The following e-filed documents, listed by NYSCEF document number (Motion 004) 38, 39, 40, 41, 42, 44, 45, 46, 47, 48 were read on this motion to/for LEAVE TO FILE. DECISION + ORDER ON MOTION Respondent, by order to show cause, seeks to limit the relief considered by the Referee at Business Corporation Law (hereinafter “BCL”) Article 11 hearing to a determination of the fair-market value of petitioner’s shares. The Court modified the order to show cause and directed the parties to address why the Referee should not consider fair-market value of petitioner’s shares as a non-exclusive remedy in this dissolution matter as well as requiring the proposed elective purchaser, Willard, post a bond pursuant to BCL §1118(c)(2). As an initial matter, the Court directed movant to file proof of service no later than November 23, 2022, and such proof of service was filed nearly two weeks after this deadline on December 6, 2022 (NYSCEF Doc. 43). The failure to timely file proof of service is grounds to deny the application in its entirety; however, the Court, in its discretion, addresses the merits of the application. DISSOLUTION HEARING AND REMEDY As the Court previously found in its Consolidated Decision and Order on Mot. Seqs. 002 & 003, respondent’s absolute right to avoid dissolution by electing to purchase petitioner’s shares pursuant to BCL §1118 has long since expired (see NYSCEF Doc. No. 35). That decision referred the merits of the petition, including any appropriate remedy under Article 11 of BCL, to a Special Referee/JHO. The instant proposed order to show cause seeks to limit the remedies available under the BCL to a fair-market buyback/election. However, the Court and Special Referee are not so limited in fashioning an appropriate remedy under Article 11 of the BCL, and the Court has broad latitude in fashioning the appropriate remedy (Qadan v. Tehseldar, 139 AD3d 1036 [2d Dept 2016]). Where an alternate remedy to dissolution is appropriate, such as the buyback suggested by respondent, the Court may nevertheless order dissolution should the alternate remedy not be timely effectuated (id.; see also David v. Alpha Packaging Industries Inc., 267 AD2d 384 [2d Dept 1999]). Where there is a factual dispute regarding the necessity of dissolution and, therefore, a dispute over the appropriate remedy, as exists here, the Court must conduct a hearing on the petition and the appropriate remedy (Nicastro v. VJN Real Estate Corp., 175 AD3d 1296 [2d Dept 2019]). The Court, in conducting the hearing, is guided by BCL §1104-a, which provides that the Court, in determining whether involuntary dissolution is the appropriate remedy, shall weigh whether liquidation of the corporation is the only feasibly means that petitioner may expect a fair return on his investment and whether liquidation is reasonably necessary to protect the rights of shareholders. As noted by the Court in its prior Consolidated Decision and Order on Mot. Seqs. 002 & 003: “[I]t should be incumbent upon the parties seeking to forestall dissolution to demonstrate to the court the existence of an adequate alternative remedy [to dissolution]” (Matter of Kemp & Beatley (Gardstein), 64 NY2d 63 [1984]; see also BCL §1118). “[W]hen there has been a complete deterioration of relations between the parties, a court should not hesitate to order dissolution. Every order of dissolution, however, must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder’s stock at fair value” (id.). While respondent has identified an elective stock buyback by majority shareholder Willard as an alternative remedy, respondent has failed to demonstrate, on these papers, that such remedy is adequate to protect petitioner’s fair return on investment. The Court notes that, again, no affidavit by a person with knowledge has been submitted on respondent’s behalf. Furthermore, respondent’s characterization of petitioner’s failure to respond to the proposed elective purchase of petitioner’s shares as inappropriate, along with petitioner’s silence in response to the elective purchase, evinces a complete deterioration of relations, a factor supporting an order of dissolution. Under these circumstances, a hearing on the petition and appropriate remedy is required (see Nicastro v. VJN Real Estate Corp., supra). Notwithstanding, the hearing shall consider the appropriateness of an elective purchase of petitioner’s shares by respondent and shall further calculate the value of petitioner’s shares given that a dissolution order, if appropriate, must nevertheless be conditioned upon permitting an elective purchase by the shareholders (Matter of Kemp & Beatley (Gardstein), supra). Therefore, to the extent the petition seeks to limit the hearing solely to a buy-back valuation, same is denied. BOND OR SECURITY The Court turns to whether respondent should be directed to post a bond or other security in connection with the proposed elective purchase. BCL §1118(c)(2) provides, in connection with any election to purchase and in relevant part: The Court, in its discretion, may require, at any time prior to the actual purchase of petitioner’s shares, the posting of a bond or other acceptable security in an amount sufficient to secure petitioner for the fair value of his shares. Similarly, BCL §§1113 and 1115 provide, respectively and in relevant part: At any stage of an action or special proceeding under this article, the court may, in its discretion, make all such orders as it may deem proper in connection with preserving the property and carrying on the business of the corporation… At any stage of an action or special proceeding under this article, the court may, in its discretion, grant an injunction…for one or more of the following purposes: restraining the corporation…from transacting any unauthorized business and from exercising any corporate powers…collecting or receiving any debt or other property…transferring or delivering any property or the corporation Where a corporate dissolution petition is premised upon a majority shareholder’s waste or mismanagement, a bond to protect a minority shareholder’s interest is appropriate during the calculation of such shares’ value (BCL §§1118, 1113, and 1115, supra). Indeed, the failure to require a bond in the face of allegations of serious financial impropriety is reversible error (In re Kastleman, 234 AD2d 181 [1st Dept 1996]). Here, the Court previously found the petition alleges a demonstrated risk to petitioner’s rights arising from respondent’s oppressive conduct and that respondent had not denied such oppressive conduct occurred (Consolidated Decision and Order on Mot. Seqs. 002 & 003 at p. 9). Petitioner has alleged the serious financial impropriety by respondent. Such impropriety includes respondent surreptitiously identifying petitioner as the party responsible for tax compliance to the Internal Revenue Service (IRS), notwithstanding that petitioner never had such responsibility and was unaware of respondent’s surreptitious designation, and respondent then failing to withhold appropriate taxes. Petitioner alleges this impropriety resulted in hundreds of thousands of dollars of tax penalties being levied against petitioner personally. It is beyond cavil that, under these circumstances, an undertaking is mandatory pending any determination of the fair market value of petitioner’s stock (see e.g. In re Dissolution of Elliot Kastle, Inc., 234 AD2d 181 [1st Dept 1996]; In re Kastleman, supra). As to the amount of such bond, the minority shareholder seeks a bond of approximately $200,000.00 — the amount of tax liability personally assessed against the minority shareholder due to the majority shareholder’s alleged fraud/mismanagement. However, such request does not account for the value of the minority shareholder’s shares. Given that respondent has not complied with BCL §1104-a(c) — requiring respondent provide access to the financial records of the company to petitioner within 30 days of a petition for dissolution — petitioner is unable to provide even an approximate value of his shares and concomitant bond sufficient to protect same. Respondent’s failure to comply with BCL §1104-a(c) should not inure to its benefit by reducing or limiting the amount of security sufficient to protect petitioner’s interests. Therefore, in consideration of the limited tax filings available, the outstanding tax liabilities borne by petitioner, and the allegations of serious financial impropriety, the Court requires respondent post an undertaking in the amount of one million dollars ($1,000,000.00) (see NYSCEF Doc. Nos. 30-32 yearly gross receipts in excess of $400,000.00; see also In re Kastleman, 234 AD2d 181, supra, bond of $1,000,000.00 required in 1996, equaling approximately $2,000,000.00 in 2022 dollars [$1,922,260.36] [United States Bureau of Labor Statistics, CPI Inflation Calculator, www.bls.gov/data/inflation_calculator.htm]). Accordingly, it is ORDERED that the application is granted to the extent of directing the special referee consider, as a nonexclusive remedy to dissolution, respondent’s elective purchase of petitioner’s shares and the appropriate value of such shares; and it is further ORDERED that within 20 days of this order respondent shall pay into the Court the sum of one million dollars ($1,000,000.00) by certified/bank check OR file with the Clerk of the Court an undertaking with sufficient surety in a like amount; and it is further ORDERED that filing of an undertaking with the Clerk of the Court shall be made in accordance with the procedures set forth in the Protocol on Courthouse and County Clerk Procedures for Electronically Filed Cases (accessible at the “EFiling” page on the court’s website); and it is further ORDERED that, within said 20-day period, respondent shall serve upon the attorneys for the defendant a written notice of the aforesaid payment or of the filing of such undertaking; and it is further ORDERED that failure to timely pay into Court or file the undertaking, as required above, shall constitute waiver of any elective purchase by respondent and may further result in sanctions, in the Court’s discretion. THIS CONSTITUTES THE DECISION AND ORDER OF THE COURT. CHECK ONE: CASE DISPOSED X NON-FINAL DISPOSITION GRANTED DENIED X GRANTED IN PART OTHER APPLICATION: SETTLE ORDER SUBMIT ORDER CHECK IF APPROPRIATE: INCLUDES TRANSFER/REASSIGN FIDUCIARY APPOINTMENT REFERENCE Dated: January 26, 2023
