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Court Addresses Various Claims By Minority Shareholder Allegedly Oppressed By The Actions of The Majority

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  • Posted on: Sep 30 2020

In looking at the causes of action asserted in Kocak v. Dargin, 2020 N.Y. Slip Op. 33121(U) (Sup. Ct., N.Y. County Sept. 23, 2020) (here), one could walk away with the impression that the claims are disparate and lacking cohesion – breach of fiduciary, fraudulent transfers and corporate dissolution. However, when the facts and evidence in Kocak are considered, a common theme emerges: the alleged actions taken by the majority shareholder of the corporation oppressed the rights of the minority. Each of those actions, according to the Court, supported summary judgment on each of the aforesaid claims.  

Kocak v. Dargin

Background

Kocak concerned a restaurant, known as Sahara’s Turkish Cuisine (“Sahara’s”), which plaintiff purchased in 2001. Beginning in 2007, plaintiff operated the restaurant through Baba’s Restaurant Inc. (“Baba’s”), an entity of which plaintiff was the sole owner. Plaintiff’s brother managed the restaurant. 

In 2012, plaintiff agreed to sell 75% of his shares in Baba’s to defendant for $281,250.00, to be paid in installments, in accordance with the terms of a Stock Transfer Agreement. On the same day, the parties also entered into an employment agreement whereby plaintiff agreed to be an employee of Baba’s and to provide services as the Marketing and Business Development Manager in return for a net monthly salary of $2,500.00. Both the Stock Transfer Agreement and the employment agreement contained merger clauses providing that the agreements represented the parties’ entire understanding with respect to the subject matter contained therein and could be modified, amended or terminated only by a written instrument executed by the parties or their respective successors or assigns. 

Following execution of the Stock Transfer Agreement, defendant assumed responsibility for operating Sahara’s on behalf of Baba’s, assumed the role of manager, was made a cosignatory (along with plaintiff) of the bank account that served as Baba’s operating account, and was added as a signatory to the lease that Baba’s had with its landlord, Daniela Sarraf (“Sarraf”). 

Thereafter, a First Amendment of Lease, dated February 8, 2012 was entered into between Baba’s and Sarraf. Both plaintiff and defendant signed the Lease Amendment on behalf of Baba’s. Under the Lease Amendment, the lease term was extended for ten years, until December 31, 2021. 

In 2014, defendant formed Munzur LLC (“Munzur”), which he co-owned with his sister, Feliz Dargin. 

On or about September 14, 2014, a Lease Agreement was entered into between Sarraf as landlord and Munzur as tenant, for the New York City location where the restaurant opereated. Feliz Dargin signed the Lease Agreement on behalf of Munzur. In 2015, defendant opened a bank account in the name of Munzur, to serve as the operating account for the restaurant. Plaintiff was not made a signatory to the Munzur account. Defendant began depositing revenues and other monies from the operations of the restaurant into the Munzur account. In or around September or October, 2015, defendant ceased making such deposits into Baba’s bank account.

In or around September or October 2015, defendant began operating Sahara’s entirely through Munzur and paid distributions from Munzur to himself and Feliz Dargin beginning in 2016. 

In 2017, defendant formed Rojava LLC (“Rojava”), of which he was the sole owner. Thereafter, defendant amended the lease, and bank accounts to the exclusion of plaintiff. Following execution of the Stock Transfer Agreement in 2012, plaintiff had not been paid any distribution from the profits of the restaurant (whether operated through Baba’s, Munzur, or Rojava).

Plaintiff filed the action on April 18, 2016, alleging causes of action for: 1) breach of fiducuary duty; 2) fraudulent conveyance pursuant to DCL § 274; 3) fraudulent conveyance pursuant to DCL § 276; and 4) violations of New York Labor Law § 191. Issue was joined by the service of an Answer, dated June 20, 2016, containing counterclaims: 1) alleging unjust enrichment; and 2) seeking a declaratory judgment that plaintiff was no longer an owner of the subject property. 

By order, dated February 3, 2017, plaintiff added Baba’s as a party defendant. Plaintiff filed a Note of Issue on January 10, 2020, and thereafter filed a motion for partial summary judgment on the issue of liability on his first, second and third causes of action and seeking statutory dissolution pursuant to BCL § 1104-a. 

On August 21, 2020, defendants cross-moved for summary judgment on their counterclaims and dismissal of plaintiff’s complaint.

The Court’s Decision

Breach of Fiduciary Duty

The Court held that plaintiff established a breach of fiduciary. 

“[T]he elements of a cause of action to recover damages for breach of fiduciary duty are (1) the existence of a fiduciary relationship, (2) misconduct by the defendant, and (3) damages directly caused by the defendant’s misconduct.” Palmetto Partners, L.P. v. AJW Qualified Partners, LLC, 83 A.D.3d 804, 807 (2d Dept. 2011). In a close corporation, the majority shareholders owe a fiduciary duty to the minority shareholders. O’Neill v. Warburg, Pincus & Co., 39 A.D.3d 281, 282 (1st Dept. 2007); Gjuraj v. Uplift Elevator Corp., 110 A.D.3d 540, 541 (1st Dept. 2013). 

The Court found that following the execution of the Stock Transfer Agreement, defendant, as Baba’s majority shareholder, owed plaintiff fiduciary duties. Slip Op. at *4. The Court explained that the evidence demonstrated that defendant breached his fiduciary duty to plaintiff:

it [was] undisputed that defendants transferred the assets of Baba’s to Munzur, LLC and subsequently to Rojava, LLC without paying any consideration to plaintiff, removed all funds from the Baba’s bank account to bank accounts controlled by Dargin and his family and ceased all distributions to plaintiff. 

Slip Op. at *4-*5. “As such,” concluded the Court, “plaintiff has established a prima facie entitlement to summary judgment on his Breach of Fiduciary Duties claim.” Id. at *5.

Debtor & Creditor Law Claims

The Court held that plaintiff established entitlement to summary judgment on his DCL claims.

Purusant to Debtor and Creditor Law § 273, “every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.” “When a transfer is made without fair consideration, a presumption of insolvency and fraudulent transfer arises, and the burden shifts to the transferee to rebut that presumption.” Battlefield Freedom Wash, LLC v. Song Yan Zhuo, 148 A.D.3d 969, 971 (2d Dept. 2017). 

Pursuant to DCL § 276 “every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.” To demonstrate a violation of DCL § 276, a plaintiff may “rely on ‘badges of fraud.’” Wall Street Assocs. v. Brodsky, 257 A.D.2d 526, 529 (1st Dept. 1999). Badges of fraud include a “close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of the consideration; the transferor’s knowledge of the creditor’s claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance.” Id. at 529. 

The Court found that defendant had transferred all of Baba’s assets to entities controlled by him and his family without consideration, with full knowledge that plaintiff had claims against Baba’s for 25% of its assets and compensation arising from plaintiff’s employment contract. As a result, plaintiff “established a prima facie entitlement to summary judgment on his DCL claims.…” Slip Op. at *5. 

Involuntary Dissolution

Business Corporation Law § 1104-a permits involuntary dissolution of a corporation when the controlling shareholders are found guilty of “oppressive action” toward the minority. Oppression arises when “those in control” of the corporation “have acted in such a manner as to defeat those expectations of the minority stockholders which formed the basis of [their] participation in the venture.” In re Kemp & Beatley, Inc., 64 N.Y.2d 63, 74 (1984). Situations where the petitioner is “frozen out” or “squeezed out” are precisely the type of oppressive situations” that BCL § 1104-a is designed to address. In re Wiedy’s Furniture Clearance Center Co., 108 A.D.2d 81, 84 (3d Dep’t 1985); In re Rambusch, 143 A.D.2d 605, 606 (1st Dept. 1988); In re Dissolution of Pickwick Realty, 246 A.D.2d 863, 866 (3d Dept. 1998) (finding that the lower court’s ordering of dissolution following its consideration of, inter alia, the “shareholders’ attempt at voiding petitioner’s shares” was “proper in the totality of these circumstances and fully necessary to protect petitioner’s interest”). 

The Court found that defendant’s actions frustrated plaintiff’s “reasonable expectations of remaining a shareholder of the entity operating the restaurant and to share in the profits of the business.” Slip Op. at *6. The Court explained that the record showed that defendant “diverted the property and assets of Baba’s Restaurant within the meaning of BCL § 1104-a(a)(2).” Id. (“It is undisputed that Dargin transferred, assigned, or otherwise diverted, for no consideration, all the assets of Baba’s and that he denies that Kocak has any ownership of the disputed shares.”). As such, the Court concluded that plaintiff satisfied BCL § 1104- a(a)(2). Id. (citing Matter of Verdeschi, 63 A.D.3d 1084, 1085 (2d Dept. 2009). Accordingly, the Court granted summary judgment on this claim.

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