- It Aint Over 'til It's Over: Courts Decide Post-Dissolution Controversies
- May 19, 2011 | Author: Peter A. Mahler
- Law Firm: Farrell Fritz, P.C. - New York Office
If you think that the formal dissolution and winding up of a close corporation necessarily brings an end to shareholder warfare, think again. As two recently decided cases illustrate, even many years after corporate dissolution the courts may be called upon to referee ongoing disputes over the disposition of assets or even challenges to the dissolution itself.
Pursnani v. Stylish Move Sportswear, Inc., Short Form Order, Index No. 23746/09 (Sup. Ct. Queens County Feb. 28, 2011), is about as extreme an example of a lawsuit dredging up an ancient dissolution as I've ever seen. The New York Department of State's public record shows that the subject company called Stylish Move Sportswear, Inc. ("SMS") was formed in 1992 and administratively dissolved in 1996. In 2009 -- thirteen years after SMS's dissolution -- one of its shareholders filed individual and derivative claims against five other, former shareholders and a sixth individual, alleging breach of fiduciary duty and fraudulent conduct with regard to SMS's assets in 2003.
The defendants moved to dismiss the plaintiff's amended complaint on a number of grounds including failure to state a valid claim. Defendants primarily argued that the plaintiff lacked standing to assert derivative claims because he was not a shareholder of SMS at the time of the alleged wrongdoing in 2003 (or afterward) due to its dissolution in 1996.
The decision by Queens County Supreme Court Justice Denis S. Butler rejects defendants' argument based on Section 1006 of the Business Corporation Law which governs corporate action and survival of remedies after dissolution. Subdivision (a) of the statute provides:
A dissolved corporation, its directors, officers and shareholders may continue to function for the purpose of winding up the affairs of the corporation in the same manner as if the dissolution had not taken place, except as otherwise provided in this chapter or by court order.
Section 1006(a) also contains a non-exhaustive list of authorized post-dissolution actions and governing rules, including the corporation's ongoing title ownership of its assets, the continuing validity of corporate bylaws and shareholder voting rights, and the corporation's ongoing ability to sue or be sued in its own name. Subdivision (b) expressly preserves all remedies as to claims and liabilities in existence as of the date of dissolution, as follows:
The dissolution of a corporation shall not affect any remedy available to or against such corporation, its directors, officers or shareholders for any right or claim existing or any liability incurred before such dissolution, except as provided in sections 1007 (Notice to creditors; filing or barring claims) or 1008 (Jurisdiction of supreme court to supervise dissolution and liquidation).
Justice Butler accordingly concludes that "pursuant to [BCL] 1006(b), the rights and remedies of shareholders existing prior to dissolution are viewed as if the dissolution never occurred. Dissolution, in and of itself, cannot preclude a qualified plaintiff from being deemed a shareholder 'at the time of bringing the action,' as required by" the statute governing shareholder derivative suits, BCL Section 626(b). "The proper parties in interest," Justice Butler adds, "the shareholders, have not been dissolved."
The second highlighted case, involving a failed attempt to vacate a three-year old judicial dissolution order, features a pair of decisions handed down the same day by a Brooklyn panel of appellate judges. In Calabrese Bakeries, Inc. v. Rockland Bakery, Inc., 2011 NY Slip Op 03596 (2d Dept Apr. 26, 2011), the court upheld a lower court's order dismissing as procedurally improper a collateral proceeding seeking to annul a default judgment for the dissolution of B.M. Baking Co. entered in a prior proceeding. In Matter of Rockland Bakery, Inc. (B.M. Baking Co.), 2011 NY Slip Op 03617 (2d Dept Apr. 26, 2011), the panel rejected the same appellants' untimely effort in the original dissolution proceeding to vacate the order of dissolution.
Here's what happened. Two corporate entities, Rockland Bakery, Inc. and Calabrese Bakeries, Inc., were 50/50 shareholders of B.M. Baking Co. In 2004, Rockland Bakery filed a deadlock dissolution petition which was granted on default in December 2005. The petition had been served on both B.M. Baking and Calabrese Bakeries by delivery to the Secretary of State. The president/co-owner of Calabrese Bakeries, who also was president of B.M. Baking, alleged that he first learned of the dissolution proceeding sometime in the winter of 2005-06 when he was released from prison and retrieved a large amount of mail from the corporate address, including the dissolution petition, which he gave to an attorney. The attorney subsequently was suspended from the practice of law.
In September 2008, Calabrese Bakeries and its two shareholders filed a separate, new proceeding under BCL Section 1008 to suspend or annul the dissolution of B.M. Baking. They alleged that the financial affairs of B.M. Baking had not been properly determined and that the judgment dissolving it was improperly entered because venue was improper, and that the appellants and other interested persons did not receive adequate notice of the proceeding.
In August 2009, the lower court dismissed the proceeding without prejudice to seeking relief in the original judicial dissolution proceeding. In its recent decision affirming the order, the appellate court acknowledged the tension between BCL 1008, which gives the court jurisdiction to annul corporate dissolution "in a special proceeding instituted under this section," and BCL 1117(b) which authorizes the court in the original dissolution proceeding to retain jurisdiction over BCL 1008 applications as well as authorizing it to make orders in a special proceeding brought under BCL 1008. The court nonetheless concluded that dismissal without prejudice to an application in the original dissolution proceeding was proper "where, as here, the success of the appellants' application to suspend or annul the judicial dissolution is largely dependent upon their application for relief from a default judgment."
Hedging their bets while pursuing their first appeal, in October 2009, Calabrese Bakeries and its individual shareholders filed a motion in the original dissolution proceeding to vacate the default judgment of dissolution entered in December 2005. The lower court denied the motion in February 2010. The appellate panel's recent decision affirming the order includes several points of interest:
- Calabrese Bakeries' individual shareholders never were shareholders of B.M. Baking, were not entitled to service of the dissolution petition under BCL 1106(c), and therefore have no standing to ask the court to vacate the default judgment of dissolution based on improper service.
- The service of the dissolution petition on B.M. Baking and Calabrese Bakeries by delivery to the Secretary of State as their statutory agent for service was proper. The "mere denial of receipt" by B.M. Baking and Calabrese Bakeries "due to late pick up of the mail at the proper corporate address is insufficient to rebut the presumption of proper service or to establish lack of actual notice."
- Even if a portion of appellants' delay in acting is attributable to their prior, suspended lawyer's neglect, "they still unreasonably delayed in making their motion for 20 months after discharging that attorney."
- Appellants failed to establish reasonable excuse for default, a potentially meritorious defense to dissolution, or that they timely asserted any meritorious claim to vacate the default based on fraud or misconduct of any adverse party.
The decisions in B.M. Baking do not reveal the appellants' underlying financial or other motives for seeking to "get back into bed" with their adversaries as co-owners of a defunct business. Perhaps they'll take their cue from the Pursnani plaintiff's comparative success and bring a new, derivative action.