Theresa
Federico, individually and as a shareholder of CHALLENGE GRAPHICS SERVICES,
INC., suing on behalf of herself and CHALLENGE GRAPHICS SERVICES, INC.,
Plaintiffs,
against
Anthony Brancato, ROSEANN BRANCATO AND
JOSEPH BRANCATO, Defendants.
|
3133-12
THE INTERNICOLA LAW FIRM, PC
Attorneys for Plaintiff
1000 South Avenue, Suite 104
Staten Island, New York 10314
BRACKEN MARGOLIN BESUNDER LLP
Attorneys for Defendants
1050 Old Nichols Road, Suite 200
Islandia, New York 11749
Elizabeth H. Emerson, J.
Disputes among co-owners of closely held business entities take on a different
dimension when the co-owners are also members of the [*2]same family. These are the cases, pitting parent against
child or sibling against sibling, that put...lawyers [and courts] to the ultimate test: How to
navigate and reach resolution of the parties' conflicting interests consistent with rational
business and legal norms, while also navigating the personally intense, intra-familial
[relationships that often hinder] rational, business-driven solutions (Peter Mahler,
Interview with Law Professor Benjamin Means on Conflict in Family-Owned
Businesses: Part One, http//www.
nybusinessdivorce.com/2013/01/articles/interviews/benjamin-means-
interview/ [accessed April 29, 2014]).
This is one of those cases. The parties are all members of the same family, as
well as officers, directors, and shareholders of a commercial printing business known as
Challenge Graphics Services, Inc. ("Challenge Graphics" or "the Corporation" or "the
Company"). Challenge Graphics was formed by the defendants Anthony and Roseann
Brancato (the "Senior Brancatos"), who started it as a small business in 1976 under the
name Corporate Color. Their son is the defendant Joseph Brancato and their daughter is
the plaintiff, Theresa Federico. Joseph has worked in the business since 1976, when he
was 16 years old, and he is knowledgeable about all aspects thereof. Theresa became a
certified public accountant and worked for various large accounting firms until 1994,
when she joined Challenge Graphics as an employee. On December 31, 2001, Anthony,
Roseann, Joseph, and Theresa entered into a shareholders agreement (the "Shareholders
Agreement"), which all of the parties acknowledge was part of the Senior Brancatos'
estate plan. The Shareholders Agreement gave Joseph and Theresa 10 non-voting shares
each in Challenge Graphics and transferred 39.2 non-voting shares to an irrevocable
trust. The trust dissolved by its own terms in 2009, and the shares in the trust were
distributed equally between Joseph and Theresa, giving each of them 29.6 non-voting
shares. The Shareholders Agreement gave Anthony 17 and Roseann 19 non-voting
shares and gave each of them 2.4 voting shares. No voting shares were given to Joseph
or Theresa. Consequently, only Anthony and Roseann hold voting shares. There are no
other shareholders.
The Shareholders Agreement vests managerial control of Challenge
Graphics in Anthony, who is the president and a director. Article IV (b) of the
Shareholders Agreement provides that, as president, Anthony "shall be responsible for
the daily management and operation of the business of the Corporation including all
decisions on the hiring and firing of the employees of the Corporation...provided
however, that [he] shall consult with the other Shareholders in the regular course of
business as he deems appropriate." Article III (B) (I) of the Shareholders Agreement
provides that, as long as Anthony is a director, none of the following actions, which
require a two-thirds vote of all of the directors, may be undertaken without his approval:
adding a new shareholder, amending the Shareholders Agreement, authorizing a loan by
the Corporation in excess of $25,000 other than in the ordinary course of business,
authorizing capital expenditures in excess of $100,000 other than in the ordinary course
of business, authorizing the Corporation to enter into a lease or purchase agreement for
office space or for investment property, merging or consolidating the Corporation with
another corporation, selling [*3]substantially all of the
assets of the Corporation, dissolving or terminating the Corporation, making an
assignment for the benefit of creditors or filing a petition in bankruptcy, or entering into
a new loan or line of credit. In addition, Article III (C) of the Shareholders Agreement
provides that distributions of the net income of the Corporation shall be made at such
intervals and in such amounts as determined by a majority of the shareholders of the
issued and outstanding voting shares, i.e., Anthony and Roseann.
Article II of the Shareholders Agreement provides that the Board of
Directors of Challenge Graphics (the "Board") shall consist of Anthony, Roseann, and
Theresa and that Joseph shall succeed any director who dies or resigns. In the event that
Joseph succeeds Anthony or Roseann, one of them must be in the majority on any vote of
the directors. The actions enumerated above that require a two-thirds vote of all of the
directors also require Anthony's approval as a director. If Joseph replaces Roseann, all
actions by the Board will then require Anthony's approval. Likewise, if Joseph replaces
Anthony, all actions by the Board will then require Roseann's approval. Thus, as long as
one of their parents is on the Board, Theresa and Joseph are not in control of the
Board.
Article II of the Shareholders Agreement also provides that the officers of
Challenge Graphics shall be Anthony as president, Roseann as secretary and treasurer,
and Joseph and Theresa as vice presidents and that they shall hold their respective offices
until their death or resignation. The Shareholders Agreement does not enumerate the
duties of any of the officers except the president. As previously noted, Article IV (b)
provides that the president is responsible for the daily management and operation of the
business, including all decisions on the hiring and firing of employees. Moreover, Article
IV (a) provides that Challenge Graphics "shall continue the employment of each of the
Shareholders in their executive capacity so long as he or she shall continue to duly
perform their executive duties, at such salaries and expense allowances as may from time
to time be fixed by the Board."
Theresa characterized her role at Challenge Graphics as that of Chief
Financial Officer. From 1994 until her termination in 2012, her duties were limited to
accounting, finance, and human resources. She supervised the payroll, which was
prepared by an outside payroll company, and two employees, a bookkeeper and a
receptionist. She also assisted the outside accounting firm that prepared the Corporation's
tax returns. Her duties did not change after 2001, when she became an officer and
director. In 2008, she stopped going to the office and began working from home.
Between 2008 and 2012, she appeared at Challenge Graphics' offices only a handful of
times. She had limited interaction with the Corporation's employees, and she had no
interaction with Joseph, to whom she had not spoken for several years. All
communications between Theresa and Joseph went through Anthony.Joseph, on the other
hand, has been involved in all aspects of the business. In 1976, he began working at
Corporate Color as an apprentice while still in high school. After graduating from
college, he worked full-time and eventually became a successful salesperson. Over the
years, he gained experience in every department at Challenge Graphics, including [*4]production, bindery, and sales. He has taken over much of
Anthony's managerial role since 2008, when Anthony had triple-bypass surgery. Joseph
runs the business for six months of every year while Anthony is in Florida. He makes
decisions regarding pricing and production, as well as hiring and firing. Any
disagreements with his father, however, are resolved in favor of Anthony.
Despite their differing roles at Challenge Graphics, Joseph and Theresa
received the same compensation. Theresa's compensation package included a salary in
the amount of $100,100 a year; a bonus; medical insurance; a credit card for gas
purchases; payments for a car, car insurance, and car repairs; payments for taxes related
to Challenge Graphics' status a subchapter S corporation and for the preparation of her
annual tax return. Joseph received the same compensation package, except that he also
received commissions on the sales that he made. Theresa received a small commission
for placing the company's medical insurance. In addition, their parents gave each of them
a 50% interest in two buildings, 18 and 22 Connor Lane, Deer Park, New
York,[FN1]
which they owned at the time of trial. They each received 50% of the rental income
therefrom and 50% of the proceeds when 18 Connor Lane was sold in 2013.
The present dispute began in 2010, when Anthony and Roseann approached
the plaintiff about buying her shares in Challenge Graphics. Both Anthony and Roseann
were elderly and gravely ill. They realized that they could not continue their roles in the
day-to-day operation of the Company, and they were concerned about its future and that
of its 40 or more employees. Their plan was to have Joseph take over for Anthony, who
wanted to retire. They felt that Joseph was better suited to run Challenge Graphics than
Theresa because Theresa's role in the Company was more limited than Joseph's.
Moreover, Theresa had not spoken to her brother in several years. Events outside of the
workplace that occurred after Theresa began working for Challenge Graphics in 1994
caused her to refuse to speak to Joseph or to interact with him in any way both at work
and at home. All subsequent communications between Theresa and Joseph went through
Anthony. The Senior Brancatos felt that, under the circumstances, Theresa and Joseph
would not be able to run the Company together and that one of them would have to
leave. After much soul-searching by Anthony in particular, they decided that Challenge
Graphics would suffer more if Joseph were to leave the Company than if Theresa were to
leave. Accordingly, the Senior Brancatos had their estate attorney, Larry Siegel, prepare
the following reorganization plan:
1.Theresa shall sell all of her interest in Challenge Graphics, Inc. to Joe for
fair market value as determined by a mutually agreeable appraiser. Theresa will
relinquish all of her rights, title and interest in Challenge and the right to any future
payment.
2.Theresa shall be paid simultaneously with the Closing for 30% of such
appraised valuation, representing her entire interest in Challenge Graphics.
3.Joe and Theresa will exchange their interest in 18 Connor and 22 Connor
so Joe will end up with 100% membership in 22 Connor and Theresa will end up with a
100% interest in 18 Connor. Both properties shall be approved by a licensed appraiser
acceptable to both Joe and Theresa. To the extent that the value of 22 Connor exceed[s]
the value of 18 Connor Theresa shall receive ½ of the difference in value. For
example, if 22 Connor is worth [$1,100,000] and 18 Connor is worth $700,000 then
Theresa shall be entitled to $200,000 from Joe payable in equal annual installments over
a 5 year period with interest at 5% per annum.
The proposed reorganization plan was sent to Theresa in September 2010.
Although she acknowledged receiving it at that time, she did not open it until March
2011 because she knew its contents and did not wish to sell her shares. She refused to
negotiate with the Senior Brancatos even after her shares were valued at $615,000 by an
independent business evaluator selected by her. The Senior Brancatos increased the price
to $900,000, but she steadfastly refused to engage in any meaningful negotiations with
them.[FN2]
She refused to sell her shares to her brother, although she was willing to sell them to a
third party, which was not acceptable to the Senior Brancatos. Relations between Theresa
and her parents eventually broke down. Theresa directed the Senior Brancatos to
communicate with her only through counsel and refused to allow them to see their
grandchildren. The Senior Brancatos, inter alia, cancelled her check-signing authority for
the Company, reduced her salary to $10,000, withheld payments with which to pay her
taxes, changed the outside accountants and payroll company, terminated her access to the
Company's books and records, and finally terminated her employment. They also
attempted to convene a meeting of the shareholders at which they intended to terminate
the Shareholders Agreement and remove her as a director, but they were prevented from
doing so by a temporary restraining order.
Theresa commenced this action on January 27, 2012, against Anthony,
Roseann, and Joseph (the "defendants") to recover damages and to obtain injunctive
relief. The first, third, and fifth causes of action are derivative in nature and allege that
the defendants breached their fiduciary duties to Challenge Graphics, that they converted
and misappropriated the assets of Challenge Graphics, and that they have been unjustly
enriched to the detriment of Challenge Graphics. The second, fourth, and sixth causes of
action allege that the defendants breached their fiduciary duties to Theresa individually;
that they engaged in conduct that converted and misappropriated the rights, benefits, and
privileges associated with her being a Challenge Graphics' shareholder; and that they
have been unjustly enriched to her detriment. The seventh cause of action alleges that the
defendants breached the Challenge Graphics Shareholders [*5]Agreement.
At a hearing on the plaintiff's application for preliminary injunctive relief,
the parties stipulated to proceed directly to trial on the issue of liability only. The case
was tried before the court on November 13 and 20, 2012; December 7, 2012; January 29,
2013; March 11, 2013; April 2, 2013; May 20, 2013; August 13, 14, and 15, 2013;
September 3, 2013; and October 13, 2013. All of the parties testified. In addition, the
plaintiff called Challenge Graphics' accountant, Neil Dukoff, as a witness. The plaintiff
introduced 35 exhibits into evidence, and the defendants 20. Post-trial briefs were
submitted on March 4, 2014.
The burden of proof rests with the plaintiff, who must establish the truth and
validity of each claim by a fair preponderance of the credible evidence (see,
Liberty Doorworks, Inc. v Baranello, 35 Misc 3d 1222 [A] at *6). Stated otherwise,
in order for the plaintiff to prevail on any individual claim, the evidence that supports
that claim must appeal to the fact-
finder as more nearly representing what took place than the evidence
opposed to it (Id.). If the evidence does not, or if the evidence weighs so evenly
that the fact-finder is unable to indicate that there is a preponderance on either side, then
the question is decided in favor of the defendant (Id.). Only when the evidence
favoring the plaintiff's claim outweighs the evidence opposed to it may the plaintiff
prevail. (Id. at *6-*7).
The Derivative Causes of Action
The first, third, and fifth causes of action for breach of fiduciary duty,
conversion,[FN3]
and unjust enrichment, respectively, are derivative in nature. A shareholder derivative
action is a lawsuit brought by one or more shareholders on behalf of a corporation to
remedy or prevent a wrong to the corporation (Haig, Commercial Litigation in NY State
Courts, Shareholder Derivative Actions § 82.1 [3d ed]). Allegations of
mismanagement or diversion of assets by officers or directors for their own enrichment
plead a wrong to the corporation for which a shareholder may sue derivatively
(see, Abrams v Donati, 66 NY2d 951, 953; Elenson v Wax, 215
AD2d 429).
The court finds that the plaintiff has failed to establish by a preponderance of
the credible evidence that the defendants caused an injury to Challenge Graphics. The
thrust of this action is to vindicate the plaintiff's personal rights as an individual and not
as a stockholder on behalf of Challenge Graphics (see, Albany-Plattsburgh
United Corp. v Bell, 307 AD2d 416, 419). The only evidence presented by the
plaintiff regarding an injury to Challenge Graphics concerned payments made by
Challenge Graphics to Anthony and Joseph, which the plaintiff claimed represented a
diversion of corporate assets to them. In opposition thereto, the defendants [*6]presented evidence that the payments in question were
made in the ordinary course of business. The court credits the defendants' evidence.
Accordingly, the court finds in favor of the defendants on the first, third, and fifth causes
of action.
The Fourth Cause of Action for Conversion
This cause of action alleges an injury to the plaintiff individually and seeks
to recover money damages. Conversion is the unauthorized assumption and exercise of
the right of ownership over specifically identified property or goods belonging to another
to the exclusion of the owner's rights (Vigilant Ins. Co. of Am. v Housing Auth. of
City of El Paso, Tex., 87 NY2d 36, 44; Republic of Haiti v Duvalier, 211
AD2d 379, 384). While money may be the subject of a conversion claim, it must be
specifically identified and segregated and there must be an obligation to return or
otherwise treat the specific fund in a particular manner (Bahiri v Madison Realty
Capital Advisors, LLC, 30 Misc 3d 1208[A] at *2 [and cases cited therein]). If the
claim merely alleges an obligation to pay the plaintiff money that she is owed, a
conversion is not alleged even if a specific fund is the subject of the claim (Id.;
Horn v Toback, ____Misc 3d ____, 2014 NY Slip Op 24117 [App Term] at
*2)
The plaintiff has failed to establish, prima facie, that the defendants
converted any specifically identified property or funds belonging to her. In support of her
conversion claim, the plaintiff relies on the purported diversion of corporate assets by
Anthony and Joseph, the defendants' failure to distribute corporate profits, and the
reduction of her salary, among other things, which she contends devalued her shares and
deprived her of the rights, benefits, and privileges of being a Challenge Graphics'
shareholder. The court finds that the plaintiff's evidence merely establishes purported
obligations to pay her money that she claims she is owed, which is duplicative of her
contract and fiduciary-duty claims. The plaintiff never had title, possession, or control of
the funds that she alleges were converted, and she has failed to demonstrate an
immediate possessory right thereto (Bahiri, supra). Moreover, the
plaintiff has failed to identify any specific account or segregated funds that are the
subject of her conversion claim (Id.). Accordingly, the court finds in favor of the
defendants on the fourth cause of action for conversion.
The Seventh Cause of Action for Breach of Contract
The plaintiff contends that the defendants' actions interfered with and
eliminated her duties, locking her out of the business and depriving her of guaranteed
employment, in violation of the Shareholders Agreement.
The defendants contend that the plaintiff was an at-will employee, who
could be terminated at any time, and that her status as a minority shareholder did not give
her a reasonable expectation of continued employment. In support thereof, the defendants
rely on Ingle v [*7]Glamore Motor Sales(73
NY2d 183) and Gallagher v Lambert(74 NY2d 562). In those cases, the
minority shareholders were at-will employees who claimed a fiduciary obligation flowing
from the shareholder relationship. There were no contracts for a definite period of
employment, nor were there any other legally recognized limitations on the defendants'
unqualified right to discharge the minority shareholders. In Ingle, in particular,
the Court of Appeals held that a minority shareholder in a closely held corporation, by
that status alone, acquires no right from the corporation or the majority shareholders
against his at-will discharge. The court finds that Ingle and Lambert are
inapplicable to the plaintiff's contract claim because the plaintiff's discharge was
governed by the terms of the Shareholder Agreement.
It is well settled that neither party has a cause of action for breach of contract
when the contract is one for employment at will (Sabetay v Sterling Drug, 69
NY2d 329). A "permanent" employment contract is generally terminable at will
(Banach v Dedalus Foundation, Inc., 89 AD3d 481, 483). In order for an
employee to prevail on a cause of action for breach of an employment contract, she must
show that the contract was for a specified duration, that she accepted the employment on
the condition that she would only be discharged for cause, or that her discharge was
limited by agreement (Lerman v Med. Assocs. of Woodhull, 160 AD2d 838,
839). The court finds that the plaintiff falls into the third category. Under Article IV (a)
of the Shareholders Agreement, the parties agreed that the Corporation would continue
the plaintiff's employment as long as she continued to perform her executive duties.
Thus, the plaintiff was not an at-will employee.
The defendants contend that the plaintiff did not perform any executive
duties because she did not participate in the management of Challenge Graphics,
supervise more than two employees, hire and fire employees, make day-to-day business
decisions, make capital contributions, or guarantee bank loans, among other things. The
defendants contend that, from the time the plaintiff joined Challenge Graphics as an
employee in 1994 until her termination in 2012, her duties were always the same. They
were limited to financial matters, and they did not increase or change, even after she
became a shareholder, officer, and director in 2001. The defendants also contend that,
since the plaintiff worked from home and refused to interact with her brother and fellow
employees, she cannot be viewed as an executive.
As a general rule, the terms of a written agreement define the rights and
obligations of the parties to the agreement (Abiele Contracting, Inc. v New York
City School Construction Authority,91 NY2d 1, 9). The fundamental objective
when interpreting a written contract is to determine the intention of the parties as derived
from the language employed in the contract (Id.). When the parties have agreed
to conduct themselves in accordance with the rights and duties expressed in a contract,
the court should strive to give a fair and reasonable meaning to the language used
(Id. at 9-10). Courts may not by construction add or excise terms, nor distort the
meaning of those used, and thereby make a new contract for the parties under the guise
of interpreting the writing (see, Reiss v Financial Performance Corp., 97
NY2d 195, 199).
The parties' intent in entering into the Shareholders Agreement was not to
[*8]establish an operational model for the Company,
defining the individual shareholders' rights and responsibilities. Rather, the Shareholders
Agreement was meant to be an estate-planning tool. It was entered into in order to
transfer the shares in the Corporation from Anthony and Roseann to their children before
their eventual demise. The parties did not define terms such as "executive capacity" and
"executive duties," nor did they specify the duties of any of the shareholder-officers,
except the president. As one legal commentator has noted, in a family business, the
members may not document their respective ownership stakes very carefully (Peter
Mahler, Interview with Law Professor Benjamin Means on Conflict in
Family-Owned Businesses: Part Two,
http//www.nybusinessdivorce.com/2013/02/articles/interviews/interview-with-law-pr
ofessor-benjamin-means-on-conflict-in-family-owned-businesses-part-two/ [accessed
April 29, 2014]), and they clearly did not in this case.
The record does not reflect that the plaintiff was expected to participate in
the management of Challenge Graphics, to supervise more than two employees, to hire
and fire employees, to make day-to-day business decisions, to make capital contributions,
to guarantee bank loans, or even to go to the office. In fact, the opposite appears to be the
case. The record reflects that Anthony and Roseann expected Joseph to step into
Anthony's shoes when Anthony retired and that they gave Joseph management authority
to run the Company; to supervise, hire, and fire employees, and to make day-to-day
business decisions.[FN4]
The record does not reflect that Anthony and Roseann expected the plaintiff to perform
any duties that were unrelated to the financial management of the Company. The fact that
the plaintiff's duties were more limited than Joseph's does not mean that she was not
performing her "executive duties" within the meaning of the Shareholders Agreement. In
the absence of a definition of the term "executive" or any evidence that the defendants'
interpretation of that term was what the parties intended, the court finds that Theresa's
"executive duties" were the duties that she actually performed at Challenge Graphics. To
hold otherwise would result in an expansion of the Shareholders Agreement that is
unsupported by the record.
In view of the foregoing, the court finds that, under Article IV (a) of the
Shareholders Agreement, the plaintiff was entitled to remain employed as long as she
continued to perform her duties at Challenge Graphics. It is undisputed that she was
performing her duties when the Senior Brancatos terminated her employment. It is also
undisputed that they terminated her employment in order to induce her to sell her shares
and to implement their reorganization plan. Accordingly, the court finds that the Senior
Brancatos breached Article IV (a) of the Shareholders Agreement.
Pursuant to Article II of the Shareholders Agreement, the plaintiff is entitled
to be a vice-president of Challenge Graphics until her death or resignation. The title of
vice-president is not tied to or dependent upon her employment as a shareholder.
Moreover, pursuant to Article XVII, no shareholder shall take any action the result of
which would be to deprive, interfere, or [*9]hinder the
other shareholders or the orderly management, operating, voting, and control of the
business of the Corporation. The Senior Brancatos denied the plaintiff access to the
Company's books and records and terminated her employment, leaving her with no
involvement in the Company at all. They did not, however, remove her as a
vice-president. Although the Shareholders Agreement is silent on the benefits to which a
vice-president is entitled, it is clear that, by reducing the plaintiff's involvement in the
Company to zero, the Senior Brancatos rendered the title of vice-president meaningless.
Accordingly, the court finds that the Senior Brancatos breached Article XVII of the
Shareholders Agreement, as well as the covenant of good faith and fair dealing that is
implicit in all contracts.
The plaintiff has failed to establish by a preponderance of the credible evidence that
Joseph breached the Shareholders Agreement. The record reveals that, although Joseph
had management authority and the ability to hire and fire employees, his authority came
from Anthony, who clearly had the last word on all decisions that affected Challenge
Graphics. As previously discussed, Anthony and Roseann held the only voting shares
and both sat on the Board of Directors. Joseph neither sat on the Board, nor did he have
any voting shares in the Company. The record reflects that all of the decisions that form
the basis of the plaintiff's claim, including the decision to terminate her employment,
were made and carried out by Anthony and Roseann. While Joseph was consulted and
agreed thereto, the record does not reflect that he actively participated in or carried out
any of their decisions. Accordingly, the court finds in favor of Joseph insofar as the
seventh cause of action for breach of contract is asserted against him.
The Sixth Cause of Action for Unjust Enrichment
This cause of action is duplicative of the seventh cause of action for breach
of contract. Recovery for unjust enrichment is precluded when, as here, there is a valid
and enforceable written agreement, the existence of which is undisputed, and the scope
of which clearly covers the parties' dispute (Clark-Fitzpatrick v Long Is. R. R.
Co., 70 NY2d 382, 388-389). Accordingly, the court finds in favor of the defendants
on the sixth cause of action for unjust enrichment.
The Second Cause of Action for Breach of Fiduciary Duty
The plaintiff contends that the defendants breached their fiduciary duties to
her by cancelling her check-signing authority for the Company, changing the outside
accountants and payroll company, denying her access to the Company's books and
records, denying her a role in the management of the Company, reducing her salary,
withholding payments with which to pay her taxes, withholding dividends, and
terminating her employment, among other things, in order to induce her to sell her
shares.
Family members stand in a fiduciary relationship toward one another in a
co-owned business venture (Braddock v Braddock, 60 AD3d 84, 88). Moreover,
the relationship between shareholders in a closely held corporation is akin to that
between partners and imposes a [*10]high degree of
fidelity and good faith (Brunetti v Musallam, 11 AD3d 280, 281). The majority
shareholders of a closely held corporation owe a fiduciary duty to the minority
shareholders not to engage in oppressive actions toward the minority (Pierce v Gareb
Shamus Enter., Inc., US Dist Ct, EDNY, March 29, 2013, Townes, J. [2013 WL
1344963] at *10). However, a claim for breach of fiduciary duty cannot be based on the
same facts and theories as a breach-of-contract claim (Mandel Airplane Funding and
Leasing Corp. v Laserline Properties II, LLC, 33 Misc 3d 1204[A] at *4 ). In order
to be actionable, a claim for breach of fiduciary duty must be separate, distinct, and
independent of the contract itself (Id.). Thus, a shareholder of a closely held
corporation who is also an employee cannot recover for breach of fiduciary duty when
the claim is essentially an employment dispute (Id.; see also, Nasso v
Bio Reference Laboratories, Inc., 892 F Supp 2d 439, 452). Accordingly,
the court finds that the plaintiff may not recover for breach of fiduciary duty insofar as
that claim is based on termination of her employment.
The court also finds that the plaintiff has failed to establish by a
preponderance of the credible evidence that Joseph breached any fiduciary duty to her as
minority shareholder. As previously discussed, Joseph was not a director, nor did he have
any voting shares in Challenge Graphics. Moreover, the record does not reflect that he
actively participated in or carried out any of the decisions that form the basis of the
plaintiff's claim. Accordingly, the court finds in favor of Joseph insofar as the second
cause of action for breach of fiduciary duty is asserted against him.
Because the power to manage the affairs of a corporation is vested in the directors
and majority shareholders, they are cast in the fiduciary role of guardians of the corporate
welfare (Alpert v 28 Williams St. Corp, 63 NY2d 557, 568). In this position of
trust, they have an obligation to all shareholders to adhere to fiduciary standards of
conduct and to exercise their responsibilities in good faith when undertaking any
corporate action (Id.). As fiduciaries, they must treat all shareholders, majority
and minority, fairly (Id. at 569). Thus, directors and majority shareholders may
not act for the aggrandizement or undue advantage of the fiduciary to the exclusion or
detriment of the minority stockholders (Id.; Gallagher v Lambert, 74
NY2d at 572 [Kaye, J, dissenting]). However, variant treatment of minority shareholders,
such as causing their removal, is justified when related to the advancement of a general
corporate interest (Alpert at 573). If the sole purpose is reduction of the number
of profit-sharers to increase the individual wealth of the remaining shareholders, there
exists no legitimate corporate interest (Id.; Gallagher, supra).
What distinguishes a proper corporate purpose from an improper one is that, with the
former, removal of the minority shareholders furthers the objective of conferring some
general gain on the corporation (Alpert, supra). The benefit need not be
great, but it must be for the corporation (Id.). Only then will the fiduciary duty
of good and prudent management of the corporation serve to override the concurrent
duty to treat all shareholders fairly (Id.).
A claim for breach of fiduciary duty is established by proof that the directors
and majority shareholders did not treat all shareholders fairly and evenly (Shapiro v
Rockville Country Club, Inc., 2 Misc 3d 1002[A] at *9, citing Matter of
Kemp & Beatley [Gardstein], 64 NY2d 63). When a majority
shareholder engages in a "freeze-out merger," to encourage [*11]minority shareholders to accept cash for their stock, the
majority shareholder must follow a course of fair dealing toward the minority
shareholders, and they must be offered a fair price for their shares (Sieger v Zak,
18 Misc 3d 1143[A] at *10, citing Alpert at 569, affd on other
grounds 60 AD3d 661). Similarly, in negotiating with minority shareholders to buy
out their interests, a majority shareholder is under a fiduciary duty to deal fairly with the
minority shareholders and to offer them a fair price (Id.).
The record reflects that Anthony and Roseann did not act for their own
aggrandizement or to increase their own wealth. The record reflects that they were both
gravely ill and could no longer run the Company. They were concerned about its
continued viability and the jobs of its 40 or more employees after their demise. Theresa
had a long history of not communicating with Joseph directly, and they did not think that
Theresa and Joseph could run the Company together. They, therefore, had to choose one
of them. They decided that Joseph, who had worked for the Company since 1976 and
had experience in all aspects of the business, was more qualified than Theresa to take
over the Company. They formulated a plan that would fairly compensate Theresa for the
value of her shares, as well as her interests in 18 and 22 Connor Lane. They obtained an
independent appraisal of her shares from an appraiser selected by her. When she rejected
their offer of the appraised amount, they increased the offer by almost 50% to
$900,000.
Contrary to the plaintiff's contentions, the record does not reflect that the
Senior Brancatos' actions were undertaken for the sole purpose of forcing her out of the
Company. For example, there is evidence in the record that the Senior Brancatos changed
the outside accountants and payroll company for a variety of reasons, one of which was
to reduce costs. Moreover, like many closely held corporations, it was the longstanding
policy of Challenge Graphics not to declare dividends (see, Matter of
Smith[Koslowitz Contr. Co.], 154 AD2d 537, 539; Burack v I. Burack,
Inc., 137 AD2d 523, 526). Except for the previously discussed contractual breaches,
the Senior Brancatos did not act in excess of their contractual authority, nor did they
receive any direct financial benefits from any of the challenged actions (see,
Lippman v Shaffer, 15 Misc 3d 705, 711 [and cases cited therein]). All of their
efforts to remove the plaintiff from the Company were motivated by an honest belief that
her removal was necessary for the Company to survive. The Senior Brancatos were not
motivated by greed, but by a legitimate corporate purpose, which is not defeated by the
fact that the corporate objective could have been accomplished in another way or that the
actions taken were not the best way to achieve the objective (Alpert,
supra at 573). Accordingly, the court finds that the plaintiff has failed to establish
by a preponderance of the credible evidence that Anthony and Roseann did not treat her
fairly or that their actions to remove her as a shareholder were not justified by a
legitimate corporate interest.
The plaintiff contends that the Senior Brancatos' actions amounted to
shareholder oppression. Minority shareholder oppression is a specific form of breach of
fiduciary duty (Palatkevich v Choupak, US Dist Ct, SDNY, January 24, 2014,
McMahon, J [2014 WL 1509236], at *25). It is the fiduciary duty owed by majority
shareholders in a closely held [*12]corporation to
minority shareholders not to engage in oppressive actions toward the minority
(Id.). Oppressive actions refer to conduct that substantially defeats the
reasonable expectations held by minority shareholders in committing their capital to the
particular enterprise (Matter of Kemp & Beatley[Gardstein], 64
NY2d at 72]). This fiduciary duty is rooted in Business Corporation Law § 1104-a,
which provides for shareholders of at least 20% of the outstanding shares of a
nonpublicly traded corporation to petition for its dissolution when those in control of the
corporation engage in illegal, fraudulent, or oppressive actions toward the complaining
shareholders or misappropriate corporate assets (Matter of Clever Innovations,
Inc.[Dooley], 94 AD3d 1174, 1176; McCagg v Sculte Roth &
Zabel LLP, 20 Misc 3d 1139[A] at *9, revd on other grounds 74 AD2d
620). The purpose of the statute is to provide protection to the minority shareholder
whose reasonable expectations in undertaking a venture have been frustrated
and who has no adequate means of recovering her
investment(Matter of Kemp & Beatley, supra at 74 [emphasis
added]). A shareholder who reasonably expected that ownership in a corporation would
entitle her to a job, a share of corporate earnings, a place in corporate management, or
some other form of security would be oppressed in a very real sense when others in the
corporation seek to defeat those expectations and when there exists no effective
means of salvaging her investment(Id. at 72-73 [emphasis added]).
Majority conduct, however, should not be deemed oppressive simply because the
petitioner's subjective hopes and desires in joining the venture are not fulfilled.
Disappointment alone should not necessarily be equated with oppression (Id. at
73). Moreover, a minority shareholder whose own acts give rise the complained-of
oppression should be given no quarter in the statutory protection (Id. at 74).
The plaintiff does not seek dissolution of Challenge Graphics, which is the
remedy for oppressive conduct (Business Corporation Law § 1104-a). While the
court has broad latitude in fashioning alternate relief (Matter of Kemp &
Beatley, supra at 74), such relief generally consists of a forced buy-out of the
minority shareholder's shares in the corporation (see, Matter of Clever
Innovations, Inc., supra; Matter of Davis v Alpha Packaging Indus.,
267 AD2d 384, 385; Burack v I. Burack, Inc., supra). The plaintiff
clearly does not want to be bought out. What she wants is to be reinstated and to recover
damages for the purportedly oppressive conduct. However, the court is unaware of any
cases in which a minority shareholder has been allowed to remain a shareholder and
recover damages for her oppression, nor has the plaintiff brought any such cases to the
court's attention. When, as here, there has been a complete deterioration of relations
between the parties, a dissolution or buy-out is the appropriate remedy (see,
Matter of Kemp & Beatley, supra at 74), not damages.
In any event, the court finds that the plaintiff has failed to establish by a
preponderance of the credible evidence that the Senior Brancatos oppressed her. The
record reflects that the plaintiff expected to remain an officer and employee of Challenge
Graphics, working from home, with the same salary and compensation package that she
had enjoyed for years. The record does not reflect that she ever sought a greater role in
the Company than the one she had, which was limited to financial matters. The plaintiff
made no capital investment in the company since her shares were given to her by her
parents. Moreover, she received the same [*13]compensation as her brother, whose role in the Company
was much greater than hers. It was the plaintiff's longstanding disagreement with her
brother, and her refusal to speak to him directly, that caused the Senior Brancatos to try
to remove her as a shareholder. Although they offered her what they reasonably believed
was a fair price for her shares, she adamantly refused to negotiate with them and
retaliated by refusing to allow them to see their grandchildren, among other things. As
previously discussed, the Senior Brancatos were not motivated by greed, but by an honest
belief that what they were doing was best for Challenge Graphics. There is no evidence
in the record that they sought to deprive the plaintiff of a return on her investment of time
and service to the Corporation. In fact, the opposite appears to be the case. They were
exceedingly generous with her, offering her the fair market value of her shares as
determined by an appraiser chosen by her. When she refused that offer, they increased
the offer by almost 50%. The plaintiff has not produced any evidence that her shares
were worth more than the $900,000 offered or that $900,000 did not represent a fair
return on her investment. Accordingly, the court finds in favor of the Senior Brancatos
insofar as the second cause of action for breach of fiduciary duty is asserted against
them.
Injunctive Relief
The plaintiff seeks mandatory injunctive relief reinstating her to her position
as Challenge Graphics's Chief Financial Officer. The plaintiff is, in effect, seeking
specific performance of Article IV (a) of the Shareholders Agreement, which provides
that Challenge Graphics shall continue to employ her as long as she continues to perform
her executive duties.
Courts rarely, if ever, grant specific performance of a contract for personal
services (Matter of Baby Boy C., 84 NY2d 91, 101). It has long been a principle
of equity that the performance of contracts for personal services depends upon the skill,
volition, and fidelity of the person who is engaged to perform such services and that it is
impracticable, if not impossible, for a court to supervise or to secure the proper and
faithful performance of such contracts (Id.). The most persuasive reason against
specific performance in such cases recognizes that the cooperation of the parties and the
best efforts of the plaintiff are required to make it work (Id.). Courts find
repugnant the idea of compelling the continuance of a close, personal relationship, now
grown hostile and bitter as a result of the controversy and resulting litigation (25
Williston on Contracts § 67:102 [4th ed]), and rightly hesitate to use the power of
the state to force a relationship that one of the parties finds unacceptable (Matter of
Baby Boy C., supra at 101-102). Moreover, an adequate legal remedy is
available (Williston, supra). Thus, personal service contracts are not
enforceable by affirmative decree, even in favor of a willing employee (Id.).
Accordingly, the plaintiff's request for reinstatement is denied.
The plaintiff also seeks to enjoin the defendants from conducting a
shareholder meeting to terminate the Shareholder Agreement and her rights thereunder.
The Shareholders Agreement provides that it may be terminated, inter alia, by the
voluntary agreement of two-thirds of the parties thereto. A written agreement that is
complete, clear, and unambiguous on its face must be enforced according to the plain
meaning of its terms (MHR Capital Partners LP v [*14]Presstek, Inc., 12 NY3d 640, 645). The Shareholders
Agreement clearly gives the defendants the right to terminate the agreement, and the
court will not force the parties to remain in a relationship that some of them find
unacceptable (Matter of Baby Boy C., supra). Additionally, the court
finds that any wrongful termination of the Shareholders Agreement is compensable by
money damages and that the balance of the equities favors the defendants (see,
A & G Research, Inv. v GC Metrics, Inc., 19 Misc 3d 1136[A] at
* 16), who made every effort to treat the plaintiff fairly and to buy her shares at a fair
market price before terminating the Shareholders Agreement. Accordingly, the plaintiff's
request for injunctive relief is denied.
Conclusion
The court finds in favor of the plaintiff on the seventh cause of action for
breach of contract only insofar as that cause of action is asserted against the defendants
Anthony and Roseann Brancato. The court finds in favor of the defendant Joseph
Brancato on the seventh cause of action and in favor of all of the defendants on the
remaining causes of action. The plaintiff and the Senior Brancatos are directed to
proceed to trial on the issue of damages.
Dated:June 9, 2014
J.S.C.
Footnotes
Footnote 1:22 Connor Lane is the
building that houses Challenge Graphics.
Footnote 2:Although the plan was
for Joseph to buy the plaintiff's shares, the record does not reflect that he was involved in
a material way in the formulation of the plan or any of the subsequent events that led to
this lawsuit. The record also reflects that Theresa had no direct contact with him and that
she dealt exclusively with her parents.
Footnote 3:The third and fourth
causes of action, which are denominated as "misappropriation and conversion," allege
that the defendants misappropriated assets belonging to Challenge Graphics and the
plaintiff, respectively. The court finds that these allegations sound in conversion.
Footnote 4:The court notes that,
while Theresa never made any capital contributions to Challenge Graphics or guaranteed
any bank loans, neither did Joseph.