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Firm News: board of directors

Shareholder Disputes: How to Obtain Company Documents, by Stuart F. Gartner

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What can you do if you suspect that shareholders in your company are engaging in fraud or mismanaging the company, yet your requests for corporation records go unheeded? In Novikov v. Oceana Holdings Corp., a case handled by this Firm, the Kings County Supreme Court answered that question: so long as you have a legitimate purpose (such as investigating suspected mismanagement), you can force the company to turn over relevant corporation records.

Our client was a minority owner in a closely held corporation (the "Company") that owned a mixed commercial and residential building ("Building") in the Brighton Beach area of Brooklyn.  Our client had been kept out of the decision making loop by the other shareholders, and received virtually no information from them as to the Company.  Over time, he began to suspect that the other shareholders were engaging in self-dealing and mismanaging the Company.  Among other things, our client believed that one  of the shareholders had taken a substantial loan from the Company that had gone unpaid, and that the other shareholders were paying themselves unreasonable salaries, and had rented a commercial unit in the Building at a below market rent to another, separate company owned by them.  To investigate the suspected misconduct, our client demanded to see Company tax returns, financial statements, and property leases.

The Company refused to give over the documents voluntarily, so this Firm brought a Supreme Court petition on our client's behalf to compel the Company to do so.  The Company opposed the petition, saying that it had already given a redacted Company tax return, and that our client had bad motives for seeking the documents.

The Court granted the petition, ordering the Company to give over to our client unredacted State and Federal tax returns, profit and loss statements, leases, employment and commission agreements, shareholder meeting minutes and lists, and mortgage and loan documents.  (A copy of the decision is found at www.gbglaw.com under Decisions.)  The key to the Court's decision is a well-known point of law:  In addition to a statutory right for certain documents, "[a] shareholder has a common law right to inspect corporate books and records when the request is made in good faith and for a proper purpose....Investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are in fact proper purposes ..." 

(Critically, our client with other counsel had tried previously to compel the Company to produce documents, but was turned away by the Court for failing to show a proper purpose for his request.  Our petition on his behalf included documentary evidence supporting his belief of Company mismanagement.)
 
The lesson offered by the Novikov decision is clear: the Business Corporations Law provides protections for minority shareholders; but whether you succeed in your request to obtain company documents depends on how well you can, prior to commencing a lawsuit, garner relevant facts and articulate a strong basis for your belief that the company is being mismanaged.   -SFG 11/3/2014

    




BCL 624, board of directors, business law, closely held corporation, corporate mismanagement, corporate records, corporations, inspection, limited liability companies, shareholders

Noises Off, by Arthur Xanthos

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What is a Co-op obligated to do when one shareholder-tenant complains that another shareholder-tenant is too noisy? Consider the following: Shareholder-tenant on 4th floor sues Co-op and shareholder-tenant on 5th floor. The complaint alleges that the 5th floor tenants are unreasonably noisy, and that the Co-op has failed to resolve it. As real estate development in New York City continues to accelerate, such complaints are becoming commonplace.

Co-ops are landlords, so by law they are deemed to have warranted to tenants that the premises are habitable. An unreasonably loud building obviously can make an apartment uninhabitable. But what if the ‘noise’ complained of is caused by another shareholder-tenant? Further, what if the noise is sporadic, or difficult to record or measure objectively? Such cases pose nettlesome problems for co-ops, managing agents, and their carriers, because money damages are often not the primary goal of the plaintiff. How do you resolve a claim where the plaintiff wants peace and quiet, the defendant-tenant argues that the noise is the natural by-product of a happy, busy family life, and the Co-op cannot control the noise or the plaintiff’s reaction to it?

In our practice, we have seen or suggested several, non-orthodox settlement possibilities: (1) The Co-op can pass and enforce more stringent carpeting and padding rules; (2) Subject to cost, the Co-op can invest in soundproofing materials at the ceiling, floor, or wall interfaces; (3) The parties can explore an apartment swap, or a buyout/sale; (4) The Co-op can monitor noise (via a property manager or superintendent) and assess reasonable fines based on violations of a well-defined noise policy; and (5) If warranted and authorized under the proprietary lease, the Co-op can attempt a dispossess proceeding based on the offending tenant creating a nuisance. See, e.g., Domen v. Aranovich, 1 N.Y.3d 117 (2003). Failing resolution, a strong summary judgment motion on behalf of the Co-op is imperative, keeping in mind that as recently as a few days ago the First Department kept a Co-op in a lawsuit while dismissing the offending, noisy tenant from the case! Brown v Blennerhasset Corp., 2014 N.Y. App. Div. LEXIS 188, 1-3 (1st Dept. Jan. 14, 2014).

                                                                                                   -APX 1/17/14
Arthur Xanthos, board of directors, Brown v. Blennerhasset, co-op and condo, noise complaints, premises liability, proprietary lease, real estate, tenant, warranty of habitability