Decided March 15, 2005.
Hamburger, Maxson, Yaffe, Wishod Knauer, LLP, Melville, New York, counsel for petitioner.
Ruskin, Moscou Faltischek, P.C., East Tower, Uniondale, New York, counsel for respondent.
The following papers were read on Petitioner's application to dissolve Oyster Bay Manor Senior Residence, Inc., Oyster Bay Senior Residence, Inc. and Oyster Bay Senior Residence Realty, Inc. and related relief; and Respondent's cross-motion to dismiss the petition:
Order to Show Cause dated June 25, 2004;
Verified Petition affidavit of David Wagner sworn to on June 21, 2004;
Affidavit of Ronald J. DeVito sworn to on June 17, 2004;
Petitioner's Memorandum of Law;
Notice of Cross-motion dated August 12, 2004;
Affirmation of Christine McInerney, Esq. dated August 12, 2004;
Affirmation of Wayne L. Kaplan, Esq. dated August 12, 2004;
Affidavit of Rachel Dombrowsky sworn to on August 12, 2004;
Respondent's Memorandum of Law;
Affidavit of David Wagner sworn to on October 12, 2004;
Petitioner's Reply Memorandum of Law;
Supplemental Affirmation of Richard Hamburger, Esq. dated December 12, 2004;
Supplemental Affidavit of David Wagner sworn to on December 17, 2004;
Affidavit of Frederick Schulman sworn to on October 28, 2004;
Reply Affidavit of Rachel Dombrowsky sworn to on October 28, 2004;
Reply Affirmation of Christine McInerney, Esq. dated October 28, 2004
Respondent's Reply Memorandum of Law.
Petitioner David Wagner moves by Order to Show Cause pursuant to Business Corporation Law § 1104 for judicial dissolution of the Respondent corporations
Respondent Rachel Dombrowsky cross-moves for an order dismissing the petition.
Petitioner David Wagner and Respondent Rachel Dombrowsky each own 50% of all outstanding shares in the Respondents Oyster Bay Manor Residence, Inc. ("Oyster Bay Manor") and Oyster Bay Senior Manor Residence, Inc. ("Harbor House"), both of which are currently being operated as duly licensed adult home facilities.
Wagner and Dombrowsky presently constitute the Board of Directors of the two corporations.
Wagner advises that Dombrowsky and he originally purchased the Oyster Bay property in the early 1990's and converted it into an adult home Oyster Bay Manor which opened in 1994. They subsequently developed certain nearby property, and in early 2002 after some two years of construction they opened Harbor House, an adult home which is separate, but physically adjacent to Oyster Bay Manor.
According to Wagner, Harbor House has been operating at a loss since it opened for business in February 2002. Those losses presently amount to some $50,000.00 per month, allegedly "with no relief in sight".
Wagner further contends that when he discussed the corporations' financial situation with Dombrowsky, she agreed that the facilities should be sold to a larger entity which could sustain them until market conditions improved.
To this end, they contacted Ronald J. DeVito, the parties' former counsel, who is now associated with the Senior Housing Consultancy Group. Mr. DeVito apparently located several purchasers, including a national corporation, the Carlyle Group Realty Partner III, L.P. ("Carlyle Group") which later made an "all cash" offer of $22.5 million for the corporations.
Mr. DeVito asserts that there has been a downturn in the adult home industry attributable to overbuilding and that while "empty beds * * * will undoubtedly fill in the years ahead, * * * they are not going to fill in the short-term future."
Wagner contends that when Dombrowsky and he met with representatives of the Carlyle Group in December 2003, Dombrowsky initially favored acceptance of the Carlyle offer. However, Dombrowsky allegedly contacted him shortly thereafter and told him that she had changed her mind and that she was no longer interested in selling the corporations.
According to Wagner, Dombrowsky told him that the Carlyle Group offer would not produce the net profit she had hoped for a position which Wagner describes as unrealistic, since the corporations are "hemorrhaging money," and would soon confront an $18 million balloon payment on an outstanding construction loan, scheduled to mature in June 2005.
After rejecting the Carlyle Group offer, Dombrowsky made efforts to locate investors who might be interested in purchasing Wagner's interest in the corporations.
Wagner claims that Dombrowsky arranged for "more than a dozen groups to inspect and tour the facilities * * * [but that] [m]ost of them showed little or no interest" in the properties. It is undisputed, however, that one of the prospective purchasers recently signed an initial letter of intent with Wagner to purchase his stock.
Specifically, Dombrowsky's submissions contain the affidavit of Fredrick Schulman ("Shulman"), who is President of CU Capital Services, Inc. ("CU"), the proposed purchaser. Schulman asserts that Wagner and he entered into a letter of intent in August 2004; that CU has now completed its due diligence; that it is prepared to move ahead; and that an agreement has been effectively reached concerning virtually all material terms, with only one or two exceptions.
Moreover, Schulman asserts that to demonstrate its good faith, CU has agreed to make a $180,000.00 down payment which subject to stated conditions could be retained by the Wagner in the event that the transaction is not consummated.
Thereafter, by verified petition dated June 2004, Wagner commenced this proceeding pursuant to Business Corporation Law § 1104 (a)(3) for dissolution of the corporations on the ground "[t]hat there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders."
Wagner now moves for an order dissolving the corporations pursuant to BCL 1104; or alternatively, for an relief (1) directing that the corporations be sold as a going concern; and/or (2) allowing the business and assets of the corporations to be sold to the Carlyle Group. Dombrowsky cross-moves for an order dismissing the verified petition.
Notably, Dombrowsky asserts that Mr. DeVito lacks the requisite national experience as a broker to obtain a full and representative range of offers and that he is biased in favor of the Carlyle Group offer since he would earn a commission if that sale was consummated.
Dombrowsky also contends that Wagner has not shown that any internal dissension exists with respect to the daily operation of the corporations' business activities and that his application is solely driven by personal considerations and the desire to accomplish an immediate "cash out" of his interests. Specifically, Dombrowsky argues that in November 2003, Wagner approached her and advised that he wanted to retire and "cash out his interest in the Corporations."
According to Dombrowsky, the construction and start-up expenses associated with the new facility were anticipated by the parties as a part of their original business plan in which Wagner himself participated.
Dombrowsky advises that although Wagner and she initially projected a break even occupancy for Harbor House at eighteen months in order to obtain a bank loan in 1999, they later realized that this projection was unrealistic since the senior housing market had evolved particularly with respect to the number of facilities operating in the area.
Some eleven months prior to the filing of the petition herein, the parties consulted an expert in the business of senior housing, who apprised them that, in his nationwide experience with the construction of senior housing, senior residence properties "almost always have taken thirty to thirty six months to lease up * * *." After the foregoing consultation, the parties allegedly accepted that certain losses would ensue and hired a full time marketing advisor in December 2003.
Dombrowsky characterizes the corporations' current negative position as only temporary, and asserts that the market has "already begun to improve," in response to which she fully expects that "the Corporations will return to the steady profitability that we saw in prior years."
Dombrowsky further asserts that Wagner was on board with the foregoing projection until he made the decision to cash out his share of the business.
Pursuant to Business Corporation Law ("BCL"), a petition for dissolution may be presented by the holders of one-half of all outstanding shares of a corporation entitled to vote in an election of directors on the ground "there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders." BCL §§ 1104(a)(3). See, In the Matter of Fazio Realty Corp., 10 AD3d 363 (2nd Dept. 2004); and In the Matter of Dubonnet Scarfs, Inc., 105 AD2d 339 (1st Dept. 1985).
Generally speaking, "[i]n determining whether a petition for dissolution should be granted, the issue is not who is at fault in creating a deadlock, but whether a deadlock exists." See, Matter of Validation Review Associates, Inc., 236 AD2d 477, 478 (2nd Dept. 1997), revd. other grnds., 91 NY2d 840 (1997); Matter of Kaufmann, 225 AD2d 775 (2nd Dept. 1996); Matter of Goodman v. Lovett, 200 AD2d 670 (2nd Dept. 1994); and Sternberg v. Osman, 181 AD2d 897, 898 (2nd Dept. 1992).
Nor is the remedy is "to be denied merely because it is found that the corporate business has been or could be conducted at a profit." BCL § 1111(b)(3); Matter of Validation Review Associates, Inc., supra. See also, Application of Dubonnet Scarfs, Inc., supra, at 346; Tavlin v. Munsey Candlelight Corp., 69 AD2d 865, 866 (2nd Dept. 1979); and 4 White On New York Corporations, ¶ 1104.2, at 11-43.
On the other hand, "[t]he fact that the parties disagree over the Petitioner's plan for the company's future is not dispositive of the fundamental issue of whether the conditions of the statute have been satisfied such that the extraordinary step of judicial dissolution is warranted." Application of Glamorise Foundations, Inc., 228 AD2d 187 (1st Dept. 1996). Further, "the mere fact that a closely-held corporation may have substantial liquid assets which a shareholder wishes to reach is an insufficient basis for judicial dissolution." See, Matter of Murphy, 120 AD2d 733, 736 (2nd Dept. 1986); and Matter of Dubonnet Scarfs, supra, at 343. A hearing may be ordered, however, "if there were some contested issue determinative of the validity of the Petitioner's application." Matter of Kaufmann, supra, at 776; Tavlin v. Munsey Candlelight Corp., supra.
Whether the remedy of dissolution should be granted rests within the discretion of the court. 4 White On New York Corporations, ¶ 1104.2, at 11-40, 11-43.
Application of the foregoing considerations to the facts presented, supports the conclusion that a triable issue has been presented with respect to whether the remedy of dissolution is warranted.
Here, the internal dissension does not arise from the day-to-day operation of the properties but rather, principally derives from a philosophical business disagreement with respect to whether the parties should continue to operate the business in light of the alleged financial difficulties identified by Petitioner. It does not appear that the alleged dissension has materially affected the parties' ability to actually operate the corporations.
Further, while the Wagner contends that the business is effectively moribund with no possibility of financial recovery, Dombrowsky has vigorously opposed this assessment, depicting the corporations' financial circumstances in an entirely different and opposing light, i.e., she has asserted that the market downturn is temporary and that the difficulties presently experienced by the corporations were anticipated and normal in light of the expenditures undertaken and the prevailing market conditions.
Upon these sharply opposing allegations, the Court cannot determinatively conclude that the corporations' plight is irremediable a key premise underlying Wagner's theory that dissolution would be beneficial to the shareholders.
The Court also regards as significant the fact that there is presently outstanding a potential alternative to the drastic remedy of judicial dissolution; to wit: the buy-out offer made by the entity (CU) located by Dombrowsky, which offer could if accepted obviate the need for any judicial intervention.
The Court notes that Wagner has not addressed the specific contentions made by Mr. Schulman and Dombrowsky with respect to the potential imminence and/or viability of the buy-out offer made by CU.
It is settled that the dissolution remedy conferred by BCL § 1104 (a)(3) is available only where the alleged internal dissension and/or division is such that dissolution would be "beneficial to the shareholders."
Accordingly, while there may be a degree of internal dissension between the parties, their conflicting allegations with respect to the corporation's financial prospects and the significance of the market and financial conditions they are now experiencing, require that a hearing be held to determine if dissolution would, in fact, be beneficial to the stockholders within the meaning of BCL § 1104 (a)(3). See, e.g., Tavlin v. Munsey Candlelight Corp., supra at 866; and Matter of Kaufmann, supra at 776.
Accordingly, it is,
ORDERED that the motion of Petitioner David Wagner is granted to the extent that the matter shall be set down for a hearing with respect to whether judicial dissolution would be beneficial to the shareholders of the subject corporations; and it is further,
ORDERED that the motion by Respondent Rachel Dombrowsky to dismiss the petition is denied; and it is further,
ORDERED, that counsel for the parties shall appear for a conference on April 5, 2005 at 9:30 a.m. to schedule such discovery as may be needed and a hearing herein.
This constitutes the decision and Order of the Court.