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Court Determines That Internal Dissention Among Shareholders Sufficient to Warrant Judicial Dissolution of Commercial Real Property Sales Brokerage Business

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  • Posted on: Jan 8 2020

New York’s Business Corporation Law (“BCL”) provides shareholders owning 50% or more of a corporation two paths to judicial dissolution: a) BCL § 1104 – deadlock at the board or shareholder level such that the corporation “cannot continue to function effectively, and no alternative exists but dissolution”; or b) BCL § 1104-a – where directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholder(s).

Under BCL § 1104, dissolution may be ordered where deadlock between shareholders establishes that the corporation “cannot continue to function effectively, and no alternative exists but dissolution.” Molod v. Berkowitz, 233 A.D.2d 149, 150 (1st Dept. 1996), lv. dismissed, 89 N.Y.2d 1029 (1997); Neville v. Martin, 29 A.D.3d 444, 444-45 (1st Dept. 2006); Matter of Cunningham & Kaming, 75 A.D.2d 521, 522 (1st Dept. 1980).  In this regard, a shareholder owning at least “one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors” may petition the court for dissolution based on one of the grounds set forth in BCL § 1104(a): (1) the directors are so divided about the management of the corporation’s affairs that the votes required for action by the board cannot be obtained; (2) the shareholders are so divided that the votes required for the election of directors cannot be obtained; and (3) there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.

Once a petitioner has established a prima facie showing of entitlement to dissolution, it is within the court’s discretion whether to issue an order granting dissolution without a hearing. BCL § 1111(a).

Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation (see generally Hayes v. Festa, 202 A.D.2d 277, 277 (1st Dept. 1994)), thereby “pos[ing] an irreconcilable barrier to the continued functioning and prosperity of the corporation.” Matter of T.J. Ronan Paint Corp., 98 A.D.2d 413, 421 (1st Dept. 1984). Notwithstanding, “dissolution and forced sale of corporate assets should only be applied as a last resort.” Matter of Klein Law Group, P.C., 134 A.D.3d 450 (1st Dept. (2015) (quoting Matter of the Dissolution of 168½ Delancey Corp., 174 A.D.2d 523, 526 (1st Dept. 1991) (internal citations omitted)).

“In determining whether dissolution is in order, the issue is not who is at fault for a deadlock, but whether a deadlock exists. Matter of Kaufmann, 225 A.D.2d 775 (2d Dept. 1996). “[T]he underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation’s affairs.” Matter of Goodman v. Lovett, 200 A.D.2d 670, 670-71 (2d Dept. 1994).

Even if dissension and/or deadlock exists, allegations that a petitioner acted in bad faith by creating the underlying disputes to justify dissolution “constitute a defense to a dissolution proceeding,” and therefore require a hearing to determine the issue. Myers v. Gold, 77 A.D.2d 652, 653 (2d Dept. 1980) (internal citations omitted); Matter of Rappaport, 110 A.D.2d 639, 641 (2d Dept. 1985). But see Matter of Eklund Farm Machinery, Inc., 40 A.D.3d 1325, 1326-27 (3d Dept. 2007) (summarily granting dissolution despite allegations that petitioner acted in bad faith by “creat[ing] dissension to obtain dissolution” where the record clearly established that the petitioner was completely excluded from control and operation of the corporation by respondent).

In Doshi v. Besen, 2019 N.Y. Slip Op. 33771(U) (Sup. Ct., N.Y. County Dec. 30, 2019) (here), the Court granted the motion of a 50% shareholder to dissolve the corporation on the grounds that the internal dissension between the two shareholders was so severe that dissolution was “inevitable” and beneficial to them.

Doshi was a special proceeding brought pursuant to BCL §1104(a), in which Petitioner, Amit Doshi (“Doshi”), sought the judicial dissolution and an accounting of Besen & Associates, Inc. (“B&A” or the “Company”), a New York Corporation in which Doshi and Michael Besen (“Besen”) each owned fifty percent of the Company’s outstanding shares.

The Company was formed in 1988 for the primary purpose of operating a commercial real property sales brokerage business. Doshi and Bensen worked together in the Company for almost thirty years and are the Company’s only two shareholders. Together, Doshi and Bensen were B&A’s only officers and directors until July 20, 2018, when Doshi resigned his positions as an officer, director and employee of B&A, “due to the severe dissension between the parties and Petitioner’s complete distrust of Respondent.”

According to Doshi, the dissention began in 2017. Doshi maintained that “[t]here was such severe disagreement and dissention between us about the direction and operation of B&A[,] and the use of its funds that we were, in fact, in a deadlock and could not continue.” Doshi opposed the way in which Besen operated B&A and accused Besen of using B&A assets for his personal enjoyment. As a result, Doshi and Bensen discussed separating their joint interest in B&A and other jointly held businesses.

Besen blamed Doshi for abandoning B&A and joining Meridian Capital, a competitor of B&A. Besen accused Doshi of misconduct and breaches of his fiduciary duty, including: converting millions of dollars from B&A; misappropriating B&A funds to participate in deals not involving B&A; loaning money to clients of B&A through his own entity, without earning fees or commissions for B&A; and interfering with the payment of commissions to B&A. Besen repeatedly alleged that “the differences between [Besen and Doshi] are irreconcilable”, and that any attempt to settle their differences “will continue to be fruitless.”

Based upon the dissention between the parties, and their tolerance of such at the expense of B&A (Slip Op. at *4), the Court held that “B&A [could not] escape the fallout of the admitted collapse in the relationship between Doshi and Besen.” For this reason, explained the Court, “[t]he parties need not come to blows to satisfy BCL §1104 (a).” Id. at *6.

The Court reasoned that “[r]egardless 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.” Id. at *7. For that reason, concluded the Court, there was no purpose in “delay[ing] the inevitable” because to do so would inflict “even more harm to the corporation.” Id.

Because “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’” (id. at *7), the Court granted the motion to dissolve B&A and conduct an accounting after the dissolution. Id. at *8.

Takeaway

Internal dissension, reflected by an intense personal hostility, often poses an irreconcilable barrier to the continued functioning and prosperity of a corporation. Where a deadlock exists to the extent that dissension becomes the norm, the impasse may effectively destroy the loyalty and good faith required of shareholders in their dealings with each other. The inevitable result is the destruction of the business. In such a case, dissolution affords the court a remedy to direct what is obvious to all, that the deadlock and dissension effectively destroyed the orderly functioning of the corporation. As a consequence, when the shareholders of a company who are actively conducting the business of the corporation cannot agree, it becomes in the best interests of those shareholders for a court to order a dissolution. Such was the situation in Doshi. The animosity and hostility between these parties had created a hopeless situation in which they were “so divided that they [could] accomplish nothing but destroy the successful company they created together.”

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