Matter of Rivara

[*1] Matter of Rivara 2005 NY Slip Op 51378(U) [9 Misc 3d 1102(A)] Decided on September 1, 2005 Surrogate's Court, Nassau County Riordan, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on September 1, 2005
Surrogate's Court, Nassau County

Proceeding to determine the rights and interests of Veronica Rivara in and to certain properties claimed as Assets by the Estate of ANTHONY RIVARA, SR., Deceased.



321506



Goetz Fitzpatrick & Flynn, Esqs.

One Penn Plaza, No. 4401

New York, NY 10019

Levy & Schneps

1615 Northern Blvd.

Manhasset, NY 11030

John B. Riordan, J.

This is a reverse discovery proceeding under SCPA 2105. The issue, after a non-jury trial, is simple: who owns two corporations, Rivara's Shipyard, Inc. and Rontone Sales, Inc. The claimants are Anthony Rivara, Jr., as executor of the estate of his father, Anthony Rivara, Sr., and his step-mother, Veronica Rivara.

Anthony Rivara, Sr.(Anthony Sr.) died on December 29, 1999. He was survived by four distributees: his second wife, Veronica Rivara (Veronica), and his three adult children, Anthony Jr., Joan and Carolyn. The decedent's Will, executed on March 2, 1990, was admitted to probate in this court on July 22, 2003 and letters testamentary were issued to Anthony Rivara, Jr.(Anthony Jr.). The Will makes no provision for Veronica, but it does nominate her as a successor executor. The probate petition represented the estate's value at approximately $870,000.00. Veronica disputed this representation because it included assets, the two corporations, that she alleges belongs to her. Consequently, on June 11, 2003, Veronica commenced a proceeding pursuant to SCPA 2105 to delete these assets from the probate petition and to enjoin Anthony Jr., as executor, from exercising dominion and control over Rivara's

Shipyard, Inc. and Rontone Sales, Inc. because they were owned by Veronica and should be delivered to her.

The court notes that the two corporations own the following properties. Rontone Sales, Inc. owns a fifty-foot pleasure boat and Rivara's Shipyard, Inc. owns five lots of unimproved real property located in Queens County and designated as Block 16063, lots 18, 20, 21 and 24, and Block 16065, lot 1. These properties are being used, in whole or in part, as storage facilities for an adjacent construction company, Pile Foundation, Inc., owned by Anthony Jr.

During the litigation, there arose a dispute as to the availability of a jury trial on these issues. The Appellate Division decided that Veronica did not have the right to a jury trial because her claim in the reverse discovery proceeding sounded in equity, rather than in the legal action of replevin (Matter of Rivara, 12 AD3d 611 [2004]).

The court's initial concern is the burden of proof and which party carries the affirmative and what quantum of proof is required to sustain that burden. For the reasons that follow, the court holds that Veronica has the affirmative burden of proof and that she is required to meet that burden by clear and convincing evidence.

Veronica is the petitioner in this proceeding. The order to show cause and petition that commenced the litigation seek affirmative relief from Anthony Jr. in his capacity as executor of [*2]his father's estate. Heretofore, Anthony Jr. has exercised dominion and control over the real and personal property owned by Rivara's Shipyard, Inc. and Rontone Sales, Inc. Veronica wants to put a stop to that conduct and have the court recognize her as the true owner of these corporations. As noted by the Appellate Division, the petition was commenced pursuant to SCPA 2105 as a reverse discovery proceeding. Any impression that the gravamen of the pleadings arose from the action at law known as replevin was dispelled by the Appellate Division when it ruled that these facts did not sound in replevin but rather in the equitable aspects of SCPA 2105 that require the court to determine the rightful owner of property. This distinction drawn by the Second Department is significant because it points to the type of analysis necessary to arrive at the proper burden of proof.

In order to determine the nature of the burden of proof, it is necessary to examine the theories of the case advanced by the petitioner in the prosecution of the proceeding and the respondent in its defense. It is also necessary to examine the facts as they are elicited at the trial, for reasons to be discussed below. Here is where the distinction drawn by the Appellate Division becomes relevant. In Matter of Vannini (141 NYS2d 493 [1950]), the court held that when a reverse discovery sounds in replevin, it is governed by the standard of a preponderance of credible evidence. But the Appellate Division has rejected the argument that this proceeding sounds in replevin, necessarily finding that the Vannini burden of proof relied upon by petitioner is inappropriate. More persuasive, indeed controlling, are the line of cases cited by the respondent to the effect that a petitioner in a SCPA 2105 proceeding must prove the elements of her claim by clear and convincing evidence (Matter of Poggemeyer, 87 AD2d 822 [1982]; Matter of Effros, 43 AD2d 539 [1973]). In the court's opinion, this result is more suitable to the facts.

Whether one accepts Veronica's version of the facts, or whether one accepts Anthony Jr.'s version, it is certainly clear that Veronica's interests in Rivara's Shipyard, Inc. and Rontone Sales, Inc. arose from her relationship with her husband, a relationship that all agree was a loving and confidential one. While a certain amount of sympathy naturally resides with a surviving spouse, those feelings themselves are a source of concern. They reflect the nature and intimacy of the relationship and the dangers that can result when one of the spouses is no longer available to respond to assertions made by the survivor. It is for this reason that claims against a spouse's estate that are made by such a near relative and withheld until after the death of the other will be scrutinized with great care and will be sustained only when supported by clear and convincing evidence (Matter of Effross, 43 AD2d 539 [1973]). This result is all the more supported when the facts indicate a close, confidential relationship with suggestions that the claimed interest in the properties arose from some form of a gratuitous transfer or gift by the decedent (Matter of Abramowitz, 38 AD2d 387, aff'd 32 NY2d 654 [1973]; Scheideler v Scheideler, 37 Misc2d 965 [1962]; Matter of Smith, NYLJ, July 30, 2002 at 21). When a person claims title to property by virtue of a gift from a decedent, then the burden of proving the gift is upon the donee, and the proof must be convincing, clear and satisfactory (Gruen v Gruen, 68 NY2d 48 [1986]) and must be inconsistent with any other purpose (Matter of Miller, 8 Misc2d 1059 [1957]).

The foregoing notwithstanding, the court would like to note that even if the applicable standard of proof was the lesser quantum of preponderance of the credible evidence, the following findings of fact and conclusions of law would not change.

[*3]Findings of Fact, Conclusions of Law

The findings of fact and conclusions of law are divided into the following topics: 1) pre-incorporation conduct; 2) the incorporation of the two corporations; and 3) the business affairs of the two corporations. This approach is necessitated by the equivocal nature of the proof as to the incorporation of the two corporations. The court notes that when the issue of corporate ownership is raised it is the actions of the parties that will be dispositive, rather than the adherence to the corporate formalities (Hunt v Hunt, 222 AD2d 759 [1995]).

Pre-Incorporation Conduct

Veronica Rivara and Anthony Rivara, Sr. were married in February, 1973. It was the second marriage for both. The decedent brought into the marriage certain real estate assets and a contracting company that was not successful (T. page 108). It is not clear from the testimony whether these properties corresponded to the lots subsequently owned by Rivara's Shipyard, Inc. However, the court does note that Veronica did not testify to any specific property that was hers alone when she entered the marriage or acquired subsequently. Another asset of the decedent that he owned individually was the boat later transferred to Rontone Sales, Inc. (T. page 185, 188).

As to the real estate assets owned by Rivara's Shipyard, the court notes that Veronica testified at the trial that the funds used to purchase the lots owned by Rivara's Shipyard, Inc. came from another corporation, Marine Construction Corp. However, at an earlier deposition she could not recall the source of funds for the purchase of these assets (T. pages 204, 205). Veronica did admit (T. page 206) that the largest of the five lots owned by Rivara Shipyard, Inc. was previously owned by Anthony Sr., individually. These facts are significant when juxtaposed with the insertion of Marine Construction Corp. into the testimony. No evidence was introduced as to the ownership of Marine Construction Corp. Veronica may have intimated an equity interest in this business, but no evidence was introduced to that effect. In fact, the evidence points in the other direction, that the boat owned by Rontone Sales, Inc. was originally owned individually by Anthony Sr. (T. page 184), and that the real property owned by Rivara's Shipyard, Inc. was originally owned by Anthony Sr. or at least controlled by him (T. pages 204-209).

The upshot of this line of questioning is relevant to the court's conclusion that a clear and convincing standard must be applied to the proof. The confidential relationship enjoyed by husband and wife, together with the allegations of gratuitous transfers from Anthony Sr. to Veronica through the two corporations, require the court to proceed accordingly. However, the issue of the source of these assets for the corporation is also relevant to the ultimate issues at trial. After all, if Veronica were able to convince the court of her equity participation in Marine Construction Corp. or her funds being used to purchase the corporate assets, it might be probative of the capitalization of the corporations and the intent of the parties as to stock ownership.[FN1] The court indicated this to Veronica's attorney (T. page 182) and invited him to elicit such evidence. Instead, Veronica's attorney offered no additional evidence pertinent to [*4]Rivara's Shipyard, Inc. and only sparse, equivocal testimony was elicited from Veronica on the boat owned by Rontone Sales, Inc. (T. pages 183-187). Moreover, Veronica's attorney offered to re-call another witness, an accountant, to testify about the source of funds for these corporate assets (T. page 187), but never did.

As noted above, the court applied a "clear and convincing standard" to the proof. The record should reflect that this result is compelled by the facts adduced at trial.

The Incorporation of the Two Corporations

The next set of circumstances that must concern the court is the obvious one, the formation and maintenance of the two corporations. What should be the readily ascertainable solution to this dispute, the corporate books and records, is, in fact, a collection of conflicting facts. Of course, adherence to the corporate formalities in a closely-held, family business is frequently less than perfect (but cf. Pell St. Nineteen Corp. v Yue Er Liu Mah, 243 AD2d 121 [1998]).

The corporate kit of Rontone Sales, Inc. was maintained in the possession of Veronica Rivara. She testified that she did much of the bookkeeping for herself and her husband and that it was his custom and practice to sign documents left for him to sign by Veronica. The court notes that in other areas of the couple's life together they were aware of the importance of adhering to certain legal formalities. For example, the decedent signed the requisite signature cards for the hundreds of thousands of dollars in joint accounts, with rights of survivorship, owned by the couple (T. pages 110, 111). The Rontone Sales, Inc. corporate kit shows the following. Anthony Sr. signed page 1-4 of the minutes of the organization meeting listing himself as the only director. The certificate of incorporation authorizes the corporation to issue 200 shares of stock, with no par value. The by-laws of the corporation have at page "c" a hand-written addition indicating the corporation is to be governed by one director. Article V(1) of the by-laws require all issued shares of stock to be signed by the president and the secretary. Anthony Sr. was named the President of Rontone Sales, Inc. and Veronica as the Treasurer/Secretary on August 15, 1984 at the first meeting of the board of directors. Anthony Sr. signed, as sole director, the by-laws, corporate resolution, and waiver of notice of the first meeting of the board of directors on that date.

The court notes that stock certificate No.1, for two hundred shares, is stapled in the corporate kit. The stock certificate is signed by Anthony Sr. in his capacity as President and reflects the alleged issuance of 200 shares to him. This stock certificate is not, however, signed by Veronica, although as Secretary/Treasurer she is required to do so by the by-laws. An unsigned cancellation receipt purports to reflect the return and cancellation of this stock certificate and has no probative value, as does the alleged issuance of stock certificate #

2. As to the latter, the court precluded any evidence as to certificate #

2 due to the failure of Veronica to respond to a discovery demand as to the certificate. In any event, the court would note for the record that what was offered into evidence at trial was nevertheless unsigned and would, at best, have had little or no probative value if it were admitted.

Clearly, the foregoing recitation indicates the sloppy record-keeping practices of the Rontone Sales corporation. While such lack of attention to detail may be typical of small, closely [*5]held businesses, it certainly does not inure to Veronica's benefit in her effort to sustain her burden of proof. Her evidence on this point was contradictory. At various points during her testimony, Veronica represented that she was the sole owner of Rontone Sales, Inc. from its

inception (T. page 240-243) or that the corporation was owned jointly with Anthony Sr. (T. page 237; page 64 [testimony of the accountant Michael Marrone]). In this regard the court finds that Veronica's witness, her accountant Michael Marrone proved less than helpful. In a previously prepared affidavit, Mr. Marrone swore that "Mr. Rivara made clear in our numerous discussions that these corporations belong to Mrs. Rivara." (Exhibit 8, paragraph 4). However, at trial,

Mr. Marrone testified that Rontone Sales, Inc. was jointly owned by the couple and would belong to Veronica after Anthony Sr.'s death. His testimony struck the court as compromised by his conflict due to his ongoing relationship with Veronica in providing her with accounting services. In any event, they raised the possibility that Anthony Sr. was merely mentioning a possible testamentary plan to his wife, one that never came to fruition. As with so much of Veronica's evidence, it is of a circumstantial nature, requiring the court to draw a reasonable inference from a proven set of facts.

Finally, the petitioner asks the court to draw a favorable inference from the fact that the name of Rontone Sales, Inc. is taken from the combination of the names of Veronica and Anthony Sr. While the court certainly accepts the reasonable inference of the origin of the corporate name, it sees no basis to draw a conclusion of ownership from it. In order for an inference to be drawn from circumstantial evidence, the inference must be logically compelling (Gayle v New York, 92 NY2d 936 [1998], PJI3d 1:70[2005]).

The incorporation events of Rivara's Shipyard, Inc. are even murkier than Rontone Sales, Inc. The first thing that one notices about the company's corporate kit is the prevalence of Veronica Rivara's signature and the complete absence of Anthony Rivara Sr.'s signature. The corporate status sheet, dated April 8, 1980, indicates "Anthony Rivara Sr. (sic)" is the corporation's director, that he and Veronica were President and Secretary, respectively, and that while the corporation's capitalization called for 200 shares of stock at no par value, Veronica was listed as the holder of ten (10) shares. Skipping ahead to the certificates portion of the corporate kit, stock certificate #

1 for ten (10) shares is "issued" to Veronica. The certificate contains Veronica's signature as "secretary-treasurer" but does not contain Anthony Sr.'s signature as President. His initials are on that signature line in pencil, but they merely represent a direction of the place to sign, if Anthony Sr. so intended, provided in all likelihood by the couple's then attorney, Leo Howard.

The court notes that Mr. Howard was not called or subpoenaed by either side to testify. It appears from the colloquy of the attorneys that Mr. Howard is alive but very aged. Nonetheless, the court would like the record to reflect that it draws no adverse inference from the failure of either side, especially Veronica, to produce him as a witness. There is no indication that Leo Howard has had any relationship with either Anthony Sr. or Veronica for many years. Moreover, there is no reason to believe that Mr. Howard would be presumed to give favorable testimony to Veronica's position. The court finds that Mr. Howard is more like a stranger to both parties, and therefore, available to both parties as a witness, and no inference should be drawn from his

absence (Rosa v Blander, 47 AD2d 865 [1975], Prince, Richardson on Evidence §3-140 [Farrell 11th ed]). [*6]

Returning to the corporate kit, the court notes that Rivara's Shipyard, Inc., like Rontone Sales, Inc., contains a provision in its by-laws requiring the signature of both its President and Secretary-Treasurer to effectuate the issuance and transfer of stock. The court has already alluded to stock certificate #

1, ten (10) shares that were ostensibly issued to Veronica on

April 16, 1980, without the signature of Anthony Sr. Veronica maintains that this certificate was cancelled in order to pave the way for the issuance of certificate #

2 of 200 shares to her. The cancellation of certificate #

1 is unsigned. Certificate #

2 is missing, with no corroborative proof in the corporate kit of an objective nature to support Veronica's claims. In fact, Veronica's testimony on this point was problematic to her position. She testified (T. page 260-262) that she presented stock certificate #

2 to her husband for signature and he never returned it or signed it. This is the certificate that was supposed to transfer to Veronica the corporation's entire capitalization of 200 shares. Several inferences may be drawn from Anthony Sr.'s failure to return the executed certificate and the court cannot engage in speculation as to which one should be adopted.

The Business Affairs of the Two Corporations

The failure to adhere to the corporate formalities in the incorporation process is not fatal to a person's claim to ownership of some or all of the shares of the business (Hunt v Hunt, 222 AD2d 759 [1995]). Since there is no adequate proof that certificates of stock were issued for either corporation, the court must then examine other evidence to determine the validity of Veronica's claim (Rocha Toussier y Asociados, S.C. v Rivero, 184 AD2d 397 [1992]). Therefore, the court will proceed to the third part of its analysis, the manner in which these two corporations were run after the incorporation.

The court again notes that it finds that the assets transferred into the two corporations were originally owned or controlled by Anthony Sr. (in the case of Rivara's Shipyard, Inc., the lots of unimproved real property in Queens and in the case of Rontone Sales, Inc., apparently created merely as a holding company for the boat). There is no evidence of any financial activity in Rontone Sales, Inc.. The boat owned by Rontone was kept near Anthony Sr. and Veronica's home. Soon after Anthony Sr. died, Anthony Jr. demanded, and Veronica acquiesced, in having the boat towed to Anthony Jr.'s marina. Veronica evidently felt intimidated by Anthony Jr., or believed that he would have her interests at heart. In fact, she testified that she waited to pursue this matter until she realized that Anthony Jr. would take the position that the corporations were estate assets. Nonetheless, Veronica did testify that the boat owned by Rontone Sales, Inc. was originally owned individually by Anthony Sr. (T. page 184).

On the other hand, Rivara's Shipyard, Inc. was a viable business concern. Its commercial value rested in the lots' proximity to Pile Foundation, Inc., a business owned by Anthony Jr.[FN2] He [*7]used part of these real properties for storage purposes and paid Rivara's Shipyard, Inc. $2,500.00 per week for the privilege of doing so. The court notes that these payments stopped when Anthony Sr. died. These substantial payments to Rivara's Shipyard, Inc. form the basis of the evidence most damaging to Veronica's claim. Introduced into evidence (Exhibits 1-7, 10-12) are ten years of corporate tax returns for Rivara's Shipyard, Inc. The tax returns for the years 1991 and 1992 are on Forms 1120-A (U.S. Corporation Short-Form Income Tax Return). Neither of these forms had a Schedule K that contains the ownership attribution questions. In 1993, the corporation filed a Form 1120 (U. S. Corporation Income Tax Return). It contained, in Schedule K, a request for information about ownership of the corporation. It contained no information that would indicate that more than 50% of the corporation was owned by an individual.[FN3] Commencing with the tax year 1994 the corporate tax returns were all prepared with the assistance of the accountant Michael Marrone. He was called as a witness by Veronica. Before discussing his testimony, it is necessary to review those seven tax returns, from the tax years 1994 through 2000.

In the tax years 1994 through 1998, Anthony Rivara, Sr. signed the returns as President of the corporation. Each of these returns contains an entry for Schedule K, item #

5, where the taxpayer is asked to identify ownership of the corporation. Each of these schedules represents that the corporation that is owned 100% by Anthony Rivara, Sr. Another item of interest is contained in these tax returns, not pointed out by the parties. Each of these five returns, at Schedule K, item #

13, lists the number of shareholders of the corporation as "1." Of course, this is in conformity to item #

5, but it does indicate the attention to detail given these returns by Anthony Sr. Mr. Marrone testified that he would discuss the question of ownership with the Rivaras. The court found this testimony problematic because, as Mr. Marrone stated, there was no current financial impediment to his listing the ownership of the corporation in any way. A reasonable person would conclude that if there was no obstacle to listing Veronica as the sole or part shareholder of the corporation, then the failure to do so may be indicative of the truth of the entry that was made in the tax returns, Mr. Marrone's protestations to the contrary at this late date notwithstanding.

Anthony Rivara, Sr. died on December 29, 1999. The 1999 corporate return for Rivara's Shipyard, Inc. was signed by Veronica Rivara on September 30, 2000, in her capacity as secretary of the corporation. Once again, at Schedule K, item #

5, the corporation is listed as being owned 100% by Anthony Rivara Sr. This clearly constitutes an admission against interest on her part. Curiously, the 2000 return, again signed by Veronica, answers the question contained in Schedule K, item #

5 in the negative. The question reads, "at the end of the tax year, did any individual, partnership, corporation, estate, or trust own, directly or indirectly, 50% or more of the corporations voting stock." This answer is logically and patently false. However the corporation was owned, there could have been no more than two owners of the stock, Veronica and Anthony Sr. Therefore, under any theory of the case, one of these two parties owned at least 50% of the corporation's shares. [*8]

In his testimony, Michael Marrone attempted to rehabilitate the evidence and admissions contained in these tax returns. The court finds his testimony unpersuasive. Mr. Marrone would have the court believe that the matter of ownership was of such small consequence that the entries in favor of Anthony Sr. were inconsequential and erroneous. This strikes the court as unbelievable. After all, if it was inconsequential to make an incorrect entry, then it was also inconsequential to make the correct entry. Moreover, the taxpayer and the preparing accountant are under an obligation to provide accurate information on the tax return, under penalty of perjury. Mr. Marrone, as a certified public accountant, surely knows the importance attached to this attribution line in Schedule K. It provides the Internal Revenue Service with a useful link to the recipients of corporate profits, dividends, etc. Proper attribution is also an estate planning tool when spouses seek to equalize their estates. Therefore, the entry is not as inconsequential as

Mr. Marrone would have the court believe. Ironically, this whole litigation arises from the importance that is attached to just such things.

In addition, the court notes that the 2000 corporate return was marked by Mr. Marrone as the "final" return by the corporation. If the corporation was a going concern, and would continue to receive rental income from the lots, under the ownership of Veronica, then no accountant would mark such a return as "final." Mr. Marrone's credibility is further compromised by his admission that he continues to provide accounting services to Veronica Rivara.

The court notes that other tax returns were admitted into evidence. These are the Employer's Annual Federal Unemployment (FUTA) Tax Returns, Forms 940-EZ. The returns cover the years 1994 through 2000. The last one was signed on January 9, 2001. The person who signs the return, under penalty of perjury, is required to state his or her title with the corporation. The form even prompts an answer, "Title (owner, etc.)." In each and every return,

Veronica Rivara signed as "Bkkpr" (bookkeeper) and no more, except the last return where she put "sec'y."

The court finds that these documents, all admitted into evidence, all prepared by the parties when there could be no possible motive to lie, all prepared in such a way that one entry would be as easy and as presently inconsequential as any other entry, are strong evidence in favor of Anthony Rivara, Sr. being the sole owner of Rivara's Shipyard, Inc. Clearly, the importance of the evidence is such that it manifests Veronica's failure to meet not only the clear and convincing standard but also the preponderance of the credible evidence standard. The court notes that the other evidence of Veronica's activity with the corporation (signing forms, paying bills, etc.) is equivocal on the issue of ownership. After all, nothing prevents a corporation and its shareholders from delegating such powers to its officers, employees, etc.

The consequence of the foregoing analysis is that Veronica Rivara has failed to sustain her burden of proof. All the evidence, in fact, compels the necessary conclusion that Rivara's Shipyard, Inc. and Rontone Sales, Inc. was owned by Anthony Rivara Sr. and were correctly considered an estate asset. The petition of Veronica Rivara is dismissed.

Settle decree.

Dated: September 1, 2005

JOHN B. RIORDAN [*9]

Judge of the

Surrogate's Court Footnotes

Footnote 1:It might also be probative of a theory of liability based on constructive trust. The elements required for imposition of a constructive trust are a promise, a transfer of property in reliance thereon, a confidential relationship and unjust enrichment (Janke v Janke, 39 NY2d 786 [1976]). No such proof was offered here.

Footnote 2: There was evidence of litigation involving Rivara's Shipyard, Inc. that commenced after Anthony Sr. died. The court did not find it persuasive for either side who appeared for the corporation. Likewise, the identity of the party paying the carrying charges of the corporation, insurance for example, is equivocal in nature.

Footnote 3:The court notes that under any theory of the case, this entry would be inaccurate.