There are plenty of advantages to practicing business divorce litigation in New York.  The diversity of businesses and clients, complexity of agreements and transactions, and excellence of judges and attorneys make New York, in my view, the place to be for commercial litigators of all stripes.

One downside is the reality that crowded dockets and busy judges sometimes results in too terse decisions from the trial and appellate courts.  At the appellate level, hundreds of pages of evidence, and nuanced, extensively briefed legal theories are sometimes reduced to a one-line decision.  Not only do those one-liners inevitably leave the parties dissatisfied, but they also miss an opportunity to lend reasoned, precedential analysis to complex and unsettled questions of law.

But in some sense, that’s where the lawyers come in.  New cases can be won or lost in the grey areas created by brief appellate authority, and the sharpest lawyers will find the precedential value in even the shortest appellate decisions.

These few paragraphs are already much longer than the Fourth Department’s recent decision affirming dismissal of a shareholder’s claim for dissolution pursuant to BCL 1104-a in Kavanaugh v Consumers Beverages, Inc., 205 NYS3d 637 (4th Dept 2024).  But in a few words, the Fourth Department packs a punch in corporate dissolution jurisprudence.

The Corporation

Consumers Beverages, Inc. (the “Corporation”) is a Buffalo-based chain of beverage stores presently owned by the eight children of its late founder, Larry Kavanaugh. 

Toward the end of his life, Larry transferred shares of the Corporation to his children pursuant to a written Share Purchase Agreement, which also serves as the Corporation’s shareholders’ agreement.  The SPA is among the most “protective,” that I’ve ever reviewed; it includes several layers of provisions to protect against share ownership by anyone outside the Kavanaugh family. 

The SPA also plainly announces Larry’s intention—and his children’s agreement—to leave the management of the Corporation to those shareholders that were working for the Corporation.  Specifically, the SPA states that there were two classes of shares: voting shares and non-voting shares.  Those children that were employed by the Corporation received voting shares; those children that were not employed by the Corporation received non-voting shares. 

The SPA further provides that “in the event a Shareholder who is employed by the Corporation ceases to be employed by the Corporation for any reason whatsoever, such Shareholder shall . . . redeem all such [voting] shares, in exchange for an equal number of non-voting common shares.”

Neil Acquires a Majority of Voting Shares

Following the founder’s death, one of the eight children, Neil Kavanaugh, oversaw the disposition of their late-father’s shares.  Larry’s voting shares were distributed among those siblings employed by the Corporation, and as a result of that distribution, Neil became the owner of 53.8% of the Corporation’s voting shares; the remainder of the voting shares were held by three other siblings that worked for the Corporation: Matt, Jim, and Helen Kavanaugh (collectively, the “Petitioners”).

According to the Petitioners, Neil also undertook to secretly acquire his other siblings’ non-voting shares in the Corporation, as well as their interests in Kavcon Development LLC, a real property holding LLC that was also divided among the siblings upon their father’s passing.  Those efforts resulted in a series of quiet side deals between Neil and certain siblings. 

When the Petitioners learned of those side deals, they commenced a string of lawsuits seeking to undo them in part based on their violation of the right of first refusal provisions in the SPA.  Ultimately, the Appellate Division, Fourth Department held that Neil’s side deals were “null and void” (Kavanaugh v Kavanaugh, 200 AD3d 1568 [4th Dept 2021]). 

The Alleged Oppression

As told by the Petitioners, Neil felt his grip on the family companies slipping after the Fourth Department’s decision.  In response, he did three things: (1) immediately following the Fourth Department’s order, Neil made a $2 million loan from the Corporation to Kavcon, allegedly to fund a $2.7 million payment from Kavcon to himself; (2) in March of 2022, Neil terminated Matt’s 40-year employment with Consumers, and (3) in May of 2022, Neil terminated Jim’s 40-year employment with Consumers.

Based on those actions, as well as a laundry list of other alleged acts of malfeasance, Petitioners commenced a proceeding under BCL 1104-a for the judicial dissolution of the Corporation.  After years of litigation, Petitioners alleged, the drastic step of dissolution was the only way to end Neil’s allegedly oppressive and abusive reign.

Neil moved to dismiss the dissolution Petition.  He argued that since Matt and Jim’s termination, their voting shares were converted to non-voting shares, and they therefore lacked standing to prosecute an action for dissolution under BCL 1104-a, which requires ownership of at least 20% of “shares entitled to vote.” 

While Neil acknowledged that Helen had standing (she remained employed by the Corporation), Neil argued that Helen’s dissolution petition should be dismissed because she has “adequate alternative remedies,”—she is a plaintiff in at least one other plenary action seeking money damages arising from the same “oppressive conduct.”

Erie County Justice Timothy J. Walker, in a January 18, 2023, ruling from the bench, dismissed the dissolution petition.  Matt and Jim, the Court held, lacked standing to seek dissolution because upon their termination, their voting shares were redeemed for non-voting shares.  Although Helen had standing, said the Court,

As to Helen . . . the Court finds based on the related lawsuits there are more than adequate remedies to a dissolution.  And a dissolution, number one, under the common law or statute is disfavored in New York, especially when there are other ways to handle the grievances and/or differences or legal issues. . . . Helen has more than adequate remedies, and dissolution is not one of them.”

Petitioners’ appeal raised two interesting questions:

Expectation of Continued Employment vs. Mandatory [Voting] Share Redemption

One need not look too far to find BCL 1104-a dissolution cases where the oppressive conduct is the termination of petitioner’s employment with the corporation (In re HGK Asset Mgmt., 644 NYS2d 26, 26-27 [1st Dept 1996]; In re Weidy’s Furniture Clearance Center Co., 108 AD2d 81, 84 [3rd Dept 1985]).  The Petitioners cited these cases in arguing that by terminating the 40-year employment of Matt and Jim, Neil engaged in oppression warranting dissolution.

On the other hand, less than a year ago, I wrote about how the combination of at-will employment and a mandatory share redemption clause could leave ousted shareholders out in the cold (Laurilliard v McNamee Lochner, P.C., 79 Misc 3d 1220(A) [Sup Ct Albany Co 2023]). Though Neil did not cite the Laurilliard case, he argued for the same result.

Neil’s argument hinged on the language of the SPA that contemplated a shareholder being terminated “for any reason whatsoever, whether voluntarily or involuntarily.”  How could Matt and Jim have a reasonable expectation of continued employment, Neil argued, in the face of language that suggests a shareholder can be involuntarily terminated.

When Does the Court Consider Adequate Alternative Remedies?

There is no question that BCL 1104-a requires the court to consider “whether liquidation is the only feasible means whereby the petitioners may reasonably expect to obtain a fair return on their investment.”  Dissolution should be a remedy of last resort, and a court has broad discretion to fashion a less-drastic, alternative remedy to dissolution.  Consider this post about a case ordering a compelled buyout of the complaining shareholder, or this post about a case finding money damages sufficient to remedy the oppressive conduct.

Despite that requirement, Helen argued that the trial court’s dismissal of her petition due to the existence of adequate alternative remedies (Helen’s other lawsuit) put the cart before the horse.  According to Helen, the alternative remedy question must come after the Court finds grounds for dissolution, not at the motion to dismiss stage.  After all, how can the Court determine the existence of adequate alternative remedies without making any findings on the oppressive conduct to be remedied?

The Fourth Department Affirms

In a one-line decision dated March 15, the Appellate Division, Fourth Department affirmed Justice Walker’s dismissal “for reasons stated at Supreme Court.”

Though we were not treated to a lengthy (or any) analysis in the Fourth Department’s affirmance, I suspect that sharp business divorce practitioners will find the value in appellate-level authority for the questions above. 

For one, Kavanaugh underscores why shareholder-employees should be mindful of the perilous trap created by the combination of at-will employment and a shareholders’ agreement that ties certain rights to employment status. 

Second, for those opposing dissolution, it’s never too early to start arguing about adequate alternative remedies. According to Kavanaugh, in the right circumstances the existence of adequate alternative remedies (including other unresolved legal claims) can yield a first-round dismissal of a dissolution petition.

[View source.]