Corporate dissolution proceedings in New York are governed by strict procedural rules. When litigation is pending between the owners of one or more closely held companies, it is not uncommon in my experience for the defendant(s) to want to assert a counterclaim seeking dissolution of the relevant corporation(s). However, filing a separate dissolution proceeding is generally a better tactical move. A would-be dissolution petitioner recently found this out the hard way.
In Corner Furniture Discount Ctr., Inc. v Sapirstein, two partners had formed a retail furniture business in the 1980s, which later expanded into four corporations: two furniture entities and two real estate holding companies. In 2018, after discovering that his partner Sapirstein had apparently been embezzling funds for many years, Stechler removed Sapirstein as an officer and director of the business and barred him from decision making. The furniture entities sued Sapirstein alleging claims for breach of fiduciary duty, fraud, conversion, and violation of the faithless servant doctrine.
Sapirstein filed an answer and alleged counterclaims against all four entities, including a claim for dissolution based on “oppression” and “waste” under Section 1104-a of the Business Corporation Law (the “BCL”).
The four entities filed a motion to dismiss Sapirstein’s dissolution counterclaim as procedurally defective and non-compliant with BCL Sections 1105 and 1106. Section 1105 requires a party suing to dissolve a corporation to file a “petition for dissolution,” which Sapirstein had not done. Section 1106 requires a party suing to dissolve to file the petition by “order to show cause,” outlining very specific procedures the court and petitioner must follow once the order to show cause is filed.
These specific procedures include:
- “the order to show cause must require the corporation and all interested persons to show cause not less than four weeks after the granting of the order, why the corporation should not be dissolved;
- the court may order the corporation, officers, and directors to produce to the court a schedule of pertinent information, including corporate assets and liabilities, and the name and address of each shareholder, creditor, and claimant;
- the petitioner must publish the order to show cause at least once in each of the three weeks prior to the return date of the order to show cause in a newspaper of general circulation in the county where the corporation’s principal office is located;
- the petitioner must serve the order to show cause upon the state tax commission, the corporation, and each person named in the petition, or in any schedule of shareholders, creditors, or claimants at least ten days prior to the return date of the order to show cause, or if served by mail, at least 20 days before the return date; and
- the petitioner shall file the order to show cause and the petition with the clerk of the county where the office of the corporation is located within ten days after the order is entered, and shall file the schedule of information required by the court, if any, 10 days thereafter.”
Sapirstein’s dissolution counterclaim complied with none of these procedures. After discovering his error, Sapirstein attempted to belatedly file an order to show cause, petition, and declaration for dissolution. In his decision, the Judge noted that a “proponent of dissolution must comply with Business Corporation Law 1105 and 1106” and “[t]here must be strict compliance with the procedures set forth” in the statutes. The court cited, among other decisions, In re WTB Properties, Inc. In WTB, the Second Department had held that the trial court erred in ordering dissolution before the petitioner satisfied the requirements of BCL 1106. The Court also held that the lower court had the discretion to allow the petitioner to “amend the petition and comply with the statutory requirements.” Sapirstein’s error in not seeking leave to amend his pleading as an answer/petition was fatal. As the Court held, “Sapirstein’s efforts to correct his defective first counterclaim with a Petition and declaration in support, fail as they do not comply with Business Corporation Law §§ 1105 and 1106. Absent from Sapirstein’s submission are an Order to Show Cause, a Verified Petition, and proof of publication. Sapirstein fails to plead a cause of action in compliance with the dictates of Business Corporation Law §§ 1105 and 1106″ (citations omitted). As a result, the court dissolved Sapirstein’s dissolution claim.
Sapirstein went on to bring a separate proceeding in Bronx County Supreme Court for judicial dissolution of the businesses. This petition was essentially a carbon copy of the one he had filed for Corner Furniture just over a week earlier. The court refused to sign his order to show cause a whopping four times, each for a different procedural failure, including:
- Failure to include the affidavit and exhibits upon which the petition was based.
- The order to show cause provided insufficient basis for the relief sought.
- Failure to comply with the notice requirement of 22 NYCRR 202[.7] (f) which requires the movant to show that a “good faith effort has been made to notify the party against whom the temporary restraining order is sought of the time, date and place that the application will be made in a manner sufficient to permit the party an opportunity to appear in response to the application.”
- Failure to comply with the prior notice requirement of 22 NYCRR 202.7 (f).
The Court granted Sapirstein’s fifth proposed order to show cause, but only to the extent of ordering an appearance. The court also reassigned the proceeding to Justice Franco, the same justice who dismissed Sapirstein’s dissolution counterclaim in Corner Furniture.
It seems apparent that Sapirstein would have been better off filing a separate dissolution proceeding than asserting a counterclaim seeking dissolution. He could have eventually filed a motion to consolidate the two cases.
As this case illustrates, when filing a dissolution proceeding in New York, the statutes and applicable court rules must be strictly complied with so as to avoid an embarrassing and expensive loss on procedural grounds.
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1 2019 NY Slip Op 32245(U) [Sup Ct Bronx County June 14, 2019].
2 A discussion of the corporate machinery by which Stechler was able to effectuate these changes in corporate governance are beyond the scope of this article.
3 New York Consolidated Laws, Business Corporation Law, BSC § 1105.
4 New York Consolidated Laws, Business Corporation Law, BSC § 1106.
6 291 AD2d 566 [2d Dept 2002].