Matter of the Jud. Dissolution of Stony Creek Indus. Inc.
Annotate this CaseDecided on February 2, 2005
Supreme Court, Nassau County
In the Matter of the Application of ANDREW MAYBAUM, Petitioner, For the Judicial Dissolution of STONY CREEK INDUSTRIES, INC. Pursuant to Section 1104(a) of the Business Corporation Law, Respondent.
6886-04
COUNSEL FOR PETITIONER
Jordan M. Hyman, Esq.
10 East Merrick Road - Suite 308
Valley Stream, New York 11580
COUNSEL FOR RESPONDENT
Francis X. Casale, Esq.
534 Broad Hollow Road - Suite 301
Melville, New York 11747
Leonard B. Austin, J.
Petitioner, Andrew Maybaum ("Maybaum"), seeks the judicial dissolution of Stony Creek Industries, Inc. ("Stony Creek"). Stony Creek cross-moves to dismiss the petition and for sanctions.
BACKGROUND
Stony Creek is a domestic corporation which was incorporated in 1996. It is primarily engaged in the business of recycling of concrete and asphalt products.
Mark Carroll ("Carroll") owned all of the outstanding shares of Stony Creek. Maybaum was an employee of Stony Creek.
In or about 2000, Carroll transferred 25% of the outstanding shares of Stony Creek to Maybaum. The shares were transferred to Maybaum in appreciation of what Carroll believed was Maybaum's outstanding service to Stony Creek.
Maybaum commenced this special proceeding pursuant to Business Corporation Law §1104-a seeking the judicial dissolution of Stony Creek. Maybaum alleges that since May 22, 2002, Carroll has frozen Maybaum out of the business and excluded him from the management of Stony Creek. Maybaum further alleges that Carroll has engaged in this course of conduct specifically to deprive Maybaum of his interest in the Stony Creek.
Maybaum's petition fails to relate the full circumstances surrounding his discharge from Stony Creek. Prior to his alleged exclusion from the management of Stoney Creek, Maybaum was significantly involved in the financial operations of Stony Creek. He retained David Maybaum, his father, and Michelle Maybaum, his sister as Stony Creek's accountants.
In or about May 2002, Carroll discovered that Maybaum had been diverting money from Stony Creek for his personal use instead of paying a Small Business Administration loan. Maybaum also secreted and destroyed default notices sent to Stony Creek indicating that the Small Business Administration loan was in default, and hid from Carroll the fact that a collection action had been commenced by the lender, Banco Popular. As a result, a default judgment was entered against Stony Creek and Carroll, who had personally guaranteed the loan, in the sum of $703,793.55.
Maybaum also diverted money that was due from Stony Creek to the Internal Revenue Service as withholding and payroll taxes. Carroll avers that Maybaum assured him that the appropriate tax returns had been filed and that the taxes had been paid. As a result, Stony Creek owes approximately $460,000.00 to the Internal [*2]Revenue Service for withholding and payroll taxes.
Upon discovering that Maybaum had been diverting money from Stony Creek, Carroll terminated Maybaum's employment with Stony Creek. Since that time, Carroll has not permitted Maybaum to participate in the operation of Stony Creek.
Stony Creek also reported Maybaum's activities to the Nassau County District Attorney. This resulted in Maybaum being arrested and charged with Grand Larceny in the Second Degree and Falsifying Business Records in the First Degree.
As a result of a plea agreement reached between Maybaum and the District Attorney's office, Maybaum agreed to plead guilty to Falsifying Business Records in the First Degree, an E Felony, in full satisfaction of the charges. As part of the plea agreement, Maybaum agreed to make restitution of $182,089.38 to Stony Creek. The restitution payment schedule required that $10,000.00 be paid prior to sentencing. The balance was to be paid through the Probation Department.
The disposition of the criminal charges against Maybaum did not preclude any civil action which could be brought against Maybaum, his wife, his father and/or his sister. The plea agreement only related to Maybaum's activities during the period January 25, 2001 through May 2002.
During his plea allocution, Maybaum admitted that, during the period of January 25, 2001 through May 2002, he made entries in the business records of Stony Creek which made his personal expenses appear as if they were business expenses. He acknowledged that he used the funds obtained through the falsification of Stony Creek's business records to pay his personal expenses.
Stony Creek has commenced an action in this Court against Maybaum and Katherine Maybaum, his wife, seeking to recover the sums alleged diverted from Stony Creek to the Maybaums for their personal use. That action is captioned Stony Creek Industries, Inc., Mark Carroll and Marianne Carroll, Plaintiffs, against Andrew Maybaum and Katherine Maybaum, Defendants (Nassau County, Index No 934/04). ("Stony Creek Action"). Stony Creek claims that Maybaum diverted at least $510,000 for his personal used between 1998 and 2002 by either writing checks to petty cash or checks directly from the business to pay his personal expenses. Stony Creek believes that Maybaum diverted funds that were supposed to be deposited into the corporate 401(k) plan and that Maybaum diverted additional monies by receiving checks payable to Stony Creek and cashing them or by receiving and pocketing cash received in payment of amounts due Stony Creek.
Against this factual backdrop, Maybaum seeks the judicial dissolution of Stony Creek. Stony Creek seeks dismissal of the petition.
DISCUSSION
A. Corporate Dissolution
Business Corporation Law §1104-a permits the court to dissolve a corporation whose shares are not publicly traded upon the application of the holders of shares representing at least 20% of the shares entitled to vote if the directors or those who control the corporation "...have been guilty of illegal, fraudulent or oppressive action toward the complaining shareholders" or if the corporate assets or property is being "...looted, wasted, or diverted for non-corporate purposes" by the corporate officers, directors or those who control the corporation. [*3]
Maybaum owns more than 20% of the shares entitled to vote. The shares of Stony Creek are not publicly traded. Therefore, the issue is whether Maybaum has established any basis for the dissolution of Stony Creek.
There are no allegations in the petition that Carroll, who is the other shareholder and the person who controls Stony Creek, has been looting, wasting or diverting corporate assets or property for non-corporate purposes. In fact, Carroll has been investing and using non-corporate assets in an effort to save the business and prevent Stony Creek from going into bankruptcy resulting from Maybaum's defalcations. Thus, Maybaum has not established a factual basis for dissolution of Stony Creek pursuant to Business Corporation Law §1104(a)(2).
Business Corporation Law §1104-a(1) permits the owner of 20% or more of the voting shares of a corporation to dissolve the corporation if the controlling shareholders, officers or directors activities are illegal, fraudulent or oppressive. The terms illegal and fraudulent are to be given their common meaning. Matter of Kemp & Beatley, Inc. [Gardstein], 64 NY2d 63 (1984). The term "oppressive" is not defined in the statute.
A minority shareholder is subject to oppression when the majority or controlling parties' "...conduct defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture." Id. at p. 73. See, In the Matter of Charleston Square, Inc., 295 AD2d 425 (2nd Dept. 2002); In re Dissolution of Upstate Medical Associates, P.C., 292 AD2d 732 (3rd Dept. 2002); and Application of Rambusch, 143 AD2d 605 (1st Dept. 1988).
In reaching a determination of whether the majority's actions are oppressive, the court must consider all of the facts and circumstances of the case. Matter of Kemp & Beatley, Inc. [Gardstein], supra.
Dissolution of the corporation under Business Corporation Law §1104-a is discretionary. Matter of Weidy's Furniture Clearance Center Co., Inc., 108 AD2d 81 (2nd Dept. 1985); Gimpel v. Bolstein, 125 Misc 2d 45 (Sup Ct., Queens Co.1984); and Matter of Topper v. Park Sheraton Pharmacy, Inc., 107 Misc 2d 25 (Sup.Ct., NY Co., 1980); and Business Corporation Law §1111(a).
Oppressive conduct is generally found when a minority shareholder has been excluded from participation in corporate affairs or management for no legitimate business reason or personal animus, or where an employee/shareholder is discharged without cause and, thus, is deprived of his or her salary or when corporate policies are changed by the majority to prevent the minority shareholder from receiving a reasonable return on their investment. See, Matter of Weidy's Furniture Clearance Center Co., Inc., supra (minority shareholder fired from family business because of family dispute); Matter of Kemp & Beatley, Inc., [Gardstein], supra (corporate policy changed after petitioner's terminated employment to deny them distribution of corporate earnings); Gunzberg v. Art-Lloyd Metal Products Corp., 112 AD2d 423 (2nd Dept.1985), (shareholders who were long term employees and officers who ran the corporation were removed from their office, fired and denied compensation); In re Dissolution of Upstate Medical Associates, P.C., supra (petitioner discharged from employment and excluded from operation of corporation for no legitimate business reason); and Matter of Topper v. Sheraton Park Pharmacy, Inc., supra (minority employee-shareholder who was most
[*4]
active member of business fired, removed as officer, removed as co-signer on corporate bank account, excluded from corporate offices and denied compensation).
A corporation should be dissolved only as a last resort. See, Matter of Parveen, 259 AD2d 389 (1st Dept. 1999); and Matter of Imperatore, 128 AD2d 707 (2nd Dept. 1987).
In this case, Maybaum has not established a prima facie case of oppressive conduct. Maybaum was discharged from his employment with Stony Creek for cause. Maybaum engaged in a systematic and prolonged course of diverting corporate assets for his personal use. He falsified the records of Stony Creek to make the personal expenses he paid from corporate funds appear to be corporate expenses. He advised Carroll that all corporate withholding and payroll taxes had been paid when in fact he had diverted this money to his personal use. He advised Carroll that a business loan was current when, in fact, the loan was in default. When suit was brought on the loan, he suppressed such information so that Carroll would not learn about the commencement and pendency of the action which resulted in the entry of a default judgment against Stony Creek and Carroll, individually.
Maybaum owed Stony Creek a duty of good faith and loyalty in the performance of his duties. Wallack Freight Lines, Inc. v. Next Day Express, Inc., 273 AD2d 462 (2nd Dept. 2000); and Maritime Fish Prods. v. World-Wide Fish Prods., 100 AD2d 81 (1st Dept. 1984). He undeniably breached this duty by diverting corporate assets to his personal use and falsifying corporate records to make it appear that his personal expenses were actually corporate expenses. Thus, he has no reasonable expectation of continued employment or continued participation in the operation of the business. See, Gimpel v. Bolstein, supra.
His only reasonable expectation was a possible entitlement to dividends, voting at shareholders meetings and statutory access to corporate records. Id.; and Business Corporation Law §§602, 624.
Maybaum fails to establish that Stony Creek ever paid a dividend or that corporate policy was changed after he was terminated to deprive him payment of dividends. See, Burack v. I. Burack, Inc., 137 AD2d 523 (2nd Dept.), app. dism.,73 NY2d 851 (1988), in which the court found that the failure to pay dividends to a minority shareholder did not constitute oppressive conduct warranting corporate dissolution in view of corporate history of not paying dividends.
Maybaum does not claim that he has been denied access to corporate records as permitted by Business Corporation Law §624. Nor does he claim that he has not received notice of shareholders meetings as required by Business Corporation Law §605.
A shareholder whose own acts result in the complained of oppression cannot seeks dissolution of the corporation, utilizing Business Corporation Law §1104-a, on the basis of those very acts. See, Matter of Pace Photographers, Ltd. [Rosen], 71 NY2d 737 (1988); and Matter of Kemp & Beatley, Inc. [Gardstein], supra. This is exactly what Maybaum is attempting to do. His firing as a corporate employee and his exclusion
from corporate business are a direct result of his having stolen from the corporation and falsified its records.
[*5]
Maybaum has failed to establish that any of the actions of the directors or those in control of the corporation have been illegal, fraudulent or oppressive towards him. He has failed to set forth a basis upon which the Court can dissolve Stony Creek. Thus, the petition must be dismissed.
B. Sanctions
Respondent seeks sanctions pursuant to 22 NYCRR §130-1.1. The Court may, in its discretion, impose sanctions for frivolous conduct. 22 NYCRR §130-1.1(a). Sanctions may be imposed upon an attorney, a party or both. 22 NYCRR 130-1.1(b).
The financial sanction to be imposed includes actual expenses incurred including reasonable attorney's fees and an amount sufficient to discourage such frivolous conduct in the future. See, Scholet v. Newell, 229 AD2d 621 (3rd Dept., 1996); and 22 NYCRR § 130.1.1(b).
Conduct is frivolous if:
(1) it is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law:
(2) it is undertaken primarily to delay or prolong the resolution of the litigation, or to harass or maliciously injure another; or
(3) it asserts material factual statements that are false.
22 NYCRR §130-1.1(c).
Under these circumstances, this special proceeding appears to have been commenced to harass Carroll and Stony Creek on grounds which are wholly without merit in law and which cannot be supported by a reasonable argument for an extension, modification or reversal of existing law.
Petitioner admitted at his plea allocution that he falsified business records and used the funds of obtained from those false records for his personal gain. He has already consented to pay Stony Creek restitution of $182,000.00 which sum was to be paid without prejudice to any claims of Stony Creek for recovery of money improperly diverted by Maybaum.
In support of its cross-motion, Stony Creek places before the Court evidence that Maybaum misappropriated more than $500,000 during the period 1998 through 2002. Maybaum does not specifically deny these allegations in his affidavit in opposition to the cross-motion. Furthermore, he does not address Stony Creek's allegation that he took checks payable to the corporation and cashed them or pocketed cash that was paid to Stony Creek.
Maybaum's continued protestations of innocence are further evidence of the frivolous nature of this special proceeding. Maybaum asserts that he pled guilty to avoid subjecting his wife, his father and his sister to criminal investigation and prosecution. In essence, Maybaum is asserting that he is a "stand up guy" who took the [*6]fall so that his wife, father and sister could avoid being investigated and prosecuted criminally.
In truth, Maybaum's position is no different than that of the child who murders his parents and then pleads for mercy as an orphan.
Amazingly, Maybaum asserts that his prosecution was a conspiracy between Stony Creek, its lawyer and the Nassau County District Attorney to destroy his reputation yet, Maybaum did not enter Serrano plea. People v. Serrano, 15 NY2d 305 (1965). See also, North Carolina v. Alford, 400 U.S. 25 (1970). The colloquy at Maybaum's plea allocution clearly establishes that (1) he was advised of his constitutional rights; (2) he was advised that a plea of guilty is the same as a conviction after trial; and (3) the Court would not accept his guilty plea unless he was actually guilty.
Maybaum further went on to admit, on the record, that, between January 25, 2001 and May 8, 2002, he was employed by Stony Creek; that he falsified business records of Stony Creek to make it appear as if his personal expenses were actually business expenses of Stony Creek; and that he used the funds obtained through the falsification of business records to pay his personal expenses.
If Maybaum truly believed he was not guilty of these charges, the time and place to contest these allegations was in the criminal proceeding in County Court. Maybaum is collaterally estopped from contesting the facts underlying his criminal conviction. See, Buggie v. Cutler, 222 AD2d 640 (2nd Dept., 1995). A criminal conviction, whether by plea or after trial, is conclusive proof of the facts underlying the conviction and collaterally estops a party from relitigating those facts in a subsequent civil action.
Grayes v. DeStasio, 166 AD2d 261 (1st Dept., 1990); and Merchants Mutual Ins. Co. v.
Arzilli, 98 AD2d 495 (2nd Dept., 1984).
The charge of Grand Larceny in the Second Degree was dismissed not, as Maybaum asserts, because it was unprovable. It was dismissed as part of the negotiated plea arrangement. The Court and the District Attorney had to give a legally valid reason for dismissing the charge.
Maybaum's assertion that he did not take anything from Stony Creek is contradicted by his being ordered to pay $182,089.52 in restitution. The court can order a criminal defendant to pay restitution "...of the fruits of his or her offense or reparation for the actual out-of-pocket loss cause" by the defendant's criminal activity.
Penal Law §60.27(1). When ordering restitution, "...the court must make a finding as to the dollar amount of the fruits of the of the offense and the actual out-of-pocket loss to the victim" caused by the defendant's criminal activity. Penal Law §60.27(2). The amount of restitution ordered by the court may not exceed the actual out-of-pocket amount of damage sustained by the victim as a result of the defendant's criminal conduct. See, People v. Liriano, 184 AD2d 788 (2nd Dept., 1992).
Therefore, the County Court made a factual finding that, during the period covered by the plea, Maybaum misappropriated at least $182,089.52 from Stony Creek. If Maybaum believed that the amount that he was being ordered to pay in restitution was improper or excessive, he could, and should, have requested a hearing in County Court to determine the appropriate amount of restitution. Penal Law §60.27(2). See, People v. Hong Ping Lou, 299 AD2d 559 (2nd Dept. 2002). Alternatively, Maybaum [*7]could have appealed the amount of the amount he was ordered to pay as restitution since the court may not order restitution in an amount in excess of that permitted by law. A waiver of the right to appeal does not bar an appeal from an illegal sentence. People v. Casiano, 8 AD3d 761 (3rd Dept., 2004). He did neither.
Maybaum has also misrepresented the facts. He asserts that he could not be fired because he was a partner in the business. This is a misstatement of fact and law. Maybaum was an at will employee and is a minority shareholder of Stony Creek. He could be fired at any time with or without cause. See, Ingle v. Glamore Motor Sales, Inc., 73 NY2d 183 (1989); and American Home Products, Corp., 58 NY2d 293 (1983).
Maybaum further alleges that Carroll concocted this scheme to accuse him of theft to deprive him of his interest in Stony Creek. This, too, is a material misstatement of fact. Such a claim is belied by the fact that Maybaum pled guilty to falsifying business records and admitted, at his plea allocution and that he used the money he received from the falsified business records for his personal expenses.
Sanctions may also appropriate in regard to Maybaum's attorney. Although Maybaum's attorney did not sign the petition, he did sign the statement required by 22 NYCRR 130-1.1-a(a) on the legal back attached to the petition and order to show cause commencing this special proceeding. By his signature, counsel certified that, to the best of his knowledge formed after a reasonable inquiry, the contents of the submitted papers are not frivolous. Clearly, that is not true.
Stony Creek and Carroll have commenced an action in this Court seeking to recover the amount Maybaum alleged diverted from Stony Creek during the periods not covered by the criminal charges and in excess of the ordered restitution. The seventh cause of action in the amended complaint in the Stony Creek action seeks to rescind the issuance of Stony Creek stock to Maybaum.
Maybaum's attorney in this proceeding also represents Maybaum in the other action. Thus, the commencement of this special proceeding appears to be an attempt to blunt the other action even though there is no merit whatsoever to Maybaum's claims and contentions herein.
Maybaum's attorney is well aware, or should be aware, of the circumstances surrounding Maybaum's termination at Stony Creek. He has chosen either to ignore or conveniently forget these facts when preparing the petition.
This proceeding is utterly without merit in law or fact and was undertaken primarily to harass Carroll and Stony Creek and to gain a collateral advantage in the Stony Creek action. It contains material misstatements of fact. This is exactly the type of conduct that is sanctionable pursuant to 22 NYCRR §130-1.1.
Accordingly, it is,
ORDERED, that Respondent's motion to dismiss this special proceeding is granted and the petition is hereby dismissed; and it is further,
ORDERED, that Petitioner's application for the judicial dissolution of Stony Creek is denied; and it is further,
ORDERED, that Respondent's application for sanctions against Andrew Maybaum and Jordan M. Hyman, Esq. is granted to the extent that counsel for Respondent, Andrew Maybaum and Jordan M. Hyman, Esq., are directed to appear [*8]before this Court on March 18, 2005 at 9:30 a.m. to be heard as to the appropriate sanction to be imposed herein.
This constitutes the decision and Order of the Court.
Dated: Mineola, NY _____________________________
February 2, 2005 Hon. LEONARD B. AUSTIN, J.S.C.
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