewarned that sufficient evidence of waiver of those rights will be fatal to their claims. Finally, the case is a helpful reminder for practitioners that, when drafting agreements, any terms which the party wishes to enforce in the future must be moved to the body of the agreement, since courts will not enforce language found solely in a whereas clause.
[1] N.Y. Bus. Corp. Law § 1104, Petition in case of deadlock among directors or shareholders (McKinney).
[2] N.Y. Bus. Corp. Law § 1104-a, Petition for judicial dissolution under special circumstances (McKinney).
[3] BCL § 1104 requires shareholders representing one-half of all voting shares. See N.Y. Bus. Corp. Law § 1104(a). BCL § 1104-a requires shareholders representing only twenty percent of outstanding voting shares in closely held corporation. See N.Y. Bus. Corp. Law § 1104-a(a).
[4] Matter of Ilich, 2023 NY Slip Op 50171(U), at *2 (Sup. Ct., Bronx Cnty. 2023).
[5] Id. at *10.
[6] Id. at *5.
[7] Id. at *2–*3.
[8] Id. at *1–*2.
[9] Id. at *10.
[10] Id. at *10.
[11] Id. at *2–*3.
[12] Id.
[13] N.Y. Bus. Corp. Law § 1104(a)(1), (2).
[14] Matter of Ilich, 2023 NY Slip Op 50171(U), at *4 (quoting Application of Sheridan Const. Corp., 22 A.D.2d 390, 391 [4th Dept. 1965], affd, 16 N.Y.2d 680 [1965]) (bracketing removed).
[15]N.Y. Bus. Corp. Law § 1104-a(1), (2).
[16] Matter of Ilich, at *8 (citing Matter of Kemp & Beatley, Inc., 64 NY2d 63, 72 [1984]).
[17] Id. at *3.
[18] Id. at *6.
[19] Id. at *7.
[20] Id.
[21] Id. at *8.
[22] Id. at *9.
[23] Id. (citing Grace v. Nappa, 46 NY2d 560, 565 [1979]).
[24] Id.
[25] Id. (quoting Grand Manor Health Related Facility, Inc. v. Hamilton Equities Inc., 65 AD2d 445, 447 [1st Dept. 2009]).
[26] Id. at *10.
[27] Id.
[28] Id.
[29] Id.
