| Feldmeier v Feldmeier Equip., Inc. |
| Decided on August 22, 2018 |
| Appellate Division, Fourth Department |
| Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. |
| This opinion is uncorrected and subject to revision before publication in the Official Reports. |
Decided on August 22, 2018 SUPREME COURT OF THE STATE OF NEW YORK Appellate Division, Fourth Judicial Department
PRESENT: WHALEN, P.J., CARNI, LINDLEY, AND WINSLOW, JJ.
773 CA 17-01930
v
FELDMEIER EQUIPMENT, INC., HUNT LANE ASSOCIATES, LLC, ROBERT E. FELDMEIER, JEANNE C. JACKSON AND LISA F. CLARK, DEFENDANTS-RESPONDENTS.
HARRIS BEACH PLLC, SYRACUSE (JULIAN B. MODESTI OF COUNSEL), FOR PLAINTIFF-APPELLANT.
BARCLAY DAMON LLP, SYRACUSE (JON P. DEVENDORF OF COUNSEL), FOR DEFENDANTS-RESPONDENTS.
Appeal from an order of the Supreme Court, Onondaga County (Donald A. Greenwood, J.), entered January 19, 2017. The order granted that part of the motion of defendants seeking summary judgment dismissing the complaint and denied the cross motion of plaintiff seeking, inter alia, reimbursement of certain expenses.
It is hereby ORDERED that the order so appealed from is modified on the law by granting the cross motion in part and directing defendants to reimburse plaintiff for his reasonable attorneys' fees and litigation expenses related to defending against the counterclaims, and to advance an additional $75,000 to plaintiff for that purpose, directing that defendants Robert E. Feldmeier, Jeanne C. Jackson and Lisa F. Clark be restrained from using assets of defendant Feldmeier Equipment, Inc. to pay for any attorneys' fees and litigation expenses related to the defense against the dissolution cause of action and directing those individual defendants to reimburse defendant Feldmeier Equipment, Inc. for all amounts paid by it for that purpose, and as modified the order is affirmed without costs and the matter is remitted to Supreme Court, Onondaga County, for further proceedings in accordance with the following memorandum: Plaintiff, a former employee, officer, and director and a current minority shareholder of defendant Feldmeier Equipment, Inc. (Corporation), a closely held corporation, commenced this action in which he alleged that defendants Robert E. Feldmeier, Jeanne C. Jackson and Lisa F. Clark (collectively, individual defendants), who were officers and directors of the Corporation, had breached their fiduciary duties to plaintiff. As a result of their alleged "egregious breach of the fiduciary duties," plaintiff sought damages as well as common-law dissolution of the Corporation. Defendants answered the complaint with general denials and asserted counterclaims for, inter alia, unfair competition, misappropriation of trade secrets and breach of fiduciary duty.
Approximately three years after this action was commenced, defendants jointly moved for, inter alia, summary judgment dismissing the complaint. Plaintiff cross-moved for summary judgment seeking, inter alia, an order "directing that [the Corporation] be dissolved under the common law," an order advancing him certain amounts and reimbursing him for his expenses in defending against the counterclaims, and an order restraining the individual defendants from using the Corporation's funds "to pay for attorneys' fees and other professional service fees related to this action." Supreme Court granted defendants' motion and denied plaintiff's cross motion. We conclude that the court properly granted defendants' motion, but erred in denying those parts of plaintiff's cross motion seeking reimbursement and an advance of funds related to defending against the counterclaims and seeking to restrain the individual defendants from using the Corporation's funds to defend against dissolution of the Corporation.
As background, we note that the Corporation was founded in 1953 by Robert H. Feldmeier (father), who is the father of plaintiff and the individual defendants. Ultimately, plaintiff and the individual defendants became employees, officers and directors of the Corporation. The Corporation had only 50 shares and, as of 2008, the shares were distributed as follows: the father and Margaret Feldmeier (mother) held 13 shares each, and plaintiff and the individual defendants held 6 shares each. The father and mother thereafter formed defendant Hunt Lane Associates, LLC (Hunt) and, on December 28, 2010, they transferred their 26 shares to Hunt. The father and mother thereafter transferred their interests in Hunt to their children, equally, with each child owning 25%. Thus, as of January 3, 2011, each child owned 6 shares of the Corporation and each owned 25% of Hunt, which owned the remaining 26 shares of the Corporation.
Plaintiff became president of the Corporation in 1996, and he also subsequently became a manager of Hunt. The individual defendants took positions as the Corporation's vice-president, secretary and treasurer. In the spring of 2011, tensions erupted between plaintiff and the individual defendants, and plaintiff resigned from all of his positions in the Corporation and Hunt, thereby becoming a non-employee, minority shareholder. At that time, he was the only person to have that status. Following his resignation, plaintiff created a new company that directly competed with the Corporation. In addition, Jeanne Jackson transferred two of her shares to her daughter, nonparty Jennifer Jackson, and Lisa Clark retired.
It is undisputed that plaintiff did not receive any distributions or dividends from the Corporation after he resigned, which prompted him to commence this action. Plaintiff asserted causes of action for breach of fiduciary duty against the individual defendants, common-law dissolution of the Corporation, a constructive trust, and an accounting. For the most part, the viability of the latter three causes of action turns on whether there was any breach of fiduciary duty. With respect to the alleged breach of fiduciary duty, plaintiff contended that the individual defendants had failed to authorize a distribution of earnings, increased their combined salaries and bonuses, engaged in nepotism, retained excessive earnings, increased the Corporation's bad debts, increased loans to the Corporation's officers, and increased inventory, and that the individual defendants had taken those actions "to avoid making any dividend distribution to all shareholders, including Plaintiff."
Contrary to plaintiff's contention, we conclude that defendants met their initial burden on the motion with respect to the breach of fiduciary duty cause of action. To establish a cause of action for breach of fiduciary duty, plaintiff was required to establish " (1) the existence of a fiduciary relationship [or duty], (2) misconduct by [defendants], and (3) damages directly caused by [defendants'] misconduct' " (Matter of Lorie DeHimer Irrevocable Trust,
In his breach of fiduciary duty cause of action, plaintiff alleges that the individual defendants made certain facially-valid business decisions in bad faith and for the sole purpose of depriving him of distributions, either by reducing the net income available for distributions or by using income for their own compensation that instead could have been used for distributions. Thus, according to plaintiff, the "breach" is the failure to pay plaintiff dividends, and that breach is established by various acts of misconduct by defendants.
We conclude that defendants established that there was no misconduct and thus no breach of fiduciary duty by the individual defendants. Indeed, defendants established that dividends or distributions had never been paid to shareholders and that, instead, after bonuses were paid to certain non-owner employees of the Corporation and, at times, to the mother and father, the employee-officers were paid large bonuses. When the mother, father and nonparty Jennifer Jackson held shares of the Corporation, they did not receive bonuses commensurate with their shares of ownership. Moreover, after Hunt became the majority shareholder, it did not receive any money from the Corporation that could be considered a de facto or disguised dividend. Thus, defendants demonstrated that there was no misconduct by the individual defendants when they continued the established practice of paying bonuses to officers, who were also [*2]shareholders.
With respect to the other claimed "breaches" of fiduciary duty alleged in the complaint, defendants established that each action was a legitimate and good-faith business decision entitled to protection under the business judgment rule, "which provides that, where corporate officers or directors exercise unbiased judgment in determining that certain actions will promote the corporation's interests, courts will defer to those determinations if they were made in good faith" (Matter of Kenneth Cole Prods., Inc., Shareholder Litig.,
In opposition to the motion, plaintiff contended that summary judgment was premature because certain discovery requests were still outstanding. We agree with defendants that plaintiff failed to "show that the discovery sought would produce evidence sufficient to defeat the motion . . . , and that facts essential to oppose the motion were in [the movant's] exclusive knowledge and possession and could be obtained by discovery" (Resetarits Constr. Corp. v Elizabeth Pierce Olmsted, M.D. Center for the Visually Impaired [appeal No. 2],
Plaintiff further contended that the individual defendants acted in bad faith and engaged in misconduct by failing to change the method of distributing profits after plaintiff's resignation. In his affidavit, which was submitted in opposition to defendants' motion and in support of his cross motion, plaintiff averred that, while he was president, the Corporation had used bonuses as "disguised" or "de facto" dividends, which was fair when all shareholders were employees but was oppressive to him once he resigned and no longer received bonuses. As noted above, however, plaintiff's contention lacks merit inasmuch as other non-employee or non-officer shareholders were either never paid bonuses or received bonuses that were not commensurate with their representative shares of ownership.
In addition to allegations in the complaint, plaintiff raised new allegations of defendants' misconduct, i.e., failing to hold annual meetings, paying Lisa Clark for good will and a covenant not to compete upon her retirement, creating a profit sharing plan with employees, increasing customer deposits and improperly making loan repayments to the individual defendants. Even assuming, arguendo, that we may consider those allegations of misconduct despite the fact that they were raised for the first time in opposition to defendants' motion for summary judgment (see generally DiFabio v Jordan,
Plaintiff submitted the affidavit of an expert who opined that the compensation paid to the individual defendants, although significantly less than when plaintiff was president, was excessive and constituted de facto dividends that should have been distributed to shareholders. The expert further opined that the payments to Lisa Clark for her "so-called goodwill' " and her covenant not to compete were "highly unusual," and that the individual defendants made those payments to divert assets in an effort to depress the value of plaintiff's shares. With respect to the remaining actions that were challenged by plaintiff, the expert opined that the profit sharing [*3]plan, retained earnings, customer deposits and increased inventory reduced income available for distribution and were made without "any reasonable explanation." In our view, plaintiff failed to raise any issue of fact to refute defendants' evidence that the individual defendants' decisions on compensation were the "product of valid business judgment" (Marx v Akers,
" conclusory allegations of wrongdoing,' " which are insufficient to raise a triable issue of fact or otherwise justify judgment in plaintiff's favor (Marx,
Assuming, as does our dissenting colleague, that plaintiff raised material issues of fact by submitting that expert affidavit, we nevertheless conclude that defendants, in reply, "conclusively refute[d]" the bases of the expert's opinion (First Franklin Fin. Corp. v Beniaminov,
Based on the foregoing, we further conclude that the court properly granted that part of defendants' motion with respect to the common-law dissolution cause of action. As plaintiff correctly recognized, he could not seek judicial dissolution under Business Corporation Law § 1104-a because he owned less than 20% of all outstanding shares of the Corporation. Nevertheless, he could seek common-law dissolution. "Predicated on the majority shareholders' fiduciary obligation to treat all shareholders fairly and equally, to preserve corporate assets, and to fulfill their responsibilities of corporate management with scrupulous good faith, the courts' equitable power [to dissolve a corporation] can be invoked when it appears that the directors and majority shareholders have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute" (Matter of Kemp & Beatley [Gardstein],
Inasmuch as plaintiff's substantive causes of action for breach of fiduciary duty and dissolution were properly dismissed, we conclude that the court properly granted those parts of defendants' motion with respect to the constructive trust and accounting causes of action (see generally Potter v Davie,
We agree with plaintiff, however, that the court erred in denying that part of his cross motion seeking reimbursement and an advance of money for expenses related to defending against the counterclaims. The counterclaims are asserted against plaintiff "by reason of the fact that he . . . was a director or officer of the [C]orporation," and Business Corporation Law § 722 (a) provides that he may be indemnified by the Corporation for his "reasonable expenses, including attorneys' fees actually and necessarily incurred as a result of such action or proceeding . . . if [he] acted, in good faith, for a purpose which he reasonably believed to be in . . . the best interests of the [C]orporation." That is so even though the counterclaims are brought, in part, by the Corporation itself (see Sequa Corp. v Gelmin,
Finally, we further conclude that the court erred in denying that part of plaintiff's cross motion seeking to restrain the individual defendants from using the Corporation's funds to pay for any expenses related to defending against the dissolution cause of action and seeking reimbursement for the Corporation of any such amounts paid since the inception of this action (see Matter of Boucher v Carriage House Realty Corp.,
All concur except Carni, J., who dissents and votes to further modify the order in accordance with the following memorandum: I respectfully dissent in part. Even assuming, arguendo, that defendants met the initial burden on their summary judgment motion with respect to the breach of fiduciary duty cause of action, I conclude that plaintiff raised issues of fact in opposition by submitting the affidavit of a certified public accountant with expertise in forensic [*5]financial examination of, inter alia, manufacturing businesses. The affidavit of defendants' expert submitted in reply merely created credibility questions to be resolved at trial. In granting defendants' motion, I submit that Supreme Court improperly engaged in issue determination, not issue finding (see generally Goldstein v County of Monroe,
Thus, in addition to the modifications to the order made by the majority, I would modify the order by denying that part of defendants' motion with respect to the breach of fiduciary duty cause of action. Inasmuch as the common-law dissolution, constructive trust and accounting causes of action all rely upon a breach of fiduciary duty as an essential element, I would further modify the order by denying those parts of defendants' motion with respect to those causes of action and reinstating the complaint in its entirety.
Entered: August 22, 2018
Mark W. Bennett
Clerk of the Court