Matter of Pappas

[*1] Matter of Pappas 2012 NY Slip Op 51189(U) Decided on May 9, 2012 Sur Ct, New York County Anderson, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 May 9, 2012
Sur Ct, New York County

In the Matter of the Application of Robert H. Groman and Helga Hensing, as Co-Executors of the Estate of Christo Byron Pappas, Deceased, for Leave to Compromise the Claims as and Between Nicholas Cola and Byron Chemical Company, Inc., and the Estate of Christo Byron Pappas Pursuant to SCPA § 1813.



2003-2184

Nora S. Anderson, J.

The executors of the estate of Christo Byron Pappas request permission to compromise four litigations pending in this and other courts (SCPA § 1813). Laura Candela, who receives six percent of the residuary estate, objects to the settlement. The parties have stipulated that the court may decide the matter on the papers submitted.

A discussion of the history of this estate is required before the merits of the proceeding can be evaluated. Decedent died on June 6, 2003. Under his probated will, he left his estate, worth approximately $31,700,000, to family, friends and various employees of Byron Chemical Company, Inc. ("Byron Chemical"), the company of which he was the majority shareholder. Letters testamentary issued to Robert H. Groman, Laura Candela and Helga Hensing on October 23, 2003.[FN1]

At the time of his death, decedent owned 164 shares (82 percent) of the outstanding stock of Byron Chemical. Laura Candela and Nicholas Cola, both employees of the Company, each owned 18 shares (nine percent). Upon decedent's death, the disposition of his ownership interest in the Company was governed by a Shareholder Agreement and Irrevocable Proxy executed on September 29, 1993, and amended on December 23, 2002 (the "Shareholder Agreement"), which provided for the sale of his Byron Chemical stock to the other two shareholders. Pursuant to the Shareholder Agreement, the estate sold half of its interest in Byron Chemical (82 shares) to Cola in December 2003 for $1,721,081.81.[FN2] For reasons not relevant here, Byron Chemical redeemed [*2]Candela's shares, and she opted not to purchase the estate's remaining 82 shares. Thus, Cola currently owns 100 shares of the Company and the estate owns 82 shares.

From the outset, the estate's administration proved complicated and contentious, with litigation involving Byron Chemical and/or Cola and Candela on various fronts. The executors first contended with Cola, who they believed had taken money and documents from decedent's apartment after his death. In December 2003, they obtained in this court an Order to Attend (SCPA § 2103) compelling Cola to appear for an inquiry concerning the property (the "Discovery Proceeding"). Cola turned over to the executors the estate documents and cash that he claimed to have in his possession and then was examined. Thereafter, the executors took no further action.

Shortly thereafter, Candela brought an action against the estate, Cola and Byron Chemical in Supreme Court, Nassau County (the "Candela Action"). Candela alleged that Byron Chemical had breached her employment contract by failing to pay her annual bonuses equaling 10 percent of Byron Chemical's pre-tax profits. She also asserted causes of action against the estate for, among other things, fraud, unjust enrichment and breach of fiduciary duty based upon alleged misconduct by decedent related to Byron Chemical. Ultimately, she was only successful on her claims against Byron Chemical related to her employment contract, for which she obtained a judgment in excess of $5.5 million.

The judgment Candela obtained against Byron Chemical in the Candela Action had a significant impact on the estate's administration. Not only did the judgment reduce the value of the estate's interest in Byron Chemical, but it also triggered additional litigation with Cola and Byron Chemical. They jointly commenced an action against the estate in Supreme Court, Queens County, in August 2006, seeking in excess of $10 million in damages for decedent's alleged breach of fiduciary duty, fraud and violations of New York's Business Corporation Law (the "Byron Action").[FN3] Cola sued primarily on the basis that his employment contract had the same bonus provisions as Candela's, and Byron Chemical sued to be indemnified for its liability to Candela and (potentially) to Cola under their respective employment contracts.[FN4] In response, the estate, as a Byron Chemical shareholder, asserted several derivative counterclaims against Cola arising out of his role as an officer of Byron Chemical.

At about the same time as the Byron Action was commenced, the executors brought an action against Byron Chemical in Supreme Court, New York County, seeking roughly $1.4 million in unpaid compensation earned by decedent as President and Chairman of Byron Chemical and approximately $2.95 million for the unpaid balance of loans decedent had made to the Company ("the Estate Action"). Thereafter, the executors filed a petition in this court, seeking a declaration that Cola owes the estate additional funds for his December 2003 purchase of 82 shares of Byron Chemical stock, on the theory that the sale price was calculated incorrectly [*3](the "Stock Purchase Proceeding"). In response, Cola asserted counterclaims against the estate, alleging that he is entitled to a refund of the entire amount that he paid for such shares because the shares of the Company were essentially valueless.

The Settlement and Release Agreement (the "Settlement Agreement") for which the executors seek authorization (SCPA

§ 1813) would conclude the Discovery Proceeding, the Byron Action, the Estate Action and the Stock Purchase Proceeding through the exchange of mutual releases among Byron Chemical,

Cola and the estate.[FN5] Under the Agreement, the estate would recover from Byron Chemical $1,999,297.84 of the amount of outstanding loans due and owing the estate from Byron Chemical. In turn, the estate would refund to Cola $1,536,581.80 of the total amount ($1,721,081.81) that Cola paid for his purchase of the 82 shares of the estate's Byron Chemical stock in December 2003.[FN6]

Additionally, Cola would purchase the remaining 82 shares of the estate's Byron Chemical stock for $202,725.[FN7] Further, because the estate would be refunding to Cola a substantial portion of the price that he paid for its shares of Byron Chemical, the estate would have a basis to seek a refund from New York State and federal taxing authorities on the ground that the estate's shares of Byron Chemical as of decedent's death were worth less than what was previously reported on its tax returns. However, the estate fiduciaries do not quantify the monetary benefit to the estate if such refund effort were successful.

According to petitioners, the settlement would be in the best interests of the estate for several reasons. First, it would resolve all pending litigation with Cola and Byron Chemical, thereby avoiding the risk of loss (or inability to recover on potential judgments obtained against Byron Chemical and Cola), as well as the very substantial legal fees that would no doubt be incurred to litigate the pending proceedings to conclusion. Second, it would also result in the estate receiving $462,716.04 in liquid assets [FN8] plus $202,725 for the estate's minority interest in Byron Chemical, with the further possibility that the estate would obtain a tax refund. Third, it [*4]would permit the fiduciaries to move closer to making final distributions and winding up the estate.

Candela, however, asserts that the fiduciaries have not demonstrated that the settlement is in the best interests of the estate because the fiduciaries have not set forth the value of the estate's minority interest in Byron Chemical for which Cola will pay the estate $202,725. Among other things, Candela insists that such amount is "absurdly low" and bears no relation to the fair market value of the shares.

SCPA § 1813(1) provides that the court may approve a compromise "for good cause shown." The central consideration for the court is "whether the proposed compromise is in the estate's best interests" (Matter of Lazarus, NYLJ, Mar. 19, 1998, at 35, col 4 [Sur Ct NY County], affd 257 AD2d 436 [1st Dept 1999]). "Authorization under section 1813 should not be granted if the proposed settlement would be an unreasonable exercise of the fiduciary's discretion" (id.). Among the factors courts consider are the "relative merits of the parties' positions (as qualified by the knowledge that litigation is never risk free) and the value of achieving peace for the combatants sooner rather than later" (id. [citations omitted]).

Based on the current record, the court is not in a position to evaluate whether the Settlement Agreement is in the best interests of the estate. Such a determination would at a minimum require knowledge of the value of all the parts of the deal. However, as discussed below, petitioners have not offered an appraisal for the estate's shares of Byron Chemical which they propose to transfer to Cola in exchange for $202,725.

Based on what a prudent fiduciary would ordinarily do under circumstances such as these, the executors presumably evaluated the worth of the estate's claims against Cola and Byron Chemical relative to the worth of their claims against the estate, taking into consideration the respective merits of the claims, the risks of loss and the costs of continued litigation. On the same basis, they presumably then determined that it was in the best interests of the estate to give up its claims and the estate's remaining shares of the Company in exchange for the surrender of their adversaries' claims and approximately $665,500 ($462,716.04 plus $202,725 for the shares). In determining how much to offer as their part of the bargain, the fiduciaries would ordinarily have had to assess the fair market value of the shares that they were proposing to surrender to Cola as part of the bargain.

Petitioners, however, offer several reasons why such assessment is unnecessary. The first is that the sale of the shares should be viewed not in isolation, but as part of the settlement as a whole. The second is that the Company's financial statements and the "fact that the Estate is merely a minority shareholder clearly militates in favor of a determination of the reasonableness of the monetary portion of the consideration to be paid ... in exchange for the remaining shares of Byron Chemical."

The court agrees that the sale should not be viewed in isolation and further agrees that the estate's status as a minority shareholder would normally be relevant to the value of the shares. However, by asking the court to consider the estate's minority interest and the Company's financial statements as a basis for valuation, petitioners are essentially asking the court to act as its own expert. This the court cannot do. In the absence of a credible appraisal of the 82 shares the fiduciaries are offering to surrender as part of the deal, the fiduciaries cannot plausibly claim to know the total value of what they propose to give in settlement. Accordingly, the court too [*5]would simply be speculating as to the total worth of what the fiduciaries would be giving to their adversaries in exchange for the total worth of what they themselves would be getting. In other words, while the fair market value of one of the assets to be surrendered or sold remains unknown, it is not possible to gauge whether the proposed settlement as a whole would serve as a net benefit or net detriment to the estate.

Accordingly, the petition is denied without prejudice to renewal upon the submission of an appraisal or some other appropriate basis for valuing the estate's minority interest in

Byron Chemical as of the time of the execution of the Settlement

Agreement.

This decision constitutes the order of the court.

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S U R R O G A T E

Dated: May , 2012 Footnotes

Footnote 1:Laura Candela resigned with court permission in 2004 (Matter of Pappas, NYLJ, Nov. 18, 2004, at 31, col 4).

Footnote 2:Under the Shareholder Agreement, the purchase price was 150 percent of the book value of the shares of Byron as reflected on the Company's December 31, 2002 balance sheet, attached to, and forming part of, its 2002 federal income tax return.

Footnote 3:The Byron Action was subsequently transferred to Supreme Court, New York County.

Footnote 4:According to Byron Chemical and Cola, the court in the Candela Action made certain findings of misconduct by decedent in his role as President and majority shareholder of Byron Chemical, which findings make decedent (and therefore the estate) liable to Cola and Byron Chemical.

Footnote 5:Cola also filed papers supporting the executors' application for approval of the Settlement Agreement under SCPA § 1813.

Footnote 6:The Settlement Agreement also provides for the withdrawal of Cola's objections to the executors' Second Amended Accounting (which Cola made in his capacity as a beneficiary of six percent of the residuary estate). Such a provision would normally raise concerns that the fiduciaries were motivated, at least in part, by a desire to resolve objections leveled against them individually. However, a review of the objections indicates that the objections are not directed to specific conduct of the fiduciaries, but rather, to the way in which the account treats matters that are the subject of the pending litigations involving Cola and Byron Chemical.

Footnote 7:Cola will then be the sole shareholder of Byron Chemical.

Footnote 8:The estate would receive $1,999,297.84 from Byron Chemical, but would be required to pay to Cola $1,536,581.80. Thus, the estate would receive $462,716.04 in liquid assets.