Day Op of N. Nassau, Inc. v Viola

[*1] Day Op of N. Nassau, Inc. v Viola 2007 NY Slip Op 51542(U) [16 Misc 3d 1122(A)] Decided on August 1, 2007 Supreme Court, Nassau County Warshawsky, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 August 1, 2007
Supreme Court, Nassau County

Day Op of North Nassau, Inc., d/b/a Ambulatory Surgery Center of North Nassau, Plaintiff,

against

Nora Viola, Defendant.



005018/2007



PLAINTIFF:RIVKIN RADLER LLPATTENTION: KENNETH A. NOVIKOFF, ESQ.

926 RECKSON PLAZA

UNIONDALE, NY 11556-0926

516-357-3000

DEFENDANT:SALAMON, GRUBER, BLAYMORE & STRENGER

ATTENTION: SANFORD STRENGER, ESQ.

97 POWERHOUSE ROAD, SUITE 102

ROSLYN HEIGHTS, NY 11577

516-625-1795

Ira B. Warshawsky, J.

This action arises from Defendant's termination of employment from Plaintiff Corporation and concerns the disposition of Defendant's shares of Plaintiff Corporation upon termination. Plaintiff's seeks to compel Defendant to sell her shares in the Corporation. Defendant refuses to close claiming that Plaintiff is barred from compelling her to sell her shares for failure to comply with applicable shareholder and employment agreements. As a result, Defendant cross-moves for an order pursuant to CPLR 3211(a)(1) and (7) dismissing Plaintiff's complaint. This motion to dismiss is determined as follows.

Plaintiff is a corporation doing business as an ambulatory surgery center that provides medical services to patients. The corporation's shareholders and their respective ownership interests in the corporation are as follows, Richard Gabay, M.D., Stewart Robbins, M.D., Nathan Schulman, M.D., and Jay Merker, M.D., each owning a 22.75% interest and Nora Viola, owning a 9% interest. Defendant, Nora Viola, was the Administrator of Plaintiff Corporation prior to her termination of employment on January 29, 2007.

Defendant was hired by Plaintiff pursuant to an Employment Agreement with Plaintiff which provides the terms and conditions of Defendant's employment. Under the Employment Agreement Defendant's duties of employment include responsibility "for all matters as may from time to time be assigned to her by the Board of Directors of the Corporation and in her role as [*2]Administrator of the Corporation...." The Employment Agreement provides the agreement shall continue for period of five years unless terminated pursuant to the following provisions,

1(c)Notwithstanding the foregoing, this Agreement may be immediately terminated by the Corporation for Good Cause (as such term is defined below) by written notice to Employee specifying the particulars of the circumstances forming the basis for such Good Cause. For purposes hereof, "Good Cause" shall exist upon the occurrence of any one or more of the following events:

(i) the conviction of the Employee of a fraud, felony, crime involving moral turpitude or other crime or offense not constituting a felony which has a detrimental effect on the Corporation.

(ii) the Employee engages in any act of theft, fraud or dishonest or illegal conduct against the Corporation or in connection with her duties for the Corporation; or

(iii) the Employee fails to perform any of her duties of employment in any material respector ceases to perform her responsibilities or assignments in any material respect; or

(iv) the Employee is inattentive to or neglectful of, the duties to be performed by her hereunder; or

(v) the Employee fails to comply with the policies of the Corporation or reasonable directions and orders given by duly appointed officers of the Corporation in connection with the Corporation's practice, or the Employee engages in any conduct reasonably deemed by the Corporation to be injurious to its best interests;

(vi) the Employee's breach of any of the terms of conditions of this Agreement; or

(vii) the Employee is no longer a Shareholder of the Corporation. 1(d)In the event that the Corporation seeks to terminate Employee's employment pursuant to Section 1(c)(iii) or Section (1)(c)(iv), the Corporation shall give the Employee reasonable detailed written notice stating the reasons for the proposed termination for Good Cause and the act(s) or failure(s) to act which give rise to the Good Cause in reasonable detail and Employee shall have thirty (30) says from the giving of such notice to fully cure the default, defect or other cause for termination.

Plaintiff Corporation's Shareholders' Agreement was entered into on or about January 1, 2006 and includes the following provisions (in pertinent part) governing the disposition of Defendant's shares upon termination of employment.

Section 9. Disposition of Shares Upon Termination

(a) Purchase upon Termination for Cause. Upon termination of any Shareholder's relationship with the Corporation as an employee, officer, director or consultant for "Cause," (as defined herein, the terminate Shareholder shall be deemed to have offered to sell all of the Shares or any interest therein owned by said Shareholder as of the date of termination (the "Termination Date") to the Offerees... If any Shareholder's relationship with the Corporation is terminated for Cause, the Purchase Price otherwise payable pursuant to Section 6(c).

...

(vii) a Shareholder engages in any act that could affect any regulatory good standing of [*3]the Corporation or any of its affiliates or the New York State Department of Health requires the ouster of such Shareholder from the Corporation.

...

(ix) a Shareholder breaches the terms of any employment agreement entered into with the Corporation.

...

(xi) a Shareholder's breach of any of the terms or conditions of this Agreement. In the event that the Corporation seeks to terminate the Shareholder pursuant to this Section 9(a)(xi), the Corporation shall give the Shareholder reasonable detailed written notice stating the reasons for the proposed termination for Cause and the act(s) or failure(s) to act which give rise to the Cause in reasonable detail and the Shareholder shall have thirty (30) days from the giving of such notice to fully cure the default, defect or other Cause for termination, provided, however, in the event the breach is not curable within the thirty (30) day period, so long as the Shareholder commences a cure and diligently proceeds to cure such breach, such Shareholder shall be given sixty (60) days to cure.

(b)Termination Without Cause. Upon termination of any Shareholder's employment agreement with the Corporation for any reason or no reason, including without cause or upon breach of a Shareholder's Employment Agreement by the Corporation, the terminated Shareholder shall be deemed to have offered to sell all of the Shares or any interest therein owned by said Shareholder as of the Termination Date to the Offerees...The Purchase Price for such Shares shall be as stated in Section 6(c).

The following sections of the Shareholders' Agreement govern the procedures for Corporate actions. First, Section 3 "Management" provides that "Robbins, Schulman, Gabay, Merker and Viola are collectively, from time to time, referred to herein as the Founding Shareholders." Section three continues,

Section 3(b)Notwithstanding anything herein to the contrary, (x) the written consent or the affirmative vote of at least fifty-one percent (51%) of the outstanding Shares entitled to vote thereon and (y) the written consent or the affirmative vote of at least ninety percent (90%) of the outstanding Shares of the Founding Shareholders shall be required to authorize any of the following actions:

...

(xiii) subject to Section 9(a), to amend, in any material fashion, any employment arrangement entered into by and between the Corporation and any Shareholder, or to terminate any Shareholder's employment without cause;

...

On January 29, 2007, the Board of Directors and Shareholders of Day Op held a special meeting. Defendant was present at the meeting after being notified of the meeting shortly before its commencement. At the meeting David Manko, Esq., counsel for Day Op, presented a report "related to the New York State Department ("NYSDOH") of Health SPARCS compliance and [*4]the failure of, Defendant, Day Op Administrator to appropriately respond to numerous requests for information initiated by the NYSDOH." (Board Meeting Minutes 1). "Mr. Manko reported that Ms. Viola had failed to respond to the NYDOH timely and appropriately, which could affect the regulatory good standing of the Day Op." Id. Mr. Manko also advised the Board of Directors that Ms. Viola failed "to properly maintain compliance with certain Public Health Law (Article 28) regulations as evidenced by the detailed summary of findings prepared by [HCG Consulting]." At the meeting the Board resolved to terminate Defendant's employment with Cause pursuant to Section 9(a) of the Shareholders' Agreement and Section 1(c) of the Employment Agreement. The resolution was passed with Merker, Gabay, and Schulman voting in favor, Robbins abstained, and Viola recused. Based on each shareholder's given interest in the corporation the affirmative vote constitutes 68.25% of the Founding Shareholders and 68.25% of the Corporation's outstanding shares.

Subsequent to the Board meeting, Defendant was notified by letter of her termination on January 30, 2007; on February 28, 2007 Defendant was notified by letter that Plaintiff elected to redeem her shares. Pursuant to the Shareholders' Agreement the closing date was set for April 2, 2007. Plaintiff claims that the Corporation was ready, willing, and able to close on April 2, 2007. Defendant responded by letter dated February 28, 2007 stating that Defendant does not recognize her alleged termination and that the Corporation has no authority to compel the sale of her stock.

Plaintiff initiated this action on March 22, 2007 to recover Defendant's shares of Plaintiff Corporation. Plaintiff alleges two causes of action based on the foregoing facts; (1) declaratory judgment that Defendant has no right under the Shareholder Agreement to refuse to close; (2) specific performance of Defendant to close on the sale of her shares pursuant to the Shareholders' Agreement.

On Plaintiff's application, this Court issued an Order to Show Cause on April 27, 2007 enjoining the adverse parties in this action from disparaging each other and from engaging in any act detrimental to the interests of the Plaintiff Corporation.

On cross-motion to dismiss the complaint against her, pursuant to CPLR § 3211(a)(1) based upon documentary evidence, and pursuant to CPLR § 3211(a)(7) for failure to state a cause of action, Defendant claims that Plaintiff is barred from compelling Defendant to sell her shares in the corporation for failure to comply with the provisions of termination in the Shareholders' Agreement and Employment Agreement.

Discussion

Plaintiff's motion for an Order compelling Defendant to sell her shares and Defendant's cross-motion for an order pursuant to CPLR § 3211(1) & (7) dismissing the complaint are determined as follows. The cross-motion to dismiss based on CPLR § 3211(7) is considered first as a threshold issue. The following standard governs.

On a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction (see, CPLR 3206). We accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory ... Under CPLR 3211 (a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the [*5]asserted claims as a matter of law ... In assessing a motion under CPLR 3211 (a)(7), however, a court may freely consider affidavits submitted by the plaintiff to remedy any defects in the complaint ... 'the criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one.

Roth v. Goldman, 254 AD2d 405, 406 (2d Dep't 1998) (citing Leon v. Martinez, 84 NY2d 83, 87-88 (1994)).

On a motion to dismiss where an unambiguous contract controls the rights of the parties, the contract provisions prevail over allegations in the complaint. Taussig v. The Clipper Group, L.P., 13 AD3d. 166, 167 (1st Dep't 2004), app. denied, 4 NY3d 707 (2005). The interpretation of an unambiguous contract is a question of law for the court. Id.

Plaintiff's complaint fails to allege facts that, if true, fit a cognizable legal theory. Without deciding whether Defendant's acts or omission constitute Cause' as defined by either the Employment Agreement or Shareholders' Agreement, Plaintiff did not fulfill its procedural duties as provided in the Shareholders' and Employment Agreement required to compel the sale of Defendant's shares under both termination with cause and without cause.

For Cause Termination

The Employment Agreement and Shareholders' Agreement jointly govern the disposition of Defendant's shares in Plaintiff Corporation. Section 9(a) of the Shareholder's Agreement governs the disposition of shares upon termination for cause. Sections 9(a)(i) through Sections 9(a)(x) define Cause for the purposes of the Shareholders' Agreement. Section 9(a)(xi) requires that the Corporation provide reasonably detailed written notice and an opportunity to cure a breach of any of the terms or conditions of the Shareholder's Agreement that give rise to Cause. Notably, Section 9(a)(ix) for termination with Cause is if a Shareholder breaches the terms of his or her employment agreement.

The Employment Agreement provides that Defendant's employment shall continue for five years, unless terminated pursuant to either Section 1(c) or 1(d), supra, which sets forth termination for cause under the Employment Agreement. The Employment Agreement was entered into on January 1, 2006 and thus is within its five year term. Therefore, the Employment Agreement governs Defendant's Employment Status.

The Employment Agreement provides several grounds for termination for cause. There are no provisions for termination without cause. Defendant is not an employee at will. Defendant has an employment contract for a term of five years, which by its own terms is only revocable for cause termination. Section 1(c), providing for termination with cause, requires that notice and an opportunity to cure be provided for termination pursuant to either section 1(c)(iii) and 1(c)(iv).

Notably, the Employment Agreement can also be terminated when the Employee is no longer a Shareholder of the Corporation. The Shareholders' Agreement governs whether Defendant is or is not a shareholder in the corporation.

Read together the two Agreements require that notice and an opportunity to cure be provided to Defendant prior to the forced sale of Defendant's shares for all reasons constituting [*6]Cause as defined in Section 9(a) of the Shareholders' Agreement. Specifically, pursuant to Section 9(a)(ix) notice and an opportunity to cure are required when termination of a shareholder is based on breach of the Employment Agreement, notwithstanding whether the Employment Agreement requires notice and an opportunity to cure for the same or a substantially similar act or omission.

While Plaintiff's complaint states that Plaintiff "has complied with all contractual obligations regarding its purchase of Defendant's shares," Plaintiff Corporation does not claim that the Corporation provided Defendant with notice and an opportunity to cure as provided for in the Shareholders' Agreement or the Employment Agreement. Nor does Plaintiff oppose Defendant's position that notice and an opportunity to cure were not provided.

In any event, Plaintiff does not have a cause of action for termination with cause that does not require notice and an opportunity to cure under the Employment Agreement. Paragraph fourteen of the complaint states that Defendant failed to "appropriately respond to numerous requests for information initiated by the NYSDOH. Paragraph fifteen continues that such failure to respond was jeopardizing the regulatory good standing of Plaintiff Corporation. Finally, paragraph sixteen states "[d]ue to Defendant's failure to administer her duties and obligations, the majority of the Shareholders terminate Viola as an employee, officer and director of the Day Op for Cause." Although the Complaint does not address with specificity what the basis for Defendant's termination for cause is, the language of these allegations match the language of sections 1(c)(iii) and 1(c)(iv), supra, nearly verbatim. Both sections 1(c)(iii) and 1(c)(iv) require Plaintiff Corporation to provide notice and an opportunity to cure. Therefore, Plaintiff does not have a cause of action for termination for Cause under the two agreements governing this action for failure to comply with the procedural requirements of the two agreements read together. Roth v. Goldman, 254 AD2d at 406.

Termination Without Cause

Therefore, the only available ground for Plaintiff's requested relief are those grounds that do not require notice and an opportunity to cure. Section 9(b) of the Shareholders' Agreement states the only grounds for termination that does not require notice and an opportunity to cure under the joint reading of the Shareholders' and Employment Agreements.

If termination of a shareholder is without cause, and the forced sale of a shareholder's shares is pursuant to section 9(b) of the Shareholders' Agreement, then the provisions of the Employment Agreement govern. That is, the termination of the Employment Agreement is a precondition to triggering section 9(b) of the Shareholders' Agreement. However, since Defendant has a five year employment contract and is not an at-will employee, her Employment Agreement can only be terminated for cause, as defined by the agreement within the agreement's five year term. However, Section 9(b) provides that the Corporation can force the sale of Defendant's shares upon "breach of a Shareholder's Employment Agreement by the Corporation." Plaintiff, therefore, claims that it is entitled to close on Defendant's shares because she was terminated, notwithstanding whether her termination was the result of Plaintiff's own breach. Defense counsel submits that this provision is unconscionable as a matter of law.

"A determination of unconscionability generally requires a showing that the contract was [*7]both procedurally and substantively unconscionable." Gillman v. Chase Manhattan Bank N.A., 73 NY2d 1, 10 (1988). There have been exceptional cases where a provision of the contract is so outrageous as to warrant holding it unenforceable on the ground of substantive unconscionability alone." Id., 73 NY2d at 12. A hearing is required if a finding of unconscionability is not free from doubt. See State v. Wolowitz, 96 AD2d 47, 67-68 (2d Dept. 1983). Upon a finding of unconscionability a court "may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause as to avoid an unconscionable result. UCC § 2-302(1).

Procedural unconscionability concerns the contract formation process. It is commonly defined as the absence of a meaningful choice, Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449-50 (D.C. Cir. 1965). Relevant factors to finding procedural unconscionability include whether the contracting parties were sophisticated business persons negotiating at arms-length, see Suffolk Laundry Services, Inc., v. Redux Corp., 238 AD2d 577, 579 (2d Dept. 1997), where there was gross disparity in bargaining power at the time of contract, see Blake v. Biscardi, 62 AD2d 975, 977 (2d Dept. 1978), and whether high pressure sales tactics were used, see Matter of Friedman, 64 AD2d 70, 85 (2d Dept. 1978). These foregoing factors are by no means exhaustive, nor are they presented in any hierarchal order.

By contrast, substantive unconscionability appears per se. Friedman, 64 AD2d at 85; whether a contract provision is unconscionable as a matter of law is an issue of law for a court to determine. Laidlaw Transportation, Inc. v. Helena Chemical Company, 255 AD2d 869, 870 (4th Dept. 1998). Substantive unconscionability goes to whether a contractual provision is unreasonably favorable to one side. See Wolowitz, 96 AD2d at 67-68. Wolowitz recognized that such examples are virtually limitless but include inflated prices, unfair termination clauses, unfair limitations on consequential damages and improper disclaimers of warranty. Id. (emphasis supplied).

Consistent with the courts' loathsome disposition to forfeiture, contract provisions that are oppressive, unjust, and unreasonably deprive a party of the benefits of his or her bargain are substantively unconscionable. See Schuster v. First National Monetary Corporation, 113 Misc. 1058, 1065 (NYCty Civ. Ct. 1982). The court in Schuster held a contract provision to be unconscionable as a matter of law because it resulted in the oppressive forfeiture of a terminated account executive's rights to payment upon failure to fulfill a condition that was not entirely within his capability to perform. Id.

There is no allegation or evidence in the moving papers of procedural unconscionability. The lack of procedural unconscionability does not preclude a finding of substantive unconscionability and thus unenforceability.

This Court holds that Section 9(b) of the Shareholder's Agreement which forces the sale of Defendant's shares pursuant to the Plaintiff Corporation's breach of Defendant's Employment Agreement is unconscionable as a matter of law. Pursuant to the savings clause of the Shareholder's Agreement, the remainder of the Shareholder's Agreement remains enforceable.

Section 9(b) is oppressive, unjust and unreasonably deprives Defendant of the benefits of her Agreements with Plaintiff Corporation. It is unconscionable as a matter of law to enforce the Shareholders' Agreement so that Plaintiff benefits from its own breach of Defendant's Employment Agreement. [*8]

Section 9(b) of the Shareholders' Agreement effectively renders the protections of Defendant's Employment Agreement meaningless. The protections are forfeited. Defendant's Employment Agreement provides her with five years of uninterrupted Employment. During this time the Corporation is precluded from forcing her to sell her interest in the Corporation for reasons other than those constituting Cause, as defined by the agreements. Although termination without cause under Section 9(b) of the Shareholders' Agreement requires the Corporation to buy back shares at full value, Defendant is without remedy to contest the forced sale of her shares if she is terminated for patently improper reasons such as termination by reason of Plaintiff's breach. Most notably, enforcing the provision under the given facts would allow Plaintiff Corporation to benefit from its own breach. This result is oppressive and will not be enforced by this Court.

In summary, Defendant's cross-motion to dismiss for failure to state a cause of action pursuant to CPLR § 3211(a)(7) is granted. For the foregoing reasons, Plaintiff's complaint is dismissed in its entirety without prejudice. Plaintiff's and Defendant's remaining motions are, therefore, denied as being moot.

Dated: August 1, 2007

J.S.C.

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