Resignation: Antidote for Internal Dissention and Deadlock?

Farrell Fritz, P.C.

There are countless New York corporations in which the owners are equal   50/50 shareholders and co-members of a two-member board. Where one sues the other for judicial dissolution, and the ground for dissolution is “deadlock” and/or “internal dissention”  under Section 1104 of the Business Corporation Law (the “BCL”), does the “resignation” of one director end the impasse, requiring denial or dismissal of the petition?

In Doshi v Besen, 2019 NY Slip Op 33771(U) [Sup Ct, New York County Dec. 30, 2019], Manhattan Commercial Division Justice Andrea Masley considered a 50% shareholder’s dissolution petition under BCL 1104(a), and the other shareholder’s dismissal cross-motion, in which the latter argued that the former’s resignation from the board and as an officer resulted in his relinquishment of control over the business, in effect acquiescing in respondent’s exclusive management, defeating any basis to dissolve the entity. How did this argument fare? Let’s take a look.

The Firm

In 1988, Besen formed Besen & Associates, Inc. (“B&A”) as its sole shareholder to operate a commercial real estate brokerage and investment firm. Doshi joined a year later, eventually becoming, along with Besen, a 50% shareholder, director, officer, and employee.

In July 2018, due to what Doshi referred to as “severe dissention” and “complete distrust” among the owners, he resigned as director, officer, and employee – but did not surrender his shares – of B&A.

The Dissolution Litigations

According to Doshi’s dissolution petition, the dissention began in 2017 when Besen “became distracted by his own personal investments triggering the failure of B&A, and its related joint businesses.” Besen, on the other hand, accused Doshi of “sensational misconduct and breaches of his fiduciary duty,” including “converting millions of dollars from B&A” and joining a competitor after his resignation.

Though they disagreed about who was to blame, Doshi and Besen did agree on one thing: they were hopelessly incapable of co-managing any business. B&A was just one of almost two dozen entities Besen and Doshi co-owned.

Prominently featured in Doshi’s petition were admissions Besen made in an amended complaint in a related lawsuit, also assigned to Justice Masley, in which Besen himself sued to dissolve eight entities jointly owned with Doshi.

In counterclaims, Doshi sued to dissolve an additional eight jointly-owned entities; Besen consented to dissolve seven. In a footnote, Justice Masley wrote that “[d]issolution proceedings are pending for a total of 20 entities in which Besen has an interest.”

Besen’s Admissions of “Irreconcilable” Dissention

In his amended complaint in the related action, Besen repeatedly admitted:

  • “Besen’s mistrust of Doshi has made it impossible for Besen to continue to operate any business with Doshi.”
  • “[T]here is deeply-rooted dissention and distrust between Besen and Doshi.”
  • “The differences between Besen and Doshi are irreconcilable.”
  • “Attempts to settle the differences between Besen and Doshi have been and will continue to be fruitless.”

Despite agreeing to dissolve several entities, Besen opposed dissolution of B&A. Why? The main reason seems to have been the company’s financial performance. According to Besen, the business thrived, exceeding sales of over $300 million in 2018.

Specific Examples of Deadlock

In considering whether to dissolve B&A, Justice Masley considered two main controversies.

First, according to Justice Masley, a foreclosure proceeding involving a related, but distinct, real estate holding LLC “illustrates the depth of the parties’ dissention.” In that case, an entity co-owned by Besen and Doshi so poorly maintained a building that its “squalid conditions” resulted in a “building-wide rent freeze” by the tenants.

Meanwhile, although Doshi was ready, willing, and able to pay his share of the mortgage, Besen refused to contribute his share, then refused to execute a document that would have corrected a drafting mistake that would have enabled the entity to obtain alternate financing, resulting in the loan’s default. Doshi purchased the defaulted loan and initiated the foreclosure action against Besen.

Second, according to Justice Masley “[a]nother example of the irreconcilable differences between Doshi and Besen” was “illustrated by each party’s maneuvers regarding the B&A server.” She continued:

For months, these sophisticated business people, and their equally sophisticated attorneys, have been unable to get Doshi access to B&A’s electronic documents, books and records. . . The court directed the parties to investigate the cost of imaging, or alternatively establishing a portal, and report back to the court at the next conference scheduled for November 6, 2019. However, it was not until . . . the night before a . . . status conference, that Besen finally submitted an affirmation attesting to the cost of imaging –$1,500. . . Despite this minimal cost in the grand scheme of this multi-million-dollar litigation, the parties persist in arguing about who shall bear the cost.

Denial of the Cross-Motion to Dismiss

Besen cross-moved to dismiss the petition, arguing in a memorandum of law that “[a]ny ‘deadlock’ between Besen and Doshi ceased to exist when Doshi effectively ‘dropped off the keys’ to the Company, in July 2018, and walked out the door to join forces with B&A’s direct competitor.”

Justice Masley disagreed, noting that Doshi remained a shareholder and continued to possess the “right to elect a director with a diametrically different view as to how the Company should be operated.” The court continued, “With each party holding 50% of B&A, it is mathematically impossible to elect a new director to replace Doshi, and even if a new director could be elected, it would be impossible for the two directors to agree.”

The court concluded:

The court rejects the implicit notion that B&A is a sole proprietorship. The court is compelled to deny Besen’s motion as it is undermined by Besen’s own allegations. Contrary to Besen’s wishful thinking, B&A cannot escape the fallout of the admitted collapse in the relationship between Doshi and Besen. The parties need not come to blows to satisfy BCL 1104(a).

Granting of the Petition to Dissolve

On the merits of the petition, the court held, “Regardless of whether Doshi, Besen, or both, are responsible for the demise of B&A, it is apparent to this court that these parties are so divided that they can accomplish nothing but destroy the successful company they created together.” The court concluded:

There is no contested issue for which a hearing is required (Goodman v Lovett, 200 AD2d 670, 670 [2d Dept 1994]). On the contrary, it is clear that there is ‘internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders’ (BCL 1104[a]). A hearing would only delay the inevitable and do even more harm to the corporation.

Thoughts on Besen

The stated grounds for BCL 1104(a) dissolution in Doshi are somewhat unconventional. The court focused primarily on two disputes: i) foreclosure litigation involving a real property owned and operated by a different entity, and ii) a fairly mundane electronic discovery dispute.

Should disputes involving one entity play a part in deciding whether to dissolve another? Should a single pre-trial discovery dispute serve as the basis for involuntary judicial dissolution of an allegedly thriving corporation?

Reading between the lines, it is quite apparent that Justice Masley viewed B&A and its many affiliates as mere appendages of a single business organism, in which the dysfunction between Besen and Doshi infected the entire being. Consider, for example, her remark at the end of a separate opinion issued four days earlier in a companion case brought by Besen against Doshi over real estate commissions. In that decision, the court wrote, in the context of addressing the electronic discovery dispute between the parties upon which the court relied to dissolve B&A, “The bickering over who shall pay the $1,500 cost to image the server evidences the dissention, deadlock and division. . . Their inability to cooperate to the detriment of their co-owned companies yields one conclusion: dissolve all of the joint businesses, now” (emphasis added).

Justice Masley’s conclusion that Doshi’s resignation as director did not defeat grounds of dissolution under BCL 1104(a) is undoubtedly the correct result. BCL 1104(a) authorizes dissolution based upon “director” deadlock, “shareholder” deadlock, and “internal dissention” among two or more factions of shareholders. Even with Besen serving as sole director, the entity would remain deadlocked at the shareholder level. And as far as one can tell, Doshi’s resignation did nothing to alleviate the dissention between the two owners.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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