If ever there was a ticking time bomb of a family-owned, closely held business more likely to result in business divorce litigation than the one in Matter of Brady v Brady, 2021 NY Slip Op 02705 [4th Dept Apr. 30, 2021], I haven’t seen it.
In Brady, the explosive mixture included:
- A family patriarch in his late 80s who owns and tightly controls highly valuable farmland held in corporate entities.
- Sibling rivalry among the three sons brought into the family farming business.
- A pending matrimonial divorce between the patriarch and his second wife and the mother of the youngest of his three sons.
- No shareholder or buy-sell agreements.
- No apparent succession plan.
- No apparent master plan coordinating the father’s lifetime gifting of land and the sons’ stock ownership.
- No adherence to corporate formalities.
- Commingling of business and personal finances.
- Poor recordkeeping.
- Lack of transparency.
Don’t get me wrong. Lack of formalities, lack of shareholder agreements, lax accounting, and poor or absent succession planning are common among family-owned businesses and don’t inevitably lead to dissension much less litigation when family bonds and trust remain strong. Likewise, whether and to what extent these shortcomings benefitted some or all of the various stakeholders in the Brady case before things went wrong, I can’t say. But once relations soured, they went predictably wrong, leading to the Appellate Division, Fourth Department’s recent decision affirming the lower court’s order summarily granting the youngest son’s petition for judicial dissolution of Brady Farms, Inc., which owns over 400 acres of valuable farmland in upstate Livingston County, New York.
The Brady family has owned and worked farms in Livingston County for at least three generations. In 1984, the second-generation patriarch, Myron O. Brady (“Myron O.”), incorporated Brady Farms, Inc. with 200 authorized shares, into which he contributed over 400 acres of tillable land on which Myron O. also maintained his residence. Initially the Brady Farm shareholders were Myron O. and his two sons from his first marriage, Myron C. Brady (“Myron C.”) and Scott Brady, as equal shareholders with 66 2/3 shares each.
In 1995 Scott resigned as a director, all three shareholders transferred their shares back to the company, and the company then issued 100 shares each to Myron O. and Myron C. A few years later, Brandon became involved in the Brady Farm’s farming operations and allegedly assumed sole responsibility for farming half of the company’s acreage, the other half being leased to Myron C.
In 2003, Myron C. resigned as an officer and director of Brady Farms and transferred all his shares to Myron O. giving him 100% ownership. Beginning in 2006 and over the following years, Myron O. made a series of share transfers to Brandon. As of the end of 2017, which was the last year before litigation erupted, Brady Farm’s tax return included a Schedule K-1 for Brandon reporting his ownership of 48% of its capital shares. In that same period, Myron O. gifted to Brandon over 1,200 acres of farmland owned personally by Myron O. valued over $8.5 million, most of which was placed in the Brady Farm Trust.
The Dispute’s Origins
In the subsequent litigation, Brandon and Myron O. gave conflicting accounts of the dispute’s origins.
According to Brandon, in early 2018 he objected to his father’s renewal of Myron C.’s expiring lease of company acreage for which Brandon had never seen evidence of rental payments, and he proposed that the company farm the acreage for its own benefit. Brandon also raised questions with his father about lack of distributions and his father’s failure to account for other company revenues. In response, according to Brandon, Myron O. took steps in May 2018 to unilaterally reduce Brandon’s stock ownership percentage from 48% to to 31% by means of an unauthorized amendment of Brady Farm’s certificate of incorporation to allow a transfer of shares to Myron C., removing Brandon as an officer and director, and purporting to transfer to Myron C. the “remaining” 69% of shares not owned by Brandon.
According to Myron O., Brandon triggered the legal brawl by restricting his father’s use of the farm lands held by the Brady Farm Trust that Myron O. historically had farmed including for some years after the Trust’s formation. In early 2018, Myron O. filed a lawsuit to set aside the Trust, claiming he did not realize that he had not retained a life estate in the Trust land which would permit him to continue farming the land until his death.
The Shareholder Litigations
In November 2018, Brandon filed a plenary action by summons and complaint asserting direct and derivative claims against his father and Myron C. to enforce access to company books and records, for declaratory relief upholding his ownership of 48% of the company’s capital stock, for an accounting, and for other relief.
In March 2019, Brandon filed a special proceeding by order to show cause and petition for judicial dissolution of Brady Farms pursuant to Section 1104-a of the Business Corporation Law. The verified petition alleged that Myron O. and Myron C. engaged in oppressive conduct toward Brandon and that they had wasted, looted, or diverted company assets for their personal benefit for which they should be surcharged. The petition attached 15 exhibits including documentation of share issuances to him and the company’s most recent tax returns with his father’s typed signature and K-1s reporting Brandon’s and Myron O.’s respective 48% and 52% stock ownership.
The two Myrons filed an answer to the petition with a counterclaim for declaratory relief and damages. The answer contended that Brandon’s stock ownership percentage had been properly reduced on account of a prior, defective issuance of 50 shares each to Brandon and Myron O. that exceeded the company’s 200 authorized capital shares. The answer otherwise denied Brandon’s allegations of financial impropriety and denied he was prevented from accessing company books and records. The two Myrons did not file any documentary evidence with their answer nor did they request an evidentiary hearing to determine disputed issues of fact.
The Lower Court’s Decision
The lower court’s September 2019 decision and implementing order granted Brandon’s petition for dissolution as well as his application to appoint a receiver to wind up the company’s business affairs, dissolve the company, and distribute the net proceeds to the shareholders based on their pro rata ownership interests subject to any surcharges against Myron O. and Myron C.
The court’s decision largely adopted Brandon’s petition’s allegations concerning his share ownership and respondent’s oppressive conduct, finding that “Respondents have failed to come forward with any opposition to the evidence submitted by Brandon.” Said the court:
The application for dissolution is granted. Brandon has submitted evidence of Respondents’ fraudulent and oppressive conduct, and Respondents have failed to come forward with any opposition to the evidence submitted by Brandon. For example, Respondents deny that Brandon owns 48% of the Company stock, but do not explain why the Company tax returns, signed by Myron O. acknowledge Brandon’s 48% ownership. Repeatedly respondents respond to the evidence presented by Brandon with unsubstantiated denials or allegation of a purported lack of knowledge or information.
The court was equally dismissive of the two Myrons’ failure to present evidence opposing receivership, writing,
Brandon’s application for a receiver is amply supported, whereas Respondents’ opposition is wholly lacking, despite their control of the books and records. Myron O. and Myron C. have asserted a disturbing lack of knowledge and information as to crucial financial, organizational, and other Company matters, despite Myron O.’s assertion that he has always managed the Company’s finances and records. . . . Myron O. also . . . acknowledges he has not strictly followed corporate formalities. Brandon has successfully demonstrated a lack of oversight or supervision of the Company’s affairs by the shareholders and/or the board.
The Appellate Court’s Affirmance
In their appeal from the lower court’s decision and order, the two Myrons’ brief argued that the lower court abused its discretion by summarily granting dissolution based on disputed stock ownership claims; that tax estoppel did not apply to the company’s tax returns because there was no evidence that Myron O.’s typed signature on the returns was authorized; that there was insufficient evidence of oppressive or fraudulent conduct; and that the preceding issues and others required discovery and an evidentiary hearing.
Brandon’s appellate brief countered that the two Myrons never requested a hearing in the lower court proceedings; that the undisputed documentary evidence supported Brandon’s 48% stock ownership; that Myron O. was estopped by the company’s tax returns from arguing that Brandon owned a lesser percentage; and that other than their bare denials, the two Myrons failed to offer any evidence disputing Brandon’s allegations and evidence of oppressive conduct.
The Fourth Department’s opinion affirming the lower court’s order dissolving the company and appointing a receiver made three, essential points:
- First, it agreed with Brandon that the two Myrons, having never asked the trial judge for an evidentiary hearing, failed to preserve the issue for appeal.
- Second, even had they done so, and even if there was a disputed issue of fact with respect to Brandon’s ownership percentage, no hearing was warranted as to grounds for dissolution because the two Myrons “do not dispute that [Brandon] is a shareholder and that he owns at least a 20% interest in the company, which is the requisite ownership interest needed to have standing to [seek dissolution] pursuant to [BCL] § 1104-a.”
- Third, the panel agreed with the lower court’s determination “on the record before it that dissolution was required inasmuch as respondents engaged in ‘oppressive actions toward the complaining shareholder,’ i.e., petitioner.”
It would be naive of me to suggest that anyone who controls a family-owned business that, like the Brady family, lacks a shareholders or operating agreement, or doesn’t hold regular board meetings or observe other corporate formalities, and promotes or countenances financial transactions among family members that are the antithesis of arms’-length transactions on commercially reasonable terms, and that who, upon reading this post, will rush out to a corporate lawyer who will bring the company in strict compliance with governing law and required formalities, prepare bespoke ownership agreements with carefully tailored buy-sell provisions, hire a CPA to audit the company’s books and make recommendations for GAAP compliance, prepare succession and estate plans, etc. “There’s no need for any of that with my family. I’m always fair, I know what’s best, we all get along perfectly and always will, even after I’m gone because they all love and respect each other,” the reader will react. So I won’t waste any more words proselytizing on that subject.
I will, however, devote a few more words directed at lawyers who take on representation of clients on the receiving end of dissolution cases commenced as special proceedings by petition and order to show cause or notice of petition. For such a lawyer in such a case in such a procedural setting, the Brady case is an important reminder that the response to a well-pleaded petition backed up with documentary evidence requires far more than a typical answer in a plenary action that simply admits or denies the petition’s allegations and pleads affirmative defenses. Under both Section 1109 of the BCL and Rule 409(b) of the Civil Practice Law and Rules, at the initial hearing on the date specified in the order to show cause or notice of petition, the court’s task is to determine if there are genuine issues of material fact requiring a hearing and, if not, to summarily determine the petition based on the record before it. In other words, it’s incumbent on the respondent and respondent’s counsel to answer the dissolution petition with documentary evidence and any necessary witness affidavits that either conclusively refute the petitioner’s contentions or at least give rise to factual issues requiring a hearing and perhaps discovery. The failure to do so, as in Brady, can be fatal to the defense of the case.