Matter of Long Is. Women's Health Care
Annotate this CaseDecided on April 6, 2005
Supreme Court, Nassau County
In the Matter of POLLINA KAGAN and JOAN HAZELKORN, the holders of two-thirds of the Outstanding Shares of Long Island Women's Health Care, M.D., P.C., Petitioners, for the Judicial Dissolution of Long Island Women's Health Care, M.D., P.C., pursuant to Sections 1104 and 1104(a) of the Business Corporation Law,
13333/04
COUNSEL FOR PETITIONER
Myra G. Sencer, P.C.
250 Old Country Road
Mineola, New York 11501
COUNSEL FOR RESPONDENTS
Abrams, Fensterman, Fensterman, Flowers, Greenberg & Eisman, LLP
1111 Marcus Avenue - Suite 107
Lake Success, New York 11042
Eliot Spitzer, Esq.
Attorney General of the State of NY
120 Broadway - 24th Floor
New York, New York 10271
Leonard B. Austin, J.
Petitioners, Pollina Kagan ("Kagan") and Joan Hazelkorn ("Hazelkorn"), commenced this special proceeding seeking the judicial dissolution of Long Island Women's Health Care, M.D., P.C. ("Health Care") pursuant to Business Corporation Law §§1104 and 1104-a.
Health Care has cross-moved to dismiss this proceeding pursuant to CPLR 3211(a)(1) and (3).
BACKGROUND
Health Care is a professional corporation incorporated in 1990. When Health Care was incorporated, it had five shareholders, Steven Milim, M.D. ("Milim"), Douglas Phillips, M.D. ("Phillips"), Howard Nathanson, M.D. ("Nathanson"), Steven Meltzer, M.D. ("Meltzer") and Hazelkorn. Each of the shareholders owned 20% of the shares of Health Care.
In 1998, as a result of the death of Dr. Meltzer, the decision to make Kagan a shareholder in Health Care and the decision of Nathanson and Phillips to terminate their status as shareholders in Health Care, Milim, Kagan and Hazelkorn entered into a new Shareholder Agreement ("Agreement"). Pursuant to the terms of the Agreement, Milim, Kagan and Hazelkorn became equal shareholders in Health Care with each doctor owning one-third of the shares in Health Care.
From August 1, 1998 through August 5, 2004, Nathanson and Phillips continued to practice with Health Care as independent contractors.
Paragraph 26 of the Agreement provides that at any time during there respective lifetimes, Nathanson and Phillips had the right to become equal shareholders in Health Care with Milim, Hazelkorn and Kagan upon execution of a Joinder Agreement and payment of nominal consideration for the shares within 30 days of the exercise of the option.
Petitioners allege in connection with their application for dissolution of Health Care pursuant to Business Corporation Law §1104 that they are the owners of two-thirds of the outstanding shares and that the directors are so divided regarding the management of Health Care that the votes required for action by the board cannot be [*2]obtained.
Petitioners allege in connection with their application for dissolution of Health Care pursuant to Business Corporation Law §1104-a that the assets and property of the corporation are being looted, wasted or diverted by Milim for non-corporate purposes. Additionally, although not pleaded, it appears that Petitioners are alleging that those in control of the corporation are engaging in oppressive conduct towards the complaining shareholders.
Petitioners' application is based primarily upon their allegations that Milim has dominated the operation of Health Care, has not consulted with Petitioners in making
business decisions and has exercised poor business judgment in making those decisions.
This proceeding is an outgrowth of a long term deterioration in the relationship between Petitioners and Milim. The relationship between the parties had deteriorated to the point that, on July 7, 2004, Hazelkorn and Kagan advised Milim that they were terminating their employment with Health Care. Petitioners assert Milim indicated that Health Care should be voluntarily dissolved and that they should work towards that goal to assure continuity of patient care and an orderly transition for their patients.
Petitioners assert that rather than working towards the dissolution of Health Care and the smooth transition of patient care, Milim changed the security code on the office alarm system and computers thereby denying Petitioners access to the office and their patients records. This prevented Petitioners from see patients and scheduling future appointments.
Petitioners assert that, after they told Milim that they were terminating their employment with Health Care, Health Care stopped booking appointments for Petitioners' patients. Alternatively, Petitioners' patients are being examined and treated by the other doctors or physicians assistants employed by Health Care even if those doctors and/or physicians assistants were unfamiliar with the patient or the patient has had a long standing physician-patient relationship with Petitioners.
Office staff had been instructed not to cooperate with or assist Petitioners. Potential new patients were told that Petitioners were unavailable or had no available appointments. Petitioners allege that they are not getting patient inquiries, lab or test results or correspondence. Petitioners claim that office staff is not taking or giving them telephone messages.
Hazelkorn asserts that Milim does not maintain medical malpractice insurance for his obstetrical practice. Despite Milim's failure to maintain such insurance, he continues to see obstetrical patients including those with high risk pregnancies which exposes Health Care to significant financial risk.
Petitioners claim that they have not been paid their salary and have been denied access to the financial records of the corporation.
Petitioners have significant complaints regarding Milim's management of Health Care's pension plan. Petitioners allege that Milim managed Health Care's pension plan for five years prior to 2003 and, during that time, the plan had zero growth. Upon learning of this, Petitioners consulted with a financial advisor and suggested to Milim that he transfer management of the pension plan to a professional financial advisor. [*3]Although Milim agreed to transfer management of the pension plan to a financial advisor, he failed or refused to sign the paperwork necessary to transfer the administration of the pension plan to an investment professional for nearly one year.
Petitioners further allege that Milim unilaterally decided not to make a contribution to Health Care's pension plan in 2003 causing all of the doctors to pay taxes on the money the Petitioners believed had been contributed to the pension plan.
Petitioners also question the sagacity of Milim's decision to open a Health Care office in Bellmore. In 2002, Health Care opened an office on Merrick Road in Bellmore. Health Care leased the Bellmore office for a period of ten years. Milim, Kagan, Hazelkorn, Phillips and Nathanson all signed the lease and personally guaranteed Health Care's obligations under the lease for the Bellmore office.
Petitioners infer that the decision to open a Bellmore office was made by Milim without consulting with them. They further infer that Milim negotiated the lease. They claim that the lease saddled Health Care with a financial obligation that it could not and cannot afford.
Petitioners assert that Milim paid himself significant sums to manage Health Care's business even though he lacked the business acumen to do so.
Petitioners are also concerned about Health Care's line of credit. Health Care has a rather substantial line of credit. Petitioners and Milim have personally guaranteed Health Care's obligations on Health Care's line of credit. Phillips and Nathanson were not shareholders in Health Care when it obtained the line of credit and have not personally guaranteed Health Care's obligation. Petitioners are concerned that Milim, Phillips and Nathanson will "max out" the line of credit and default of Health Care's obligations causing Petitioners to incur substantial expense.
Health Care asserts that Petitioners cannot obtain dissolution pursuant to Business Corporation Law §1104 since the statute requires that the Petitioners in such a proceeding own 50% or more the shares of the corporation when the proceeding is commenced. Health Care asserts that when Phillips and Nathanson exercised their option in August 2004 to become shareholders in Health Care, that Hazelkorn and Kagan became owners of 20% of the shares of health Care. Since Hazelkorn and Kagan collectively only 40% of the shares of Health Care, they lack standing to commence a proceeding under Business Corporation Law §1104.
Health Care further asserts that Petitioners' Business Corporation Law §1104-a claim must be dismissed. Health Care claims that Hazelkorn and Kagan voluntarily resigned from Health Care. Paragraphs 4 and 8 of the Agreement provide a procedure for the purchase and valuation of the shares of shareholders who voluntarily resign from the corporation. These provisions of the Agreement provide Hazelkorn and Kagan with appropriate redress.
DISCUSSION
A. Business Corporation Law §1104
Health Care claims that the documentary evidence requires the dismissal of this claim since the documentary evidence establishes that Petitioners own less than 50% of the shares of the corporation.
In order to obtain dismissal pursuant to CPLR 3211(a)(1), the documentary [*4]evidence must conclusively establish a defense to the action as a matter of law. Arnav Industries, Inc. v. Brown, Raysman, Millstein, Felder & Steiner, L.L.P., 96 NY2d 300 (2001); and Leon v. Martinez, 84 NY2d 83 (1994).
Business Corporation Law 1104(1) permits the owners of 50% of the shares of a corporation entitled to vote for the election of directors to commence a special proceeding to obtain the judicial dissolution of the corporation if the directors are so divided in regard to the management of the company that the votes required for action of the board cannot be obtained. If the Petitioners do not own 50% of the shares of the corporation at the time the special proceeding is commenced, they lack standing to maintain the action mandating dismissal. Matter of Sakow, 297 AD2d 229 (1st Dept. 2002); and Rust v. Turgeon, 295 AD2d 962 (4th Dept., 2002).
Paragraph 26 of the Amended Shareholder Agreement permits Phillips and Nathanson to become equal shareholders in Health Care with Milim, Hazelkorn and Kagan at any time upon the execution of a Joinder Agreement and payment of a nominal fee for shares. Health Care asserts that Nathanson and Phillips exercised that right on August 5, 2004. A copy of the letters by which Nathanson and Phillips exercised their option and the Joinder Agreement are annexed as exhibits. Kagan and Hazelkorn do not deny receipt of the notice from Nathanson and Kagan exercising their option or that the Joinder Agreement is insufficient. Therefore, as of August 5, 2004, Health Care had five shareholders each of whom owned 20% of the outstanding shares instead of three shareholders each of whom owned one-third of the outstanding shares.
Since the documentary evidence, establishes conclusively that Hazelkorn and Kagan cumulative own only 40% of the share and not the two-thirds as alleged, Health
Care asserts they lack standing to bring the proceeding and the proceeding must be dismissed.
Hazelkorn and Kagan assert that despite the Phillips and Nathanson did not properly exercise this right because there is no evidence that either paid the nominal consideration required for the issuance of shares and because they have not agreed to personally guarantee Health Care's obligations under the line of credit. However, this argument is without merit. The Agreement requires Phillips and Nathanson upon the exercise of the option to undertake the obligations of the shareholders as provided for the Agreement. The Agreement does not obligate Health Care's shareholders to personally guarantee Health Care's obligations.
Even assuming that Hazelkorn and Kagan are correct in their assertion that they own two-thirds of the shares, their petition suffers from more fundamental and fatal flaws.
Paragraph 12 of the Amended Shareholders Agreement provides that the Health Care shall have three directors, that two-thirds of the directors must be present at a meeting of the board to constitute a quorum and that except for certain situation which are not relevant to this proceeding, the directors may act through majority vote.
Petitioners have failed to allege or prove that a meeting of the directors of Health Care has ever been called at which they were unable to transact corporate business because of a deadlock. In order to obtain judicial dissolution pursuant to Business [*5]Corporation Law 1104(1), Petitioners must establish that internal dissension has resulted in a management deadlock. Matter of Parveen, 259 AD2d 389 (1st Dept. 1999); and Matter of Dubonnet Scarfs, Inc., 105 AD2d 339 (1st Dept. 1985). There are no allegations in the petition of a management deadlock.
Similarly, Petitioners fail to allege that a meeting of the shareholders had been called at which directors could not be elected. In fact, Petitioners concede that a shareholders meeting has not been held since Phillips and Nathanson became shareholders in the corporation. Thus, dissolution cannot be granted pursuant to Business Corporation Law §1104(2). See, Matter of Parveen, supra.
In order to obtain dissolution pursuant to Business Corporation Law §1104(3), the Petitioners must establish that the disagreements between the Petitioners and the Respondent create "... an irreconcilable barrier to the continued functioning and prosperity of the corporation." Matter of Kaufmann, 225 AD2d 775, (2nd Dept. 1996). See also, Matter of Goodman v. Lovett, 200 AD2d 670 (2nd Dept. 1994); and Matter of Ronan Paint Corp., 98 AD2d 413 (1st Dept. 1984). Petitioners have failed to plead the existence of such a deadlock. Petitioners have significant disagreement with Milim regarding his management of the Health Care, the decisions he has made regarding the future of the practice such as the opening of a Bellmore office and his management of the pension plan. However, none of these decisions appears to have created irreconcilable barriers regarding the functioning and prosperity of the corporation. Health Care has continued to function in spite of these disputes.
For the foregoing reasons, Respondent's application to dismiss Petitioners' application to dissolve Health Care pursuant to Business Corporation Law §1104 must be granted.
B. Business Corporation Law §1104-a
Business Corporation Law permits the owner of 20% of the shares of a corporation to seek judicial dissolution of a corporation if the directors or those in charge engage in illegal, fraudulent or oppressive acts towards the complaining shareholders or if the directors, officers or those in charge loot or waste corporate assets or divert corporate assets for non-corporate purposes.
Petitioners have standing to maintain a proceeding pursuant to this provision in that they each own 20% of the shares of the corporation.
Petitioners seek dissolution pursuant to Business Corporation Law §1104-a(2).
This section requires that Petitioners establish that the officers, directors or those in control of the corporation have looted, wasted or diverted corporate assets for non-corporate purposes. However, Petitioners have failed to advance a single factual allegation or instance of Milim having taken or misused any corporate assets for his personal use or his own enrichment. Thus, beyond conclusory allegations, Petitioners have failed to establish the basic requirements for maintaining such an action. See, Matter of Brach, 135 AD2d 711 (2nd Dept. 1987).
Although not alleged, Petitioners have, in the papers submitted on Respondent's cross-motion, set forth sufficient evidence to establish a claim under Business Corporation Law §1104(1) which permits the court to dissolve a corporation when the directors or those in control have engaged in illegal, fraudulent or oppressive actions [*6]towards the complaining shareholders.
The conduct of the majority or those in control of the corporation is oppressive,
"... 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, Inc. [Gardstein], 64 NY2d 63, 73 (1984).
Oppressive conduct is generally found when a minority shareholder has been excluded for participation in corporate management for no legitimate business reason or personal animus, where the shareholder/employee has been discharged without cause and thus deprived of salary or where there has been a change in corporate policy which prevents the minority shareholder from receiving a reasonable return on their investment. See, In re Dissolution of Upstate Medical Associates, P.C., 292 AD2d 732 (3rd Dept. 2002); Gunzberg v. Art-Lloyd Metal Products Corp., 112 AD2d 423 (2nd Dept. 1985); and Matter of Weidy's Furniture Clearance Center Co., Inc., 108 AD2d 81 (2nd Dept. 1985).
Petitioners have alleged sufficient facts sufficient to support a claim of oppressive conduct pursuant to Business Corporation Law §1104-a(1).
After Petitioners advised Milim of their intent to leave the practice, Milim had the code changed on the office alarm and computer systems preventing Petitioners from obtaining access to the office or their patients records. Milim is alleged to have told the office staff not to cooperate with Petitioners. Petitioners allege that they have not been given lab or test results, that the office staff, a Milim's direction, has refused to book appointments for their patients, that they do not receive phone messages, that patients have been diverted from Petitioners to other doctors or physicians assistants, that office staff has advised prospective new patients that Petitioners do not have any available office hours. Petitioners have not been paid salary. If these allegations are proven true, such conduct would constitute oppressive conduct for the purposes of the statute.
Ordinarily, given these circumstances, the Court would grant Petitioners leave to replead. CPLR 3211(e). However, dissolution should be granted only as last resort. Matter of Parveen, supra; and Matter of Imperatore, 128 AD2d 707 (2nd Dept. 1987). Where a shareholder agreement contains a buyout provision which will provide the shareholder with a reasonable return on investment, dissolution is inappropriate. Matter of Gold, 229 AD2d 495 (2nd Dept. 1996); and Matter of Brach, supra; and Matter of Harris, 118 AD2d 646 (2nd Dept. 1986).
The Health Care Shareholder Agreement contains specific provisions regarding the valuation of a shareholder's interest in the corporation upon the shareholder's voluntary resignation as an corporate employee. Section 4 of the Amended Shareholder Agreement specifically provides that if a shareholder terminates employment with Health Care by voluntary resignation for reasons other than physical or mental disability or retirement, the shareholder shall be deemed to have offered his or her shares for sale to Health Care for the purchase price as established by Paragraph 8(a) of the Amended Shareholder Agreement. Health Care specifically states that it is willing to comply these terms of the Amended Shareholder Agreement. Petitioners must avail themselves of this contractual provision before seeking dissolution. If Health Care fails or refuses to comply with these provisions, then [*7]Petitioners' appropriate remedy is to sue for breach of contract.
Since Petitioners have an appropriate means for obtaining a fair and contractually agreed upon return on their investment short of dissolution of the corporation, dissolution, pursuant to Business Corporation Law §1104-a, must be denied.
The dismissal of this petition is without prejudice to Petitioner's rights with regard to obtaining all of their patient records (see, Lewis v. Clement, 1 Misc 3d 464 [Sup. Ct. Monroe Co. 2004]) and seeking damages, if any, arising from the withholding of such records and/or the misdirecting of patient inquiries. It is also without prejudice to Petitioners' claims for adjustment in the distribution/buyout of their respective shares based upon claims of alleged mismanagement, breach of fiduciary duty, breach of the Health Shareholder Agreement or any other theory which negatively affects the value of their shares.
Accordingly, it is,
ORDERED, that Petitioners' application to judicially dissolve Long Island Women's Health Care, M.D., P.C. is denied; and it is further,
ORDERED, that Respondent's cross-motion to dismiss the petition for dissolution is granted and the petition is hereby dismissed.
Settle judgment on notice.
Dated: Mineola, NY _____________________________
April 6, 2005 Hon. LEONARD B. AUSTIN, J.S.C.
XXX
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
