ADDITIONAL CASES Nedal Hammad, Petitioner, v. Maysa Realty Corp., Respondent; 713241/2017 MEMORANDUM Petitioner commences these special proceedings to dissolve respondents pursuant to BCL §1104-a, on the grounds that those in control of the corporations have been guilty of illegal, fraudulent and oppressive actions towards petitioner. A hearing was held on September 11, 12, 13, 16, 17, 18, 19, 24, 26, 27 and October 2, 2019. Based on the evidence found to be credible, the Court makes the following findings of fact and conclusions of law. Findings of Fact Petitioner Nedal Hammad is the 25 percent owner of the family-owned Respondents Maysa Realty Corp. (“Maysa”), and Jamal Kamal Corp. (“Jamal Kamal”) (Maysa and Jamal Kamal are collectively referred to herein as the “Subject Corporations”), both real estate holding companies. His brothers, Jamal, Kamal, Omar, and Samir (the “Brothers”) collectively own the remaining 75 percent. Nedal also owns 25 percent in five other businesses, including Al-Lid Food Corp. (“Al-Lid”)(Foodtown Supermarket), Siham Realty Corp. (“Siham”) (real estate holding company), Amal Meat Corp. (“Amal Meat”) (C-Town supermarket), Zaid Realty Corp. (“Zaid”) (real estate holding company), and Hammad Hardware Corp. (“Hammad Hardware”) (defunct True Value Hardware retail store). The family-owned companies are collectively referred to as the “Companies.” Petitioner’s Brothers collectively own the remaining 75 percent of the Companies. The Companies use an accrual accounting methodology. Petitioner, has a B.S. in Accounting. The salaries and benefits Nedal received from the Companies were his sole source of income. In 1980, Mr. Hammad, the father of all the shareholders, purchased a supermarket that is currently incorporated as Amal Meat. The eldest son, Jamal worked in his father’s supermarket as much as time would allow while he simultaneously pursued a doctorate in pharmacy. Nedal and Kamal also worked in the supermarket in varying capacities. During this period, Mr. Hammad formed Jamal Kamal, which purchased a lot across the street from his supermarket and built six two-story buildings on the property. Mr. Hammad made Jamal vice president of the corporation that owned the property. In 1987, Jamal received a doctorate in pharmacy. In 1988, Mr. Hammad was tragically killed by a hit-and-run driver. Jamal, the oldest of the five brothers, became President of each of the existing companies. By 1995, Jamal (with the assistance of his brothers working on the ground) had built ten different corporations. In the process, Jamal had allowed Nedal to play a role in the purchasing of some of the properties and gave all of his brothers an opportunity to be involved in the growing of the family’s business empire. Jamal considered his brothers to be partners in the corporations, even though he personally had taken the entrepreneurial steps on his own to acquire them. After the death of his father, Jamal viewed himself as a playing a fatherly role in providing for the future of his father’s house. In 1994, Jamal moved to Jordan to run other family businesses located there, but Jamal remained President of the Companies. Around that time, Kamal, and Omar also moved to Jordan. In 2006, Jamal and Nedal had a personal falling out. In May of 2011, a meeting of shareholders was held and Jamal’s brothers unanimously elected Nedal as President, and Samir as Treasurer and Secretary of the Companies. In 2013, Jamal, who lived and worked in Jordan, decided he wanted to sell his shares in the Companies. Accordingly, Jamal’s brothers bought his shares, and each became a 25 percent shareholder. The sale temporarily ended Jamal’s involvement in the ownership and operations of the Companies. In 2014, Highcrest Management Corp. (“Highcrest”) was formed, and was owned 50 percent each by Nedal and Samir. The Companies paid a management fee to Highcrest, which in turn provided centralized management and administrative services to all the companies and was used to pay Nedal’s and Samir’s salaries and benefits, including, health and car insurance, car and gas payments, rent payments to Jamal Kamal, and the overhead expenses such as utilities and office supplies, for the Companies. Prior to the formation of Highcrest, management services were provided by Food Town America Corp., a separate company owned by the Hammads. In 2016, Kamal, Omar, and Samir approached Jamal and urged him to re-join the New York Corporations as a shareholder. They were unhappy with the performance of the companies under Nedal’s leadership. Kamal, Omar, and Samir each subsequently transferred 5 percent of their company shares to Jamal. Although Jamal received K-1 statements in 2016, the stock certificates reflecting the transfer of shares to Jamal were not dated until January 19, 2017. On January 5, 2017, Nedal made distributions of $220,000 from Jamal Kamal and $240,000 from Maysa. Based on the then-existing stock certificates, the distributions were made to Nedal, Kamal, Omar, and Samir, but not Jamal. Thus, Nedal, Kamal, Omar, and Samir each received a $55,000 distribution from Jamal Kamal and a $60,000 distribution from Maysa. On February 14, 2017, the Brothers, by email, made fourteen demands of Nedal with regard to the running of the corporations. One of the demands was that Nedal should not make any further payments to Highcrest. The Brothers felt Nedal was using Highcrest to drain money from the companies and enrich himself. Notwithstanding his brothers demands, on March 1, 2017 Nedal made payments to Highcrest for $29,850 from Maysa and $29,975 from Jamal Kamal. Jamal, Kamal, Omar, and Samir called a meeting of the Subject Corporations’ shareholders in June of 2017. They sent Nedal written notice of the meeting along with a proposed slate of directors for the Subject Corporations that included Nedal. Nedal responded by conveying not only that he would not attend the meeting, but also that he would challenge any attempt by his brothers to convene it. Jamal, Kamal, Omar, and Samir decided instead to call a special meeting of the Subject Corporations for August 21, 2017 (the “August 2017 Meeting”) with 60 days’ notice. On August 9, 2017, Nedal, while he was President of the Subject Corporations and the Companies, made distributions of $150,000 from Maysa and $160,000 from Jamal Kamal to himself and the Brothers, including Jamal, without their approval. Nedal’s share of the distributions was $37,500 and $40,000, respectively. The Brothers did not cash the August distribution checks. The August 21, 2017 meeting took place at the New York Corporations’ offices at 169-28 Hillside Avenue. Nedal did not attend. The Hammad brothers who did attend the August 2017 meeting unanimously elected Jamal as President, Kamal as Vice President, and Samir as Secretary and Treasurer of both Subject Corporations. On the same day as the August 2017 Meeting, Nedal filed a petition for the judicial dissolution of all seven New York Corporations (the “Dissolution Petition”), including the Subject Corporations. Other than the records obtained through discovery, the Brothers refused to allow Nedal access to the corporate books and records after taking control of the Subject Corporations. When the Brothers took control of respondents, they concluded that the distributions made that year were unaffordable. Accordingly, the Brothers agreed that they would not cash the August distribution checks. Furthermore, Kamal, Omar, and Samir repaid the January distributions back to Jamal Kamal and Maysa. Jamal, as president, retroactively changed the 2017 distributions made to Nedal from distributions to loans from the Subject Corporations to Nedal. Jamal also re-classified the March 1, 2017 payments to Highcrest as loans to Nedal. The re-classification of the payments to Highcrest were made on the grounds that the payments were unauthorized because they were in contravention of the Brothers’ letter dated February 14, 2017, and constituted self-dealing by Nedal. On December 25, 2018, Maysa and Jamal Kamal issued distributions of $509,400, of $499,900, respectively. Nedal’s share of these distributions were applied to his outstanding loans that were created by the re-classifications. These distributions were calculated to reduce the balance of Nedal’s loans to zero, which they did. Nedal was not notified of the distributions. Jamal also retroactively created a $48,000 credit on the Jamal Kamal books. Jamal stated that the space previously occupied by Highcrest was being used to manage Al-Lid and Jamal Meats. Neither Al-Lid nor Amal Meat ever paid this rent. However, Jamal posted separate $24,000 expenses on the books of Al-Lid and Amal Meat. While these payments were purportedly for rent, the true purpose was to reduce the value of Al-Lid and Aamal Meat because Nedal was in the process of being bought out of Al-Lid and Amal Meat in separate actions. Conclusions of Law A holder of 20 percent or more of the shares of a business corporation may obtain dissolution if “[t]he directors or those in control of the corporation have been guilty of…oppressive actions toward the complaining shareholder[]” (BCL §1104-a [a] [1]). Dissolution also is warranted if “[t]he property or assets of the corporation are being looted, wasted or diverted” (id., [a] [2]). The term “oppressive actions” used in BCL §1104-a (a) (1) refers to conduct that substantially defeats the reasonable expectations of the minority shareholder: “Given the nature of close corporations and the remedial purpose of the statute, this court holds that utilizing a complaining shareholder’s ‘reasonable expectations’ as a means of identifying and measuring conduct alleged to be oppressive is appropriate. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner’s expectations in entering the particular enterprise. Majority conduct 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. Rather, oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture” (Matter of Kemp & Beatley [Gardstein], 64 NY2d 63, 73 [1984]). A finding of oppression “may be based on the complaining shareholder’s frustrated expectations in such matters as…a share in the profits…of the corporation, such that [he or] she feels that the other shareholders have deprived [him or] her of a reasonable return on [his or] her investment” (Matter of Parveen, 259 AD2d 389, 391 [1st Dept 1999]; see Matter of Williamson v. Williamson, Picket, Gross, 259 AD2d 362, 362 [1st Dept 1999]). Oppression also may be found where the minority shareholder is excluded from the management or operations of the closely-held corporation (see Matter of Clever Innovations, Inc. [Dooley], 94 AD3d 1174, 1176 [3d Dept 2012]). However, even where there has been a showing of oppression or looting, a court “determining whether to proceed with involuntary dissolution” must consider “[w]hether liquidation of the corporation is the only feasible means whereby the petitioner[] may reasonably expect to obtain a fair return on [his or her] investment” (BCL §1104-a [b]). As a threshold matter, Nedal owns more than 20 percent of the shares of the Subject Corporations, and is therefore eligible for relief pursuant to BCL §1104-a. In the instant case, the petition was filed the day after petitioner was ousted as President and before any oppression could have taken place. However, subsequent, questionable events have taken place and will be considered in the interests of judicial economy. The removal of Nedal as President and manager of the Subject Corporations does not constitute oppressive conduct. Although Nedal (and Samir) did lose his Highcrest income, the retention of Nedal’s separate company as manager, is not a reasonable expectation of his stock ownership. With respect to the reclassification of the distributions into loans, this does not constitute oppressive conduct. All of the other shareholders were treated equally because they returned or did not accept the distributions. On the other hand, no acceptable justification was offered for the reclassification of the payments to Highcrest. Although the Brothers alleged that Nedal was self-dealing through Highcrest, they did not prove the allegations. Furthermore, Highcrest was the management company until the board meeting in August 2017. There was no inquiry or determination by the brothers as to what services or value that Highcrest provided up until that point. Thus, the re-classification of those payments was made without any evidentiary basis. Although the payments to Highcrest did contravene the Brothers letter dated February 14, 2017, that letter had no legal effect because the demands were not made pursuant to Board meeting. In addition, Samir was also a shareholder of Highcrest and no re-classification was made to his distributions. Accordingly, the re-classification of the payments into loans payable solely by Nedal constitutes oppressive conduct. Finally, retroactive creation of the Al-Lid rent credit to depress the value of Nedal’s interest in Al-Lid, was not oppressive to Nedal as a shareholder of Jamal Kamal because the transaction increased the value of Jamal Kamal, in which Nedal owns 25 percent, more than any of his 4 brothers. However, it does indicate that Jamal is willing to engage in oppressive conduct towards Nedal. Turning to the question of remedy, under the terms of BCL §1104-a, courts are instructed to consider both whether “liquidation of the corporation is the only feasible means” to protect the complaining shareholder’s expectation of a fair return on his or her investment and whether dissolution “is reasonably necessary” to protect “the rights or interests of any substantial number of shareholders” not limited to those complaining (Business Corporation Law, §1104-a, subd. [b], pars. [1], [2] ). “Implicit in this direction is that once oppressive conduct is found, consideration must be given to the totality of circumstances surrounding the current state of corporate affairs and relations to determine whether some remedy short of or other than dissolution constitutes a feasible means of satisfying both the petitioner’s expectations and the rights and interests of any other substantial group of shareholders” (Matter of Kemp & Beatley, Inc., 64 NY2d 63, 73 [1984]). In the instant case, Nedal’s reasonable expectations as a shareholder are to receive a dividend in proportion to his ownership. However, the oppressive conduct against Nedal was to remedy what the Brothers viewed as unauthorized and oppressive conduct by Nedal. After the December 25, 2018 distributions were made to “equalize” the distributions among all the shareholders, the Court does not find that any future oppressive conduct is intended by the Brothers and Nedal will share in future distributions. Accordingly, given to the totality of circumstances surrounding the current state of corporate affairs dissolution is not an appropriate remedy (see, Matter of Kemp, id.) However, the re-classification of the payments to Highcrest cannot be left unaddressed. The appropriate remedy in this case is to pay to Nedal the amounts paid to Highcrest that the Brothers improperly re-classified as loans. Accordingly, the plaintiff is entitled to a judgment of $29,850 from Maysa and $29,975 from Jamal Kamal. Settle Judgment. Dated: September 9, 2020
