Waldman v Aiello

[*1] Waldman v Aiello 2005 NY Slip Op 51492(U) [9 Misc 3d 1111(A)] Decided on July 7, 2005 Supreme Court, New York County Kapnick, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 July 7, 2005
Supreme Court, New York County

Bruce Waldman, a Shareholder of Gabwal Restaurant, Inc., Suing in the Right of GABWAL RESTAURANT, INC., and BRUCE WALDMAN, individually, Plaintiff,

against

Gabriel M. Aiello, GARY LEVY, JH COHN, LLP, JOHN DOE "1" through John Doe "5", and GABWAL RESTAURANT, INC., Defendants.



602235/04

Barbara R. Kapnick, J.

Plaintiff Bruce Waldman, a 49% shareholder of Gabwal Restaurant, Inc. ("the Corporation"), Suing in the Right of the Corporation and in his individual capacity, moves by order to show cause for an order:

(1) enjoining defendant Gabriel M. Aiello, Jr. ("Aiello"), a 51% shareholder of the Corporation, from making any payments or disbursements from the Corporation's income and funds, except for distributions proportionate to their 51/49 ownership interests, and other expenses directly related to the Corporation's business, such as its employee payrolls, its rent and other operational expenses made in the normal course of conducting its business, until the determination of this action; and

(2) enjoining defendant Aiello and the Corporation from putting into effect any of the resolutions adopted at a meeting of the Board of Directors and shareholders held on July 15, 2004, until the issue of the validity of those resolutions is finally resolved and determined in this action.

Defendants Aiello and the Corporation argue in opposition that plaintiff cannot demonstrate that he will suffer an immediate and irreparable injury absent the granting of the preliminary injunction, that he has a likelihood of success on the merits, or that the balance of equities weighs in his favor.

There is no dispute that there was no shareholders' agreement between defendant Aiello and plaintiff, who is a resident of Pennsylvania and is not involved in the day to day functioning of the restaurant.

Aiello, who actively runs the business, claims that Waldman agreed to reduce his ownership interest from 49% to 30% in exchange for Aiello signing a personal guaranty for a new ten-year lease in 2000.

Waldman concedes that he agreed 'in concept' that Aiello should receive a higher percentage of their business profits and that they discussed a 70/30 profit split. However, he denies ever agreeing to a reduction of his ownership interest. To the contrary, he claims that he wanted to retain his ownership percentage in the event they sold the business.

No written agreement was ever finalized. Aiello claims that the Corporation's accountants later determined that rather than change the 51/49% ownership interest through a stock transfer agreement, the parties could achieve substantially the same economic effect and their tax and "S Corporation" goals could better be met by allocating to Aiello a compensation bonus (above his [*2]base salary) calculated as a percentage of annual net profits (i.e., 40% of the net book profits), with the balance of profits to be distributed according to the 51/49% ownership interests.

There is no dispute that the parties never agreed to all the terms of the proposed compensation agreement. Waldman claims to have specifically objected to a provision in the proposed agreement which provided that all compensation and benefits paid to Aiello prior to the effective date of the terms of the agreement were deemed ratified, since past compensation which Aiello received above his 51% of the profits was an unresolved issue between the parties.

Aiello, on the other hand, claims that he had the authority to independently set his own salary since he was a 51% shareholder of the Corporation, but that he was advised by his attorneys that it would be "better practice from a corporate governance standpoint" to appoint independent directors.

Thus, Aiello sent a "Notice of Annual Meeting of Shareholders/Notice of Board of Directors Meeting" dated June 29, 2004 to plaintiff announcing an Annual Meeting of Shareholders to be held on July 15, 2004 at the Restaurant to be followed immediately by a meeting of the Board Directors. The Notice was accompanied by a letter dated June 29, 2004 to plaintiff in which defendant stated, in relevant part, as follows: Because there are a number of business issues that should be addressed in the setting of a formal annual meeting, I am now renewing such notice, which is attached to this letter. Among the matters that I propose be considered include adding one or more independent directors to the Board (and providing for suitable indemnification and compensation arrangements for them.) I believe that such directors will be able to serve a valuable role by independently addressing various of the business issues as to which you and I have been unable to reach agreement. The Board meeting to follow the Annual Meeting will consider some of these issues.

The meeting was held on July 15, 2004. Mr. Waldman, Mr. Waldman's attorney, Mr. Aiello and Robert V. Ferrari, who has served as the corporation's counsel from its inception, were present.[FN1]

Mr. Aiello presided over the meeting and Mr. Ferrari served as secretary. Resolutions were adopted expanding the number of directors on the Board from two directors - i.e., Waldman and Aiello - to four directors; amending the Certificate of Incorporation to provide that a majority of shareholders can make certain decisions without a formal meeting; and establishing a committee, consisting of the two new directors, John Schneider and Kenneth Stein, to evaluate Aiello's employment terms with the Corporation and to provide him with an appropriate compensation package.

Plaintiff contends that these actions were taken in order to exclude him from the corporate decision making process and to allow Aiello to raid the assets of the Corporation.

On or about August 20, 2004, plaintiff filed the First Verified Amended Complaint and specifically alleged that the notice of the July 15, 2004 meeting violated the Corporation's By-law's and failed to give him adequate notice of the proposed amendments and resolutions.

Although defendants contend that the notice was proper, they thereafter sent a "Notice of Special Meeting of Shareholders/Notice of Board of Directors Meeting" for a meeting to be held on September 28, 2004 at 4:00 p.m. to ratify, confirm and approve actions taken at the July 15, 2004 meeting.

No meeting was held on September 28, 2004 at 4:00 p.m. as this Court issued a temporary restraining order earlier that day which restrained defendant Aiello "from making any payment or disbursements from GABWAL RESTAURANT, INC.'s income and funds, unless directly related to the corporation's business, and made in the normal course of conducting its [*3]business operations", and restrained the defendants "from putting into effect any of the resolutions adopted at a board of directors and shareholders meeting held on July 15, 2004 or from taking any action connection therewith (emphasis supplied)."

Plaintiff argues that the resolutions which were passed at the July 15, 2004 meeting over his objections are invalid because the June 29, 2004 notice failed to comply with Article VIII of the By-Laws and failed to set forth that he had the right, as a dissenting shareholder, to elect payment for his shares pursuant to BCL § 623. Plaintiff further argues that the preliminary injunctive relief he seeks should be granted because defendant Aiello is "looting" the corporation and its assets.

Article VIII of the By-Laws provides, in relevant part, as follows: Section 4. Amendments. Except as otherwise provided herein, these By-Laws may be altered, amended or repealed and By-Laws may be made at any annual meeting of the shareholders or at any special meeting thereof if notice of the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made be contained in the notice of such special meeting, by the holders of a majority of the shares of stock of the Corporation outstanding and entitled to vote thereat; or by a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice of the proposed alteration, amendment or repeal, or By-Law or By-Laws to be made, be contained in the Notice of such Special Meeting.

Pursuant to Article II, Section 4 of the By-Laws [n]otice of the annual and each special meeting of the shareholders shall indicate that it is being issued by or at the direction of the person or persons calling the meeting, and shall state the name and capacity of each such person. Notice of each special meeting shall also state the purpose or purposes for which it has been called.

Defendants argue that the June 29, 2004 notice of the annual meeting complied with Article II, Section 4 because it was signed by Aiello himself. They further argue that there was no need to state the purpose for which the meeting was called because that requirement applies only to a special meeting.

Plaintiff argues that the meeting held on July 15, 2004 could not have been an annual meeting because under the corporation's By-Laws, such meetings may not be held prior to the first Monday in September.

Plaintiff is correct that Article II, Section 2 of the Corporation's By-Laws provides that An annual meeting of the shareholders of the Corporation for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on the first Monday of September in each year (emphasis supplied) if not a legal holiday, and if a legal holiday, then on the next secular day following, at ten o'clock A.M., Eastern Standard Time, or at such other time as is fixed in the notice of the meeting. (emphasis supplied).

However, Section 2 further provides that

[i]f for any reason any annual meeting shall not be held at the time herein specified, the same may be held at any time thereafter upon notice, as herein provided, or the business thereof may be transacted at any special meeting called for the purpose (emphasis supplied).

There is no indication in the By-Laws that "any time thereafter" must be interpreted as the same calendar year. Therefore, the meeting held on July 15, 2004 could be considered the annual [*4]meeting for 2003.[FN2]

Thus, this Court finds that the notice for the July 15, 2004 annual meeting complied with the notice requirement of the By-Laws.[FN3]

Plaintiff further argues that the notice failed to comply with BCL § 605(a) which provides in relevant part that [i]f, at any meeting, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the requirements of section 623 (Procedure to enforce shareholder's right to receive payment for shares) to receive payment for their shares, the notice of such meeting shall include a statement of that purpose and to that effect and shall be accompanied by a copy of section 623 or an outline of its material terms.

However, plaintiff's reliance on BCL § 623 is misplaced since "[t]hat section deals solely with the rights of dissenting shareholders in a merger situation to elect to receive payment for their shares". Slade v. Endervelt, 174 AD2d 389, 391 (1st Dep't 1991).

Finally, this Court finds that plaintiff has failed to set forth sufficient evidence to demonstrate a likelihood of success on the merits of his claim that defendant Aiello is improperly siphoning off the assets of the corporation.

Accordingly, based on the papers submitted and the oral argument held on the record on December 7, 2004, plaintiff's motion for a preliminary injunction is denied. The temporary restraining order is, therefore, vacated in all respects.

This constitutes the decision and order of this Court.

Dated: July 7, 2005_____________________

Barbara R. KapnickJ.S.C. Footnotes

Footnote 1:Mr. Ferrari is not representing any of the parties in this action.

Footnote 2:There appears to be no dispute that no annual meetings for any year were held prior to this date, except for the initial meeting in 1991.

Footnote 3:This Court notes that even if the notice had been intended for a special meeting, the letter accompanying the notice set forth the purpose for which it was called, and thus complied with the notice requirement set forth in Article II, Section 4 of the By-Laws.