In re Dubonnet Scarfs, Inc. , 484 N.Y.S.2d 541 ( 1985 )

OPINION OF THE COURT

Ross, J.

This case involves an appeal from a denial of a petition to judicially dissolve a closely held corporation.

In 1952, Arkwright Accessories, Inc., was incorporated in New York State. Subsequently, in 1959, there was a certificate filed changing the name of this corporation to Arkwright Mfg., Inc. (Arkwright). Then in 1960, an amended certificate of incorporation was filed, reflecting this name change.

Arkwright is affiliated with Wright Manufacturing Co., Inc. (Wright), which is a New Jersey corporation. Besides its affiliation with Wright, Arkwright also has three wholly owned subsidiaries, whose names are: Parknell Corporation (Parknell), Knitwear Building Corporation (Knitwear), Park Sewing Corporation (Park); and, while Parknell is a New York corporation, Knitwear and Park are New Jersey corporations. The affiliated corporations, Arkwright and Wright, as well as the three subsidiaries, are engaged principally in the manufacture and sale of knitwear. Although the manufacturing facilities for these corporations are located in New Jersey, their sales offices are situated in Manhattan. Collectively, it appears that these firms employ 61 persons.

Arthur Olshan (Olshan) is the President of Arkwright. It is undisputed that since the 1952 incorporation of Arkwright, Olshan has been its chief executive officer and has had sole responsibility for all design, manufacture and sales. From the time of Arkwright’s formation, Olshan has held 50% of the stock and the other 50% has been held by Dubonnet Scarfs, Inc. (Dubonnet), which is a New Jersey corporation.

Fred Thomases (Fred) and Florence Thomases (Florence) are husband and wife, and each of them owns 50% of the issued and outstanding capital stock of Dubonnet. Florence holds her Du-bonnet stock in part as nominee for Fred and in part as nominee for a person named Harry Gordon (Gordon), who has allegedly been Fred’s business partner for over 40 years.

In recent years Arkwright has operated profitably and its creditors have all been paid on a current basis.

Fred and Gordon personally guaranteed, to various financial institutions, the indebtedness of Brucol Industries, Inc. (Brucol), and certain of its subsidiaries and affiliates. Thereafter, on August 7, 1981, Brucol and these companies associated with it, filed for reorganization, pursuant to chapter 11 of the Federal Bankruptcy Code (US Code, tit 11). On July 2, 1982, as a result of the Brucol bankruptcy, Fred and Gordon were compelled, themselves, due to their guarantees, mentioned supra, to file for reorganization, pursuant to chapter 11 in the United States Bankruptcy Court for the Southern District of New York.

By order to show cause, brought in February, 1984, petitioners Dubonnet, Fred and Florence, as holders of 50% of the outstanding shares of Arkwright, moved for its judicial dissolution, upon the basis of sections 1104 and 1104-a of the Business Corporation Law as well as the common law of the State of New York. In substance, the petitioners allege in their petition that the refusal of Olshan to buy them out, since Fred and Gordon need the cash to satisfy their personal creditors, justifies dissolution.

Respondent Arkwright cross-moved to, inter alia, dismiss the petition.

Special Term denied the petitioners’ application, upon the basis that the petition does not state a cause of action, and, therefore, it granted the cross motion to dismiss. We agree.

Subdivision (a) of section 1104 of the Business Corporation Law sets forth the three reasons upon which holders of one half of the outstanding shares of a corporation can seek dissolution of the corporation and these shareholders can move on one or more of those grounds. The grounds are:

“(1) That the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained.

“(2) That the shareholders are so divided that the votes required for the election of directors cannot be obtained.

“(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.”

In 1979, section 1104-a of the Business Corporation Law became law and it expanded the availability of judicial dissolution. Under section 1104-a of the Business Corporation Law, holders of20% or more of all outstanding shares may petition for dissolution on one or both of two grounds. They are:

“(1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders;

“(2) The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.” (Business Corporation Law, § 1104-a, subd [a].)

Besides the statutory grounds for judicial dissolution, set forth supra, there is also a common-law ground. Thus, the Court of Appeals has held in Leibert v Clapp (13 NY2d 313, 317) that there is a common-law right of dissolution, when management breaches its fiduciary duty to the minority shareholders. We find that the instant petition fails to state a cause of action since this petition does not allege any facts that would justify a judicial dissolution on any of the grounds set forth either in sections 1104 or 1104-a of the Business Corporation Law, cited supra, or at common law.

Even though for over three decades, from Arkwright’s 1952 formation to date, Olshan has exercised daily management control, nowhere in the petition do the petitioners allege that such control by Olshan has led to a single instance of internal dissension, which resulted in a deadlock over a management decision and/or a stalemate in the election of a director or directors and/or a performance of duty by Olshan that was either oppressive or illegal or fraudulent or breached a fiduciary responsibility.

It is evident from our analysis of the petition that the only reason that the petitioners initiated this dissolution proceeding was to satisfy Fred’s and Gordon’s personal creditors. The creditors’ committee (Committee) in Fred’s and Gordon’s bankruptcy proceedings has demanded that, in order for Fred and Gordon to receive their final discharge from bankruptcy, they must each divest themselves, through their Dubonnet shares, of their ownership interest in Arkwright, by liquidating it and turning the proceeds over to these creditors. Furthermore, the Committee has advised Fred and Gordon that, if they do not comply with this demand, then the Committee will move against other assets of Fred and Gordon.

In the record before us is a copy of an affidavit, dated March 20,1984, of Robert A. Wiener (Wiener), who is a certified public accountant and the accountant for the Committee. In his affidavit, Wiener states that he has audited the books of Arkwright on behalf of the Committee and “found that these companies had substantial liquid assets. Specifically, Arkwright and its affiliated companies had close to two million dollars in cash or cash equivalents * * * [and] this money * * * [is] being held in interest-bearing certificates of deposit. In addition, the companies had over one million dollars in near liquid receivables”.

The only specific allegation leveled against Olshan in the petition alleges that sometime in September, 1981 Olshan and Fred agreed that, inter alia, Arkwright would acquire Dubonnet’s 50% ownership interest in Arkwright at fair value, and at the time of this agreement Olshan allegedly misrepresented the value of Arkwright’s assets. Although the petitioners charge Olshan with this misrepresentation, they do not set forth any facts that would justify the conclusion that, even if Olshan made such a misrepresentation, it has in any manner interfered with the management of Arkwright. Incidentally, Olshan, in an affidavit, dated March 15,1984, which was submitted in support of Arkwright’s cross motion, denied that he ever made such a misrepresentation. Needless to say, the mere fact that a closely held corporation may have substantial liquid assets, and a stockholder has personal financial problems totally unrelated to the corporation do not, in and of themselves, state grounds for judicial dissolution within the meaning of the Business Corporation Law sections cited supra, or at common law (see Matter of Kemp & Beatley [Gardstein], 64 NY2d 63, which contains in the majority opinion the historical background in New York State of judicial dissolution of close corporations).

The petitioners present no legal authority that holds that a shareholder in a close corporation, who is in personal financial difficulty, which is unrelated to that corporation, can demand to be bought out, because he or she needs the cash to satisfy personal creditors, and that if such demand is not complied with, then such shareholder can seek the dissolution of that corporation.

We disagree with the dissent’s contention that Olshan’s alleged refusal to cause Arkwright to buy out the petitioners sets forth a ground for judicial dissolution under the Business Corporation Law sections cited supra. None of the facts or legal authority cited by the dissent supports the conclusion that the management of Arkwright has in any way been affected by this alleged refusal.

The allegations that Fred and Gordon are in their late seventies and have a pressing need for cash arouses our sympathy as it arouses the sympathy of the dissent. However, neither sympathy nor a shareholder’s need for cash qualify as either a statutory or common-law ground for judicial dissolution.

Accordingly, the order and judgment (one paper), Supreme Court, New York County (Robert White, J.), entered May 1, 1984, which, denied the petitioners’ application for dissolution and granted the respondent’s cross motion to dismiss the petition, should be affirmed, with costs.