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Robert ARMENTANO, John Armentano and the Armentano Family Trust 2012 (John) Suing Individually and Derivatively on Behalf of Nominal, Defendant Paraco Gas Corporation, Plaintiffs, v. Joseph ARMENTANO, the Joseph A. Armentano Family Trust (2020), the Armentano Family Trust (2012) (Joseph) and Christina Armentano, Defendants, Paraco Gas Corporation, Nominal Defendant.
The following e-filed documents, listed in NYSCEF by document numbers 6-20, 30-33, 36-41 were read on this motion by Defendants Joseph Armentano (“Joseph”), The Joseph A. Armentano Family Trust (2020) (the “2020 Trust”), The Armentano Family Trust 2012 (the “2012 Joseph Trust”), Christina Armentano (“Christina”), and Paraco Gas Corporation (“Paraco”) (collectively “Defendants”) for an order pursuant to CPLR 3211(a)(1) and CPLR 3211(a)(7) dismissing the Complaint of Plaintiffs Robert Armentano (“Robert”), John Armentano (“John”), and The Armentano Family Trust 2012 (the “2012 John Trust”) (collectively “Plaintiffs”). Plaintiffs oppose Defendants' motion.
Upon the foregoing papers, and for the reasons stated herein, Defendants' motion is denied.
This action was initiated by Plaintiffs' filing of their Summons and Complaint on July 20, 2020. It arises out of Joseph's alleged improper transfer of Paraco Class “B” Stock (“B Shares” or “B Stock”) and Paraco Class “A” Stock (“A Shares” or “A Stock”) in violation of a right of first refusal (“ROFR”) and stock transfer prohibition clause found in the Paraco Class “B” Shareholders' Cross-Purchase Agreement (the “Cross-Purchase Agreement”) and the Paraco Class “A” Shareholders' Stock Redemption Agreement (the “Stock Redemption Agreement”). According to Plaintiffs, Joseph is required to offer all his B Shares to Robert and John under the Cross-Purchase Agreement and his A Shares to Paraco under the Stock Redemption Agreement. The Court held a Preliminary Conference and issued a Preliminary Conference Order providing for a completion of discovery by July 1, 2021. The Court declined to stay discovery pending this motion to dismiss.
Paraco was started by Pat Armentano (“Pat”) in 1968 and over the years grew to be the “largest privately-held provider of propane gas in the Northeast” (Joseph Aff.1 at ¶ 3; Complaint at ¶ 11). Pat had four sons, Robert, Michael, John, and Joseph, with Joseph going on to become the President and CEO of Paraco in 1988 (id.). In 1985, Pat split the company's stock into two classes; Class A Shares, which have voting rights, and Class B Shares, which do not (id. at ¶ 4). In 1991, all the shareholders and Paraco entered into the Stock Redemption Agreement and the Cross-Purchase Agreement (id. at ¶¶ 6, 8). Pat also ceased to be the sole owner of A Shares in 1991 when he gave 1.29 A Shares to Joseph, and one A Share to each Robert and Michael (id.). Robert exchanged his A Share for a B Share when he resigned from Paraco, and Michael sold his A Shares back to Paraco in 2002 when he resigned (id.). Pat died in 2010 and left 2.71 A Shares to Joseph and three to John (id.). In 2017, John resigned from the corporation and sold his three A Shares and 5.5 of his B Shares “in consideration for the corporation's assignment to him of its 50% interest in an entity known as Paraco South LLC” (id.). It is undisputed that since 2017, Joseph holds all the A Shares (Complaint at ¶ 17).
The B Shares were distributed in 1985 as follows: 40.17 to Pat; 20.33 to Rose Armentano; 12 to Joseph; 8 to Robert; and 4.05 to Michael (id. at ¶ 5). Over the years Michael sold his B Shares to Paraco. In 2012, Joseph and John created their respective trusts and transferred eight B Shares to them. Immediately prior to the events leading up to this action, the B Shares were held as follows: 25.71 by Joseph; 17.9956 by Robert; 11.50 by John; 8 by the 2012 Joseph Trust; and 8 by the 2012 John Trust (Complaint at ¶¶ 14-17).
B. Previous Litigation
In 2018, Joseph sued Robert and John for allegedly violating the ROFR in the Cross-Purchase Agreement (Armentano v Armentano, Index No. 60203/2018 [the “2018 Action”]). The 2018 Action was assigned to this Court and was disposed when this Court's granted Robert and John's motion for summary judgment in a Decision and Order dated February 28, 2019 (the “February 2019 Decision”) (NYSCEF Doc. 51). In that case, Robert and John sought to sell their B Shares to a third party and were in preliminary negotiations to do so having received a “Letter of Intent” (id. at 5). Joseph believed the “Letter of Intent” to be a bona fide offer and sought to enforce the ROFR under the Cross-Purchase Agreement to buy Robert's and John's B Shares (id.). Robert and John disagreed and argued the “Letter of Intent” was not a bona fide offer and it was on that basis that they moved for summary judgment (id.). In its February 2019 Decision, this Court held that “the Minority Shares Letter of Intent was a mere expression of interest, was non-binding in all material ways, and did not constitute an offer as it did not confer on Defendants the power of creating a contract through any future acceptance. Accordingly, the unambiguous language of the right of first refusal requiring a bona fide offer was not triggered by the Minority Shares Letter of Intent” (id. at 24-25).
C. Events Leading to Current Dispute
In 2019, the Paraco Board of Directors asked Joseph to develop a succession plan for the corporation (Joseph Aff. at ¶ 17). Joseph avers that in tandem with the succession plan, he undertook additional estate planning (id. at ¶ 17). Joseph claims that as part of the succession plan and estate planning, while acting as Paraco's CEO and the sole holder of A Shares, he terminated the Stock Redemption Agreement on October 31, 2019 and transferred one A Share to Christina (id.). Because the termination is supported by documentary evidence, it has been considered in connection with this motion.2 On December 16, 2019, the Board of Directors ratified the termination of the Stock Redemption Agreement (id. at ¶ 17). On June 24, 2020, Joseph transferred five B Shares to the 2012 Joseph Trust, and he transferred his four A Shares and 20.71 B Shares to the 2020 Trust (id. at ¶ 18).
Plaintiffs allege that they learned of Joseph's acts on November 20, 2019 when they received a Paraco Shareholder Status list dated November 20, 2019, which showed Joseph's transfer of one A Share to Christina (Complaint at ¶ 21). Robert and John received this list as part of an annual Paraco shareholders' meeting, which was scheduled to be held on December 16, 2019 (id.). Plaintiffs sent a letter to Paraco's counsel dated December 5, 2019 requesting relevant documentation relating to Joseph's transfer, including: (1) the bona fide offer from Christina to purchase all of Joseph's A Shares; (2) Joseph's written offer to sell all or part of his A Shares; and (3) Paraco's election not to purchase all of Joseph's A Shares (id. at ¶ 22). On December 9, 2019, Plaintiffs received a letter from Paraco's counsel with the Termination Agreement dated October 31, 2019 (id. at ¶ 23). At the Paraco shareholders' meeting, Plaintiffs asked about a succession plan and were told that one was being developed (id. at ¶ 26). Plaintiffs received a copy of the succession plan on February 20, 2020, which indicated that Joseph intended for Christina to succeed him as CEO (id. at ¶ 27). On June 30, 2020, Plaintiffs received an email from Paraco's counsel with an updated List of Shareholders dated June 24, 2020, which reflected Joseph's stock transfers to Christina and the trusts (id. at ¶¶ 28-30). Plaintiffs sent a letter to Paraco's counsel dated July 3, 2020 advising that Joseph failed to make a written offer to sell his B Shares to Plaintiffs, and sought documents relating to Joseph's transfer of his B Shares including: (1) the bona fide offer from the 2012 Joseph Trust and 2020 Trust to purchase all of Joseph's B shares; and (2) all documents relating to the closing of the sale/transfer of Joseph's B shares to the 2012 Joseph Trust and the 2020 Trust, including the purchase and sale agreement, transfer agreement, and consideration or purchase price. The letter further advised counsel that Plaintiffs viewed Joseph's transfer of his A Shares and his termination of the Stock Redemption Agreement improper. Plaintiff allege that Paraco's counsel did not respond to their requests (id. at ¶¶ 33-34).
D. The Stock Redemption Agreement and the Cross-Purchase Agreement
The Stock Redemption Agreement and Cross-Purchase Agreement are substantially similar. One key difference between the Agreements is that only Paraco has the ROFR in the event of an inter vivos transfer and the right to redeem stocks from, inter alia, a deceased shareholder, whereas all of the B shareholders and Paraco have the ROFR under the Cross-Purchase Agreement.
The Stock Redemption Agreement's Relevant Provisions
The Stock Redemption Agreement, dated December 17, 1991, is signed by the four brothers as owners of either voting Class A Shares and/or non-voting Class B Shares. The preamble to the Cross-Purchase Agreement provides, inter alia: (1) “WHEREAS, the Shareholders have arranged to provide necessary funds to acquire the ‘Class A’ Shares of a deceased Shareholder (the ‘Decedent’) through life insurance”; (2) “WHEREAS, the Shareholders consider it to be to the mutual advantage of themselves and their respective estates to enter into an agreement whereby, upon the death of one of them and the survival of any other, the estate of the Decedent will be obligated to sell, and the surviving Shareholders will have the obligation to purchase the ‘Class A’ Shares of the Decedent at a price deemed by all to be just and fair to all concerned”; (3) “WHEREAS, the Shareholders consider it to be to the mutual advantage of themselves to enter into an arrangement governing the lifetime transfer of their ‘Class A’ Shares”; and (4) “WHEREAS, the Shareholders by separate agreement agree that it is in their mutual best interest to enter into a separate agreement governing the purchase and sale of their ‘Class B’ Shares” (NYSCEF Doc. No. 11 at 1-2). The other relevant provisions are:
1. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL. No party (“selling Shareholder”) to this Agreement shall sell, assign, encumber, allow a lien, or otherwise dispose of his “Class A” voting Shares, either in whole or in part, during his lifetime, without first making a written offer to sell all of and not less than all his “Class A” voting Shares to the Corporation, in the manner set forth below. This Agreement shall apply to all “Class A” voting Shares now owned or hereafter acquired by the Shareholders.
The selling Shareholder desiring to sell his “Class A” voting Shares shall obtain a bona fide offer to purchase such Shares from the third party interested in purchasing such Shares. Such bona fide offer shall contain the purchase price, payout terms and all other relevant provisions for the sale of purchase of such “Class A” voting Shares ․
4. PURCHASE OF SHARES ON DEATH, DIABILITY OR LIFETIME TERMINATION OF EMPLOYMENT
A. Death. Upon the death of a Decedent, the Corporation shall purchase and the estate of the Decedent shall sell all the “Class A” voting Shares of the Corporation now owned or hereafter acquired by the Decedent. The purchase price of the deceased Shareholder's “Class A” voting Shares shall equal their value computed in accordance with the provisions of Section 5 of this Agreement.
5. PURCHASE PRICE. The purchase price of the “Class A” shares being sold hereunder shall be the formula value of such stock being purchased pursuant to the terms hereof as of the first day of the month preceding the date of such sale, such formula value to be determined by the Corporation's regular accountants in accordance with the methodology applied in the letter from Coopers & Lybrand dated January 30, 1991 The determination by the Corporation's accountants shall be final and binding on all parties hereto.
9. ASSIGNMENT. None of the Shareholders shall pledge, assign or otherwise encumber, transfer or present to be transferred the “Class A” Shares by any means whatsoever except as herein set forth.
11. TERM. This agreement shall terminate upon the occurrence of any of the following events:
(a) Cessation of the Corporation's business
(b) Bankruptcy, receivership, or dissolution of the Corporation.
(c) Bankruptcy or insolvency of any Shareholder.
(d) Failure of any Shareholder to maintain in force the insurance policies taken out by him, provided a Shareholder is not in default serves notice of termination in writing upon the defaulting Shareholder.
12. BENEFIT. This Agreement shall be binding upon the parties hereto, their heirs, legal representatives, successors, and assigns.
13. AMENDMENT. This Agreement may not be amended or modified except in writing, signed by each party.
Cross-Purchase Agreement Provisions
The Cross-Purchase Agreement, dated December 17, 1991 is signed by the four brothers as owners of either voting Class A Shares and/or non-voting Class B Shares. The preamble to the Cross-Purchase Agreement provides, inter alia: (1) “WHEREAS, the Shareholders have arranged to provide necessary funds to acquire the ‘Class B’ Shares of a deceased Shareholder (the ‘Decedent’) through life insurance”; (2) “WHEREAS, the Shareholders consider it to be to the mutual advantage of themselves and their respective estates to enter into an agreement whereby, upon the death of one of them and the survival of any other, the estate of the Decedent will be obligated to sell, and the surviving Shareholders will have the obligation to purchase the ‘Class B’ Shares of the Decedent at a price deemed by all to be just and fair to all concerned”; (3) “WHEREAS, the Shareholders consider it to be to the mutual advantage of themselves to enter into an arrangement governing the lifetime transfer of their ‘Class B’ Shares”; and (4) “WHEREAS, the Shareholders by separate agreement agree that it is in their mutual best interest to enter into a separate agreement governing the purchase and sale of their ‘Class A’ Shares” (NYSCEF Doc. No. 11 at 1-2). The other relevant provisions are:
1. RESTRICTION ON TRANSFER; RIGHT OF FIRST REFUSAL. No party (“selling Shareholder”) to this Agreement shall sell, assign, encumber, allow a lien, or otherwise dispose of his “Class B” non-voting Shares, either in whole or in part, during his lifetime, without first making a written offer to sell all of and not less than all of his “Class B” non-voting Shares to the other Shareholders (“remaining Shareholders”) and the Corporation, in the manner set forth below. This Agreement shall apply to all “Class B” non-voting Shares now owned or hereafter acquired by the Shareholders.
The selling Shareholder desiring to sell his “Class B” non-voting Shares shall obtain a bona fide offer to purchase such Shares from the third party interested in purchasing such Shares. Such bona fide offer shall contain the purchase price, payout terms, and all other relevant provisions for the sale of [sic] purchase of such “Class B” non-voting Shares.
4. PURCHASE OF SHARES ON DEATH, DIABILITY OR LIFETIME TERMINATION OF EMPLOYMENT
A. Death. Upon the death of a Decedent, each of the surviving Shareholders shall purchase and the estate of the Decedent shall sell all the “Class B” non-voting Shares of the Corporation now owned or hereafter acquired by the Decedent. The purchase price of the deceased Shareholder's “Class B” non-voting Shares shall equal their value computed in accordance with the provisions of Section 5 of this Agreement.
5. PURCHASE PRICE. The purchase price of the “Class B” shares being sold hereunder shall be the greater of: (a) the formula value of such stock being purchased pursuant to the terms hereof as of the first day of the month preceding the date of such sale, such formula value to be determined by the Corporation's regular accountants in accordance with the methodology applied in the letter from Coopers & Lybrand dated January 30, 1991 ; and (b) the amount of life insurance proceeds received by the surviving Shareholders on account of the death of the deceased Shareholder. The determination by the Corporation's accountants shall be final and binding on all parties hereto.
10. ASSIGNMENT. None of the Shareholders shall pledge, assign or otherwise encumber, transfer or present to be transferred the “Class B” Shares by any means whatsoever except as herein set forth.
12. TERM. This agreement shall terminate upon the occurrence of any of the following events:
(a) Cessation of the Corporation's business
(b) Bankruptcy, receivership, or dissolution of the Corporation.
(c) Bankruptcy or insolvency of any Shareholder.
(d) Failure of any Shareholder to maintain in force the insurance policies taken out by him, provided a Shareholder is not in default servers notice of termination in writing upon the defaulting Shareholder.
Upon the termination of this Agreement during the lives of the Shareholders, each Shareholder shall have the right to purchase from the other Shareholder any or all of the insurance policies on his life on the same terms provided in Section 8 for such purchase upon the death of a Shareholder. Upon the failure of any Shareholder to exercise this right within 60 days after termination, the right shall lapse.
13. BENEFIT. This Agreement shall be binding upon the parties hereto, their heirs, legal representatives, successors, and assigns.
14. AMENDMENT. This Agreement may not be amended or modified except in writing, signed by each party.
E. The Causes of Action
Plaintiffs allege that Joseph's transfers to Christina and the trusts are in violation of the Stock Redemption Agreement and Cross-Purchase Agreement (Complaint at ¶¶ 1-2). Plaintiffs' first three causes of action arise from Joseph's transfer of his B Shares and they are brought as direct claims by Robert and John against Joseph, the 2020 Trust and the 2012 Joseph Trust. Plaintiffs' First and Second Causes of Action are for breach of contract with the only difference being the relief sought. For their First Cause of Action, Plaintiffs seek specific performance. Plaintiffs contend that Joseph's transfer of B Stock to the 2020 Trust and 2012 Joseph Trust without first offering the stock to Plaintiffs violates the Cross-Purchase Agreement (id. at ¶¶ 36-37). Plaintiffs allege they have no adequate remedy at law and are entitled to specific performance under the Cross-Purchase Agreement, including a rescission of the transfers and the right to purchase the B Shares for an amount equal to the lesser of the price paid for the stock by the 2020 Trust and the 2012 Joseph Trust or the price as computed pursuant to Section 5 of the Cross-Purchase Agreement (id. at ¶ 38). In the event the Court does not grant them specific performance as requested in their First Cause of Action, in their Second Cause of Action, Plaintiffs seek an award of damages in the amount of $77,130,000, which they contend represents the fair market value of the B Shares transferred to the Trusts (id. at ¶ 40). Plaintiffs' Third Cause of Action requests that the Court impose a constructive trust on the B Shares transferred by Joseph based on Joseph's alleged breach of his fiduciary duty as Paraco's CEO and the trusts' alleged unjust enrichment at Plaintiffs' expense (id. at ¶¶ 41-44).
The remaining causes of action arise from Joseph's transfers of his A Shares and they are brought derivatively. Plaintiffs' Fourth Cause of Action seeks a declaratory judgment invalidating the purported Termination Agreement based on Plaintiffs' contention that it is in direct contravention of the Stock Redemption Agreement, which requires that any modifications or amendments to the Stock Redemption Agreement must be in writing signed by all parties (id. at ¶ 47). Plaintiffs contend that the succession plan was developed with the participation of the Paraco Board and concealed from Plaintiffs until after Joseph improperly transferred the A Stock to Christina and the 2020 Trust (id. at ¶ 48). Plaintiffs allege that the Paraco Board cannot make a disinterested decision to prosecute a derivative claim on behalf of Paraco's shareholders, which is the reason why the Plaintiffs did not demand that the Board commence the derivative action (id. at ¶ 49). According to Plaintiffs, since they are parties to the Stock Redemption Agreement and they did not agree to its termination, the purported Termination Agreement is invalid (id. at ¶¶ 51-53).
Plaintiffs' Fifth and Sixth Causes of Action are for breach of contract against Joseph and Christina and vary only in terms of the relief sought. In the Fifth Cause of Action for specific performance, Plaintiffs allege Joseph's transfer of one A Stock to Christina without first offering all of his A Stock to Paraco violated the Stock Redemption Agreement. Plaintiffs request the transfer be rescinded and all of Joseph's A Shares be transferred to Paraco for the price Christina paid or for the amount dictated by Section 5 of the Stock Redemption Agreement, whichever is less (id. at ¶¶ 56-58). In the event the Court does not grant them specific performance as requested in their Fifth Cause of Action, in their Sixth Cause of Action, Plaintiffs seek an award of damages in the amount of $20,000,000, which they contend is the fair market value of all of Joseph's A Stock (id. at ¶ 60).
In their Seventh and Tenth Causes of Action, Plaintiffs request that the Court impose a constructive trust on the A Shares that were allegedly transferred in violation of the provisions of the Stock Redemption Agreement based on Joseph's and Christina's breaches of their fiduciary duties (id. at ¶¶ 62-65).
Plaintiffs' Eight and Ninth Causes of Action duplicate the Fifth and Sixth Causes of Action except that they arise from Joseph's alleged wrongful transfer of the four A Shares to the 2020 Trust in violation of the Stock Redemption Agreement.
THE PARTIES' CONTENTIONS
A. Defendants' Contentions in Support of their Motion to Dismiss
In support of their motion to dismiss, Defendants submit: (1) an Affidavit of Joseph Armentano and accompanying exhibits, including a Stock Transfer Ledger (Ex. C), the Stock Redemption Agreement (Ex. D), the Cross-Purchase Agreement (Ex. E), the 2013 Stipulation and Release (Ex. F), this Court's February 2019 Decision (Ex. I), and the Termination Agreement (Ex. J); and (2) a memorandum of law in support.
In support of their motion to dismiss, Defendants argue that as this Court held in its February 2019 Decision, the Agreements “apply only to transfers to non-family members where there is a bona fide offer” (i.e., sales) and not to estate planning transfers in trust or the transfer of the one A Share Joseph made to his daughter (Defs' Mem. at 1-2). Alternatively, Defendants argue that even if the Agreements did apply to transfers in trust: (1) “Robert and John waived any claim they may have had that the transfer is subject to the rights of the other ‘B’ shareholders under the agreement by failing to object to similar transfers and making some themselves”; and (2) the parties “have released each other from all claims they may have had against each other before 2013” (id. at 1-3).
Defendants argue that this case is similar to the 2018 Action wherein Robert and John argued that the Cross-Purchase Agreement was “no longer operative and ․ has been long since been waived by the parties” (id. at 3). According to Defendants, the right to purchase under the Cross-Purchase Agreement is only triggered when there is a bona fide offer and Joseph's transfer of stock for estate planning purposes does not constitute a sale or “disposition ‘during his lifetime’ ” (id. at 5). It is Defendants' position that Joseph's transfer to the 2020 Trust does not give rise to the ROFR because Joseph continues to hold legal title to the stocks, retains the right to receive income from the shares, and it is revocable (id. at 6).3 Regarding the 2012 Joseph Trust, Defendants argue that although it is irrevocable, Joseph can replace the trustee at any time (id.). According to Defendants, the trusts merely operate to identify the persons to whom the shares go to after Joseph's death (id. at 6). Furthermore, Defendants argue that based upon the holding in Lane v Albertson (78 App Div 607 [2d Dept 1903]), the “disposition of shares as part of estate is not subject to a shareholders' agreement unless the agreement explicitly provides” (id. at 6).
According to Defendants, the Cross-Purchase Agreement limits sales and not transfers (id. at 9). Defendants argue the language of the Agreement, read as a whole, requires a third party and a bona fide offer for purchase, which includes “the purchase price, payout terms, and all other relevant provisions for the sale” (id.). Defendants further rely on the argument Plaintiffs made in the 2018 Action — i.e., that the ROFR is contingent upon the existence of a valid outstanding contract to a third party (id. at 9-10). By contrast, Defendants point out that Joseph's “transfers were gifts, in trust, to become effective upon [his] death There was no purchase price, no payout terms and no other relevant provisions of the sale” (id. at 10). Accordingly, Defendants contend that there was no trigger which would require Joseph to offer his shares to Robert or John (id. at 10).
In the event the Court were to find that the Cross-Purchase Agreement was triggered by the trust transfers, Defendants argue that Robert and John have waived any claim to enforce it because they asserted in the 2018 Action that the Cross-Purchase Agreement is no longer operative and has been waived by the parties (id.). Defendants also rely on Robert and John's alleged failure to object to the 2012 trust transfers, and the 2013 transfer of a fraction of a B Share to a trust held by Robert (id. at 11). Defendants argue that the parties released each other in 2013 from any claims they may have had against each other, including the 2012 trust transfers (id. at 10-11).4 Defendants argue that since Robert and John did not make a claim under the Cross-Purchase Agreement they “waived any right they may have to challenge Joseph's right to make the transfers at issue here” (id.).
It is Defendants' contention that Robert and John have no claim for money damages nor may they seek a constructive trust because the transfer restrictions merely trigger a right to purchase the B Shares at a value determined by Paraco's accountants, not a right to value those shares or to take control of them (id. at 11-12). Furthermore, Defendants argue Robert and John fail to state any of the elements necessary for a constructive trust cause of action (i.e., a confidential or fiduciary relationship, a promise, a transfer in reliance thereon, and unjust enrichment) (id. at 13).
Defendants argue that Robert and John fail to assert an unjust enrichment claim because they did not confer a benefit upon Joseph, and their claim is based on a written agreement (id. at 11-12). And for these same reasons, Defendants contend Plaintiffs have failed to assert a claim for breach of fiduciary duty.5
Regarding Plaintiffs' derivative claims (Fourth through Tenth Causes of Action). Defendants argue that these claims must be dismissed because Robert and John have no interest in the Stock Redemption Agreement as they no longer hold A Shares and the ROFR is held by Paraco — not the shareholders. In addition, Defendants point out that Paraco, “acting initially by its Chief Executive Officer and the sole holder of ‘A’ shares, Joseph, and then by its Board of Directors, including the three independent directors, agreed to the termination of the agreement and the transfer of the ‘A’ shares. As a result, the corporation has no basis for any of the claims Robert and John assert and Robert and John have no basis to sue on the corporation's behalf” (id. at 14). According to Defendants, the Complaint fails to allege any facts supporting Plaintiffs' claim that the decision to terminate the Stock Redemption Agreement was not a valid exercise of business judgment. According to Defendants, the Complaint is also deficient because the Agreement only gave Paraco the right to purchase the A Shares and Robert and John cannot compel Paraco to buy them. It is Defendants' contention that: (1) a transfer without consideration is not a transfer within the meaning of the Stock Redemption Agreement; (2) the Stock Redemption Agreement does not limit Joseph's right to transfer for estate planning purposes; and (3) even if Paraco could be compelled to purchase the A shares, “the result would be to leave the corporation controlling itself, which would be contrary to the law” (id. at 15).
It is Defendants' position that the derivative action brought by Robert and John on behalf of Paraco also fails because they did not comply with Business Corporation Law (“BCL”) § 626(c) by either making a demand on the Board to bring the action or by alleging that the demand is excused (id. at 15). Defendants argue the Plaintiffs' reasoning for not going to the Board (i.e., that “the demand would be futile”), fails to meet the requirements to excuse a demand based on futility under BCL § 626(c) (id. at 16). Defendants argue that: (1) the three independent Board members have no interest in Joseph's transfer of A Shares to Christina and the 2020 Trust; (2) the Board members “had full knowledge” of the transaction and supported it; and (3) Plaintiffs fail to allege that the transaction was “egregious on its face” (id.). Defendants argue the transfer to the 2020 Trust made no change in the “effective ownership and control of the corporation,” and the transfer to Christina “foreclosed the possibility that the corporation would be leaderless in the event of Joseph's sudden demise while his estate was being settled” (id.). According to Defendants, the Board's decision to ratify the termination of the Stock Redemption Agreement was in the interest of Paraco's shareholders (id.).
Defendants contend that the same arguments set forth above with respect to the transfer of Joseph's B Shares apply to the transfer of his A Shares to the 2020 Trust (id. at 18). Defendants maintain that Joseph retains legal title to the A Shares in the 2020 Trust, and the “contingent future interest that it created in his beneficiaries is not a present transfer within the meaning of the [Stock Redemption Agreement]” (id.).6
Defendants argue that since the Board ratified the termination of the Stock Redemption Agreement before Joseph transferred the A Shares to Christina and the 2020 Trust, Paraco has no rights under the Stock Redemption Agreement that Robert and John can assert derivatively (id.). Defendants repeat their position that the Board's decision to ratify the Termination Agreement was a “valid exercise of their business judgment” (id.). Defendants contend “[s]uccession planning is a quintessential business judgment issue” and the Stock Redemption Agreement had to be terminated in order for Christina to receive an A Stock in case something happened to Joseph (id. at 20). Defendants argue the “only logical determination would be that the [Stock Redemption Agreement] should be terminated” because if Joseph died all five A Shares would be owned by Paraco and Paraco would own all the controlling interest in itself (id. at 20-21). Defendants further argue that the alternative was to waive Paraco's rights under the Stock Redemption Agreement to allow Joseph to transfer one A Share to Christina, but this would not make sense either as there would be no purpose in redeeming the other A Shares since Christina would own the controlling interest in Paraco (id. at 20).
In the alternative, Defendants argue that even if the Stock Redemption Agreement was reinstated, Robert and John have no basis for any relief since only Paraco has the right to redeem A Shares (id. at 18-19). According to Defendants, since Paraco “has the right, but not the obligation, under the [Stock Redemption Agreement] to redeem” A Shares, and since the decision to exercise this right is also a business judgment, Robert and John cannot force the Board to exercise Paraco's right to redemption (id. at 21).
B. Plaintiffs' Contentions in Opposition
In opposition, Plaintiffs submit affidavits from Robert and John and a memorandum of law. In their respective affidavits, Robert and John aver that at no time did either of them intend to abandon their rights to enforce the ROFR in the Cross-Purchase Agreement or the stock transfer restrictions found in the Stock Redemption Agreement (Robert Aff. at ¶ 4, John Aff. at ¶ 4). Robert and John further aver that the Stock Redemption Agreement is still in effect because all Paraco shareholders signed it, including John who at the time did not own any A Stock, and they remain parties to the Stock Redemption Agreement even though they do not currently own any A Shares (Robert Aff. at ¶ 6, John Aff. at ¶ 6). They further point out that Joseph did not intend to abandon his right to enforce the ROFR or stock transfer restrictions given his institution of the 2018 Action in which he sought to enforce these rights against Robert and John that he now claims were abandoned (Robert Aff. at ¶ 5, John Aff. at ¶ 5).
In their memorandum of law, Plaintiffs argue that “[u]nder New York Law, rights of first refusal restricting the disposition of stock through inter vivos and testamentary transfers are both valid and binding. The Paraco Class A and Class B Shareholders' Agreements explicitly state in clear, unambiguous language that fellow shareholders and the corporation have rights of first refusal to acquire all Paraco shares of a Paraco shareholder transferor both during a Paraco's shareholder's lifetime and upon the Paraco shareholder's death” (Plfs' Opp. Mem. at 1). It is Plaintiffs' contention that Joseph's transfers of A and B Shares violated those provisions because he failed to offer all of his A and B Shares to either Plaintiffs or Paraco before making the transfers (id. at 2).
Plaintiffs contend that the branches of Defendants' motion based on CPLR 3211(a)(1) fails because the documentary evidence Defendants contend support dismissal (e.g., the 2012 and 2020 Trusts and the previous stock transfers) was not submitted in support of their motion and Joseph's affidavit cannot be considered as it is not documentary evidence (id. at 2, 12). Plaintiffs also argue that even if Defendants had provided evidence of the previous intra-family stock transfers, those transfers would not meet the “heavy burden necessary to establish the abandonment of a contract especially where, as here, both Robert and John have submitted affidavits stating that at no time did either of them ever have any intention to abandon their rights of first refusal and stock transfer restrictions in the Shareholders' Agreements” (id. at 4, 17).
According to Plaintiffs, the branches of Defendants' motion seeking dismissal pursuant to CPLR 3211(a)(7) fail because the Court must construe the pleadings liberally, taking all of their allegations as true, and giving Plaintiffs the benefit of every favorable inference (id. at 3). Plaintiffs argue that both the Cross-Purchase Agreement and Stock Redemption Agreement have language which requires a deceased shareholder's estate to sell the B Shares to the surviving shareholders and the A Shares back to Paraco. Accordingly, Defendants' argument that transfers made for estate planning fall outside these restrictions is in direct contravention of the Agreements' provisions (id. at 4).
Plaintiffs refute Defendants' argument that Paraco's ROFR in the Stock Redemption Agreement no longer applies based on the Stock Redemption Agreement's termination by asserting that the termination was unlawful because the Stock Redemption Agreement explicitly requires that all parties agree in writing to any amendment or modification and Robert and John did not agree to its termination (id. at 4-5, 17-18). Plaintiffs assert that the signatories to the Stock Redemption Agreement did not have to own an A Share because “the right of first refusal to acquire [an] A Share on behalf of [Paraco] would add value to Paraco for the benefit [of] all Paraco shareholders — Class B and Class A” (id. at 18). In addition, Plaintiffs point out that the opening recital of the Stock Redemption Agreement defines shareholders as: Joseph Armentano, Robert Armentano, Michael Armentano and John Armentano, even though at the time of the Agreement's signing, John did not own any A Shares (id.).
Plaintiffs refute Defendants' argument that Plaintiffs should be estopped from arguing that the ROFR is still in effect given their position in the 2018 Action that it was no longer operative by pointing out that their statements to this effect were contained in their memorandum of law, which has no evidentiary significance and is not a judicial admission (id. at 17, n3).
It is Plaintiffs' position that they have sufficiently alleged a basis to be excused from making a demand on the Board because the Board not only approved, but actively participated in formulating a “Succession Plan” with no notice whatsoever to Robert and John, and wrongfully approved a secret sham Termination Agreement signed only by Joseph in violation of explicit provisions in the Stock Redemption Agreement (id. at 2, 20). Plaintiffs argue the Board's actions demonstrate it was not acting in Paraco's best interest, and that Plaintiffs have sufficiently alleged reckless “and/or willfully imprudent oversight by the [Board] wholly inconsistent with the exercise of valid business judgment sufficient to excuse a demand” under BCL § 626(c) (id. at 20-21).
After quoting from the Agreements' relevant provisions, Plaintiffs argue that the restrictive language in the ROFR is not limited to sales; instead it applies to any transfer (i.e., the provisions expressly state that the parties to the Agreements shall not sell, assign, encumber or otherwise dispose of his A or B Shares, either in whole or in part, during his lifetime and upon his death by any means whatsoever) (id. at 13). According to Plaintiffs, because the restriction is not limited to sales, “a transfer by a shareholder to a trust constitutes a breach of the right of first refusal” (id. at 14). Plaintiffs argue the cases cited by Defendants are inapplicable because those cases “stand for the proposition that if the disposition of stock upon the death of a shareholder is not addressed in a shareholders' agreement, then a testamentary disposition of the stock in a will upon the death of the shareholder does not violate a right [of] first refusal” (id. at 14-15). By contrast, Plaintiffs point out that the stock transfers at issue here were made during Joseph's lifetime, and were made to inter vivos trusts by gift and not by a will (id. at 15). Plaintiffs assert that even if they were testamentary dispositions, the ROFR would still govern since section 4 of both Agreements provides a ROFR upon a shareholder's death (id. at 15). Plaintiffs further argue that Defendants have distorted this Court's holding in the 2018 Action since it merely found that the ROFR in the Cross-Purchase Agreement is triggered when the selling shareholder receives a bona fide offer (i.e., the Court did not decide that it applies only to transfers made by sales) and this issue was not before the Court in the 2018 Action (id. at 15-16). Plaintiffs contend that reading the Agreements to allow shareholders to “give away shares for free by gifts or transfers for no consideration” would lead to a result that is “absurd, commercially unreasonable,” and contrary to the parties' reasonable expectations (id. at 16).
It is Plaintiffs' contention that courts use the factors for the application of a constructive trust only as a guideline and that they should be applied flexibly, “ ‘whenever necessary to satisfy the demands of justice’ ” (id. at 21). Plaintiffs argue they are entitled to a constructive trust to oversee the A Shares and B Shares at issue because there is a possibility the stocks might be “transferred again, sold or liquidated,” or upon Joseph's death, Joseph's beneficiaries could wrongfully assert an ownership claim in violation of the ROFR in the Agreements (id. at 21-22). Plaintiffs contend the constructive trust is “imperative to protect” their interests in the “wrongfully transferred stock” (id. at 22).
Plaintiffs argue they are entitled to specific performance because “[w]here the right of first refusal has been violated, courts will award specific performance to the wrongfully transferred asset to the aggrieved party” (id. at 22). Plaintiffs contend they are entitled to purchase the B Shares for $0 because that is what the 2012 Joseph Trust and the 2020 Trust paid (id. at 22-23). Similarly, Plaintiffs argue Paraco is entitled to purchase the A Shares for $0 because that is what Christina and the 2020 Trust paid (id. at 23). Plaintiffs contend that specific performance is a proper remedy because Joseph's violation of the Agreements was not an accident, or the result of a mistake, or “made in reliance on an express promise that the transfers would be permitted” (id.). Instead, the transfers were made as a deliberate and calculated scheme to circumvent the Agreements and disenfranchise Plaintiffs (id.). In the event the Court does not grant specific performance, Plaintiffs argue that they are entitled to at least $105 million in damages, which is the alleged difference between the fair market value of the A and B Shares and the transfer price ($0) (id.). Plaintiffs contend that the discount formula in the Agreements is “a methodology to be utilized for Paraco shareholders who comply with the [Agreements] and not for those who breach them” (id. at 24).
C. Defendants' Contentions in Further Support of their Motion
In further support of their motion, Defendants submit: (1) a Reply Affirmation from their counsel, Robert A. Spolzino, Esq. dated November 20, 2020 [“Spolzino Reply Aff.”] which attaches as exhibits affirmations submitted by Plaintiffs' counsel in the 2018 Action and the memorandum of law submitted in that action; and (2) a Reply Memorandum of Law (“Defs' Reply”).
In further support of their argument that Plaintiffs' Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Tenth Causes of Action must be dismissed based on Plaintiffs' failure to comply with BCL § 626(c), Defendants point out that Plaintiffs admit that: (1) they did not make the demand required by BCL § 626 (c); and (2) the Paraco Board had full knowledge and supported Joseph's intended transfers as part of a necessary succession plan. Defendants contend that for a succession plan to be successful, Joseph had to transfer at least one A Share to Christina so the business could continue operations in the event Joseph were to unexpectedly die, and this necessitated the termination of the Stock Redemption Agreement (id. at 5). It is Defendants' position that Plaintiffs' allegations are entirely conclusory and insufficient to satisfy the requirements necessary to excuse the demand requirement (id. at 2-3). Defendants argue that the Board made a business judgment decision (not subject to judicial review) in deciding to terminate the Stock Redemption Agreement, and Plaintiffs fail to assert bad faith or fraud on the part of the Board (id. at 4, 6).
Defendants repeat their argument that the derivative claims must be dismissed because Plaintiffs have failed to establish any interest Paraco has to assert in a derivative action since the Stock Redemption Agreement was terminated before any transfer of Joseph's A Shares. Defendants argue that Joseph, Robert, John, and Michael entered into the Stock Redemption Agreement because “it was in their ‘mutual’ best interest to provide for the disposition of their ‘A’ Shares in case of their deaths” but “[t]hat mutuality ended when Robert and John surrendered their ‘A’ Shares” (id. at 5). According to Defendants, “[t]he provisions of the agreement that required their signatures to amend the contract did not survive the termination of that mutuality” (id. at 5-6).7
Defendants argue that Robert and John admit that they knew and acquiesced to the transfers by John and Joseph to trusts created for the benefit of their heirs, which was a manifestation of their intent that the agreements no longer had any validity. As such, they waived the restrictions (id. at 7).
In further support of their judicial estoppel argument, Defendants argue that John and Robert asserted in the 2018 Action “that the right of first refusal was triggered only by a bona fide offer and they prevailed on that argument” as this Court granted them summary judgment dismissing the Complaint. It is Defendants' contention that Plaintiffs are judicially estopped from changing their position simply because their interests have changed (id. at 8).
Defendants maintain that the ROFR is triggered only when there is a bona fide third-party offer, which did not occur in this case (id. at 9). According to Defendants, the transfers in this case are gifts in trust, and the transfers of shares to personal trusts does not involve a bona fide offer (id.). Finally, Defendants contend that Plaintiffs' claim for money damages must be dismissed because there is no basis for such a recovery either under the Agreements or at law. According to Defendants, the only remedy is a return to the status quo that existed prior to the transfers (id. at 10).
Defendants move to dismiss all of the causes of action of the Complaint pursuant to CPLR 3211(a)(1) and 3211(a)(7).
To succeed on a motion to dismiss pursuant to CPLR 3211(a)(1) on the ground that a defense is founded on documentary evidence, the documentary evidence that forms the basis of the defense must be such that it resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim (AG Cap. Funding Partners, L.P. v State Street Bank & Trust Co., 5 NY3d 582, 590-91 ; 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144, 152 ; Held v Kaufman, 91 NY2d 425, 430-31 ; Leon v Martinez, 84 NY2d 83, 88 ; Fontanetta v Doe, 73 AD3d 78 [2d Dept 2010]; Cohen v Nassau Educators Fed. Credit Union, 37 AD3d 751 [2d Dept 2007]; Sheridan v Town of Orangetown, 21 AD3d 365 [2d Dept 2005]; Teitler v Max J. Pollack & Sons, 288 AD2d 302 [2d Dept 2001]; Museum Trading Co. v Bantry, 281 AD2d 524 [2d Dept 2001]; Jaslow v Pep Boys — Manny, Moe & Jack, 279 AD2d 611 [2d Dept 2001]; Brunot v Joe Eisenberger & Co., 266 AD2d 421 [2d Dept 1999]). To qualify as “documentary,” the evidence relied upon must be unambiguous and undeniable, such as judicial records and documents reflecting out-of-court transactions such as mortgages, deeds, and contracts. Letters, affidavits, notes, and deposition transcripts are generally not documentary (Fontanetta, 73 AD3d 78).
If the documentary evidence disproves an essential allegation of the complaint, dismissal is warranted even if the allegations, standing alone, could withstand a motion to dismiss for failure to state a cause of action (Snyder v Voris, Martini & Moore, LLC, 52 AD3d 811 [2d Dept 2008]; Peter F. Gaito Architecture, LLC v Simone Dev. Corp., 46 AD3d 530 [2d Dept 2007]).
To the extent that Plaintiffs' claims turn on a contract, the actual provisions of the contract — rather than Plaintiffs' characterization of the terms in their pleading — are controlling (see 805 Third Ave. Co. v M.W. Realty Assoc., 58 NY2d 447, 451 ; Marosu Realty Corp. v Community Preserv. Corp., 26 AD3d 74, 82 [1st Dept 2005]). Therefore, “[w]here a written contract ․ unambiguously contradicts the allegations supporting the breach of contract, the contract itself constitutes the documentary evidence warranting the dismissal of the complaint under CPLR 3211(a)(1)” (150 Broadway NY Assoc. L.P. v Bodner, 14 AD3d 1 [1st Dept 2004]; see also Taussig v Clipper Group, L.P., 13 AD3d 166, 167 [1st Dept 2004], lv denied 4 NY3d 707  [on a CPLR 3211(a)(1) motion to dismiss, “[t]he interpretation of an unambiguous contract is a question of law for the court, and the provisions of a contract addressing the rights of the parties will prevail over the allegations in a complaint”]).
The threshold inquiry in a contract dispute is whether the contract is free from ambiguity such that its provisions may be enforced without resort to extrinsic evidence. The interpretation of an unambiguous contract is a question of law for the court (Kass v Kass, 91 NY2d 554, 566 ; W.W.W. Assoc., Inc. v Giancontieri, 77 NY2d 157 ; Taussig, 13 AD3d at 167; 1550 Fifth Ave. Bay Shore, LLC v 1550 Fifth Ave., LLC, 297 AD2d 781, 783 , lv denied 99 NY2d 505 ). Contract terms are ambiguous if they are “ ‘capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business’ ” (Sayers v Rochester Tel. Corp. Supplemental Mgt. Pension Plan, 7 F3d 1091, 1095 [2d Cir 1993], quoting Walk-In Med. Ctr., Inc. v Breuer Cap. Corp., 818 F2d 260 [2d Cir 1987]; see also Computer Assoc. Intl. Inc. v U.S. Balloon Mfg. Co., 10 AD3d 699, 699 [2d Dept 2004] [“[a] contract is unambiguous if the language it uses has a ‘definite and precise meaning, unattended by danger of misconception in the purport of the [agreement] itself, and concerning which there is no reasonable basis for a difference of opinion’ ”]). A court's task is “to determine whether such clauses are ambiguous when ‘read in the context of the entire agreement' ․ By examining the entire contract, [the Court] safeguard[s] against adopting an interpretation that would render any individual provision superfluous ․ Parties to a contract may not create an ambiguity merely by urging conflicting interpretations of their agreement’ ” (Sayers, 7 F3d at 1095 [citations omitted]).
“[T]he aim is a practical interpretation of the expressions of the parties to the end that there be a ‘realization of [their] reasonable expectations’ ” (Brown Bros. Elec. Contr., Inc. v Beam Constr. Corp., 41 NY2d 397, 400 ; see also South Road Assoc., LLC v International Business Machines Corp., 2 AD3d 829, 833 , affd 4 NY3d 272  [“[t]he language of a contract must be interpreted ‘to reach a practical interpretation of the expressions of the parties so that their reasonable expectations will be realized’ ”]). Thus, “[t]he rules of construction of contracts require [the court] to adopt an interpretation which gives meaning to every provision of a contract or, in the negative, no provision of a contract should be left without force and effect” (Muzak Corp. v Hotel Taft Corp., 1 NY2d 42, 46 ; see also Columbus Park Corp. v Department of Hous. Preserv. & Dev. of City of New York, 80 NY2d 19, 31 ; Two Guys from Harrison-N.Y., Inc. v S.F.R. Realty Assoc., 63 NY2d 396, 403 ; Singh v Atakhanian, 31 AD3d 425, 427 [2d Dept 2006] [“A contract should not be interpreted in such a way as would leave one of its provisions substantially without force or effect”]).
The legal standards to be applied in evaluating a motion to dismiss pursuant to CPLR 3211(a)(7) are well-settled. In determining whether a complaint is sufficient to withstand a motion to dismiss pursuant to CPLR 3211(a)(7), the sole criterion is whether the pleading states a cause of action (Cooper v 620 Props. Assoc., 242 AD2d 359 [2d Dept 1997], citing Weiss v Cuddy & Feder, 200 AD2d 665 [2d Dept 1994]). If from the four corners of the complaint factual allegations are discerned which, taken together, manifest any cause of action cognizable at law, a motion to dismiss will fail (511 W. 232nd Owners Corp., 98 NY2d at 152; Cooper, 242 AD2d at 360). The court's function is to “ ‘accept ․ each and every allegation forwarded by the plaintiff without expressing any opinion as to the plaintiff's ability ultimately to establish the truth of these averments before the trier of the facts’ ” (511 W. 232nd Owners Corp., 98 NY2d at 152 quoting 219 Broadway Corp. v Alexander's, Inc., 46 NY2d 506, 509 ). The pleading is to be liberally construed and the pleader afforded the benefit of every possible favorable inference (511 W. 232nd Owners Corp., 98 NY2d 144).
Where the plaintiff submits evidentiary material, the Court is required to determine whether the proponent of the pleading has a cause of action, not whether he or she has stated one (Leon, 84 NY2d 83; Simmons v Edelstein, 32 AD3d 464 [2d Dept 2006]; Hartman v Morganstern, 28 AD3d 423 [2d Dept 2006]; Meyer v Guinta, 262 AD2d 463 [2d Dept 1999]). On the other hand, a plaintiff may rest upon the matter asserted within the four corners of the complaint and need not make an evidentiary showing by submitting affidavits in support of the complaint. A plaintiff is at liberty to stand on the pleading alone and, if the allegations are sufficient to state all of the necessary elements of a cognizable cause of action, will not be penalized for not making an evidentiary showing in support of the complaint (Kempf v Magida, 37 AD3d 763 [2d Dept 2007]; see also Rovello v Orofino Realty Co., 40 NY2d 633, 635-636 ).
Affidavits may be used to preserve inartfully pleaded, but potentially meritorious claims; however, absent conversion of the motion to a motion for summary judgment, affidavits are not to be examined in order to determine whether there is evidentiary support for the pleading (Rovello, 40 NY2d 633; Pace v Perk, 81 AD2d 444, 449-450 [2d Dept 1981]; see Kempf, 37 AD3d 763; Tsimerman v Janoff, 40 AD3d 242 [1st Dept 2007]). Affidavits may be properly considered where they conclusively establish that the plaintiff has no cause of action (Taylor v Pulvers, Pulvers, Thompson & Kuttner, P.C., 1 AD3d 128 [1st Dept 2003]; M & L Provisions, Inc. v Dominick's Italian Delights, Inc., 141 AD2d 616 [2d Dept 1988]; Fields v Leeponis, 95 AD2d 822 [2d Dept 1983]).
A. The Unambiguous Terms of the Cross-Purchase Agreement and the Stock Redemption Agreement Do Not Utterly Refute Plaintiffs' Claims and Defendants' Arguments that the Parties have Waived or Abandoned the ROFRs Cannot Be Decided in the Current Procedural Posture
The essential elements of a cause of action for breach of contract are: the existence of a contract, the plaintiff's performance under the contract, the defendant's breach, and resulting damages (Brualdi v IBERIA Lineas Aeras de Espana, S.A., 79 AD3d 959 [2d Dept 2010]; JP Morgan Chase v Elec. of N.Y, Inc., 69 AD3d 802 [2d Dept 2010]).
Plaintiffs have stated claims for breach of contract based on Joseph's transfer of A Shares to Christina and the 2020 Trust, and his transfer of B Shares to the 2020 Trust and the 2012 Joseph Trust in violation of the ROFRs in the Stock Redemption Agreement and the Cross-Purchase Agreement. The clear and unambiguous terms of those Agreements make clear that the intent behind the parties' entry into the Agreements was to have an arrangement governing lifetime transfers 8 of A Shares and B Shares as well as transfers upon a shareholder's death (i.e., the parties agreed that they would obtain insurance on their lives to have ready access to funds needed to acquire the A and/or B Shares from a deceased shareholder's estate). The language further makes clear that they were entering into the Agreements to ensure that upon the death of a shareholder, the estate would be obligated to sell the A or B Shares to the surviving shareholders and/or Paraco, as the case may be.9 Thus, contrary to the cases cited by Defendants where the agreements failed to specify that a transfer by will would constitute a transfer subject to an ROFR (Globe Slicing Machine Co. v Hasner, 333 F2d 413 [2d Cir 1964]; Lane, 78 AD 607; Storer v Ripley, 12 Misc 2d 662 [Sup Ct, NY County 1958]; Matter of Blakeman, 518 F Supp 1095 [ED NY 1981]; Matthews v United States, 226 F Supp 1003, 1006 [ED NY 1964] [“in the absence of an explicit provision giving the other stockholders a right to call for the stock of a decedent by the reason his death the courts of New York are slow to read the word ‘transfer’ broadly in a first refusal agreement and are slow to treat transmission by will as requiring a sale to the other stockholders”]), here the Agreements were drafted to: (1) prevent a shareholder's ability to alienate the shares during his lifetime without triggering the ROFR; (2) require a deceased shareholder's estate to sell the B Shares to the surviving shareholders or Paraco and the A Shares to Paraco.10
The transfer restrictions and ROFRS in this case are analogous to the ones upheld in Rosiny v Schmidt (185 AD2d 727 [1st Dept 1992], lv denied 80 NY2d 227 ) and Gordon v Mazur (284 AD 289 [1st Dept 1954], affd 308 NY 861 ). Joseph's position that the ROFRs were only triggered in the event of a bona fide offer and Joseph was free to make inter vivos transfers to his 2012 and 2020 Trusts without the counterparties' (i.e., Robert and John) written consent as required by section 13 of the Stock Redemption Agreement and section 14 of the Cross-Purchase Agreement is contrary to the clear and unambiguous language contained therein. Instead, the shareholders were clearly prohibited during their lifetimes from “pledg[ing], assign[ing] or otherwise encumber[ing], tranferr[ing] [their A Shares and B Shares] by any means whatsoever except as set forth” in the Agreements. Joseph's argument that his inter vivos gifts to the trusts and Christina do not violate the Agreements' language because he did not receive any money from these transfers is misplaced. Indeed, Joseph's transfers of his A and/or B Shares to Christina, the 2012 Joseph Trust and the 2020 Trust arguably frustrates the reasonable expectations of the parties by allowing Joseph to sidestep the parties' intent to keep the shares in the hands of surviving brother shareholders or Paraco upon Joseph's death since the shares would pass outside of Joseph's estate and the estate would arguably have no obligation to sell the B Shares to Robert and John and the A Shares to Paraco as contemplated by the Agreements. Finally, Defendants' argument that Plaintiffs may only seek rescission of the transfers and cannot obtain specific performance of the ROFR or damages shall not be decided in the current procedural posture, where the Court's sole function is to determine if Plaintiffs have stated a claim for whatever remedies they are seeking, which Plaintiffs have done. There is at least some support, depending upon the facts developed, for the proposition that Plaintiffs' recovery should be limited to rescinding Joseph's transfers and reinstating the status quo, but this determination cannot be made in the context of a motion to dismiss (Gordon v Mazur, supra).
Turning to Joseph's contention that the parties abandoned the Agreements and/or that Robert and John waived their right to challenge Joseph's transfers because John, Joseph and Robert did similar transfers in 2012/2013 that went unchallenged, this argument fails as Joseph did not submit any documentary evidence in support of his argument (i.e., evidence of the prior trust transfers). Instead, the factual predicate for Joseph's position is set forth in his affidavit, which the Court has already determined it would not consider.
However, even if the Court were to consider the facts set forth in Joseph's affidavit supporting his claim of abandonment and/or waiver, Defendants have failed to sustain their burden of establishing abandonment and/or waiver as a matter of law. Waiver is an intentional, voluntary abandonment of a right (Fundamental Portfolio Advisors, Inc. v Tocqueville Asset Mgmt., L.P., 7 NY3d 96, 104 ; Nassau Trust Co. v Montrose Concrete Prods. Corp., 56 NY2d 175 ). “Such abandonment ‘may be established by affirmative conduct or by failure to act so as to evince an intent not to claim a purported advantage’ ” (Fundamental Portfolio Advisors, 7 NY3d at 104 quoting General Motors Acceptance Corp. v. Clifton—Fine Cent. School Dist., 85 NY2d 232, 236 ; Village of Kiryas Joel v County of Orange, 144 AD3d 895, 897 [2d Dept 2016]). Waiver “ ‘should not be lightly presumed’ ” and must be based on ‘a clear manifestation of intent’ to relinquish a contractual protection” (Fundamental Portfolio Advisors, 7 NY3d at 104 quoting Gilbert Frank Corp. v. Federal Ins. Co., 70 NY2d 966, 968 ; Kamco Supply Corp v On the Right Track, LCC, 149 AD3d 275, 280 [2d Dept 2017]) Waiver is generally a question of fact (Fundamental Portfolio Advisors, 7 NY3d at 104; see also Jefpaul Garage Corp. v. Presbyterian Hosp. in City of NY, 61 NY2d 442, 446 ; Village of Kiryas Joel, 144 AD3d at 897). “[W]aiver is not created by negligence, oversight, or thoughtlessness, and cannot be inferred from mere silence” (Peck v Peck, 232 AD2d 540 [2d Dept 1996]). The United States Court of Appeals for the Second Circuit has set forth the law in New York regarding abandonment of contracts as follows:
the rescission of a contract by abandonment requires mutual assent of the parties. The abandonment of a contract can, of course, be inferred from attendant circumstances and conduct of the parties. Where conduct is relied upon to establish the abandonment, the acts of the parties must be positive, unequivocal and inconsistent with an intent to be further bound by the contract. The termination of a contract is not presumed, and the burden of establishing it rests upon the party who asserts it (Armour & Co. v Celic, 294 F2d 432, 435-36 [2d Cir 1961]; see also Rosiny v Schmidt, 185 AD2d 727 [1st Dept 1992], lv denied 80 NY2d 762 ; Atlantic Co. v Jarll Realty Corp., 36 AD2d 883 [3d Dept 1971]).
Simply because a person chooses not to raise a claim with regard to one transaction does not necessarily estop that person from making a claim with regard to a future similar transaction. Robert and John dispute Joseph's claim by attesting that they did not intend to abandon their rights to enforce the ROFRs. Because the claims at issue in this proceeding arose based on transactions occurring in 2019-2020, the parties' mutual release of all claims they may have had against each other in 2013 at the time of the signing of the Settlement and Release is irrelevant (in the current procedural context) to the viability of the claims asserted in this action. Here, there are no clear manifestations of intent by Robert and John to waive and/or abandon their rights under the Stock Redemption Agreement and the Cross-Purchase Agreement and such waiver cannot be inferred as a matter of law based on their knowledge and/or participation in the prior trust transactions and their failure to object to same. Although Defendants have provided a case that may ultimately support their contention that the parties treated the ROFRs, at least with regard to transfers to the trusts, as “inoperative, abandoned and abrogated” as they consistently disregarded them in regards to such transactions (Pomeroy v Westaway, 189 Misc 307, 310 [Sup Ct, NY County 1947], affd 273 AD 760 [1st Dept 1947], lv denied 273 AD 878 [1st Dept 1948]), the Court cannot make such a factual determination in the context of a motion to dismiss (Benson v RMJ Securities Corp., 683 F Supp 359 [SD NY 1988]).
B. Given the Present Procedural Posture, The Business Judgment Rule is No Bar to Plaintiffs' Claims
The business judgment rule “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes” (Auerbach v Bennett, 47 NY2d 619, 629 ). Since the business judgment rule requires a factual determination, it is not a basis for dismissal pursuant to a CPLR 3211 motion (Armentano v Paraco Gas Corp., 90 AD3d 683 [2d Dept 2011]; Levandusky v One Fifth Ave. Apt. Corp., 75 NY2d 530 ).
“The business judgment doctrine does not foreclose inquiry by the courts into the disinterested independence of members of the board of directors of a corporation and cannot shelter individuals from responsibility for breaches of duty of care they owe as directors” (Armentano, 90 AD3d at 686, quoting Ench v Breslin, 241 AD2d 475 [2d Dept 1987]). The rule does not apply where the directors have an interest in the challenged transaction 11 (Lippman, 15 Misc 3d at 711) or where fraud, breach of fiduciary duty or other misconduct is alleged. Furthermore, the business judgment rule does not apply where the basis of the claim is a breach of contract (Goldhirsch v St. George Tower, 142 AD3d 1044 [2d Dept 2016]; Dinicu v Groff Studios Corp., 257 AD2d 218 [1st Dept 1999]; Ludwig v 25 Plaza Tenants Corp., 184 AD2d 623 [2d Dept 1982]).
The Stock Redemption Agreement is unambiguous and Joseph did not have the authority to unilaterally terminate it since any amendment or modification had to be in writing signed by the parties. The Court does not agree with Joseph's arguments that his brothers no longer had any interest under the Stock Redemption Agreement and that upon their disposal of their A Shares, there was no longer mutuality of consideration.12 Given the preamble to the Agreements making clear that: (1) the parties were shareholders holding A Shares and/or B Shares (with John holding no A Shares at the time of the Agreement's signing); and (2) the Agreements were entered into simultaneously based on the interests of all the shareholders, the Court does not agree that continuing to hold A Shares was necessary to support the Agreement's continued viability. Here, the Stock Redemption Agreement specifically recognized the possibility that one or more of the shareholders signing the Agreement held only B Shares and explained that the parties were simultaneously signing the Stock Redemption Agreement and the Cross-Purchase Agreement to benefit their mutual interests and that the Agreements were interwoven in this regard. Each shareholder to the Stock Redemption Agreement and the Cross-Purchase Agreement gave up his right to dispose of his A Shares and B Shares as he wished in order to benefit all the shareholders and Paraco. The fact that Joseph is the only shareholder left with A Shares under the Stock Redemption Agreement does not give him the unilateral right to terminate it.
The Agreement does not allow for termination because a shareholder no longer owns shares and it expressly limits the Agreement's termination to the following events: (1) the corporation ceases operations; (2) the corporation enters bankruptcy, receivership or dissolution; (3) a shareholder enters bankruptcy or is insolvent; and (4) failure of a shareholder to maintain insurance policies. And the brothers could agree in writing to terminate it. None of these occurrences has happened and neither Joseph nor the Board had the authority to unilaterally terminate (or ratify the unlawful termination of) the Stock Redemption Agreement.13 Thus, since the Complaint and the exhibits establish a cognizable claim that the Board was either acting outside the scope of its authority or in bad faith when it ratified Joseph's unlawful unilateral termination of the Stock Redemption Agreement, the business judgment rule is no bar (Curlin v Clove Land Homeowners Assn., 153 AD3d 922, 925 [2d Dept 2017]).14
C. Plaintiffs Have Satisfied the Requirements to Excuse Demand Under BCL § 626
Because Plaintiffs have asserted various claims in a derivative capacity on behalf of Paraco, Plaintiffs have to satisfy the particularity requirements concerning demand on the Board to bring suit. “Business Corporation Law § 626(c) provides that in any shareholders' derivative action, ‘the complaint shall set forth with particularity the efforts of the plaintiff to secure the initiation of such action by the board or the reasons for not making such effort’ ” (Marx, 88 NY2d at 193-194; see also Malkinzon v Kordonsky, 56 AD3d 734 [2d Dept 2008]). “Demand is futile, and excused, when the directors are incapable of making an impartial decision as to whether to bring suit” (Bansbach v Zinn, 1 NY3d 1, 9 ; Malkinzon, supra). A plaintiff may satisfy this standard by alleging with particularity (1) “that a majority of the board of directors is interested in the challenged transaction”, which may be based on self-interest in the transaction or a loss of independence because a director with no direct interest in the transaction is controlled by a self-interested director;15 (2) “that the board of directors did not fully inform themselves about the challenged transaction to the extent reasonably appropriate under the circumstances”; or (3) “that the challenged transaction was so egregious on its face that it could not have been the product of sound business judgment of the directors” (Marx, 88 NY2d at 200-01).
As noted by the New York Court of Appeals,
It is clear then that the demand is generally designed to week out unnecessary or illegitimate shareholder derivative suits. This prophylactic device assuredly should not be allowed to frustrate the true derivative suit, the very thing it was designed to protect.
* * *
As a consequence, a derivative shareholder's complaint may, in a particular case, withstand a motion to dismiss for failure to make a demand upon the board, even though a majority of the board are not individually charged with fraud or self-dealing. Particular allegations of formal board participation in and approval of active wrongdoing may, as here, suffice to defeat a motion to dismiss (Barr v Wackman, 36 NY2d 371, 378, 381 ).
Here, because Plaintiffs have conceded that they made no demand upon the Board, the Complaint must plead facts demonstrating that a demand on the Board would have been futile. Plaintiffs contend that: (1) the Board formulated and concealed the Succession Plan from Plaintiffs; (2) the Board had full knowledge and approved the transfer, thus is incapable of making a disinterested decision; and (3) the Board rubber stamped a “clear and egregious” violation of the Stock Redemption Agreement (Complaint at ¶¶ 48-50). Based on the facts alleged in the Complaint, Plaintiffs have satisfied the pleading requirements since as discussed supra, the Board's decision to ratify Joseph's unlawful termination of the Stock Redemption Agreement “is so egregious that it could not have been the product of the sound business judgment of the directors” (Matter of Comverse Tech., Inc. Derivative Litig., 56 AD3d 49, 56 [1st Dept 2008]; see also Ripley v International Railways of Central Am., 8 AD2d 310 [1st Dept 1959]; affd 8 NY2d 430 ; Barr, 36 NY2d 371; Sacher v Beacon Assoc. Mgt. Corp., 2010 NY Slip Op 50826[U], 27 Misc 3d 1221[A] [Sup Ct, Nassau County 2010], affd 114 AD3d 655 [2d Dept 2014]; Plymouth County Retirement Assn v Schroeder, 576 F Supp 2d 360 [ED NY 2008], affd 888 F2d 969 [2d Cir 1989]). In addition, although Plaintiffs have not relied on the fact that the Board may not be independent as the members are arguably controlled by Joseph since he is the sole owner of Paraco's only voting stock,16 Plaintiffs may also have this as a predicate for their excuse in not petitioning the Board to bring suit.
D. Judicial Estoppel is No Bar to Plaintiffs' Claims
The doctrine of judicial estoppel precludes a party from taking a position in one legal proceeding which is contrary to that which he or she took in a prior proceeding, simply because his or her interests have changed (see, e.g., Tedesco v Tedesco, 64 AD3d 583 [2d Dept 2009]; Environmental Concern, Inc. v Larchwood Constr. Corp., 101 AD2d 591, 593 [2d Dept 1984]). To invoke judicial estoppel, a party must demonstrate that: (1) the other party has taken one position in a prior proceeding; (2) in which that party secured a favorable judgment; and (3) that party has thereafter taken a contrary or inconsistent position in a subsequent proceeding (Kalikow 78/79 Co. v State, 174 AD2d 7, 11 [1st Dept 1992], lv dismissed 79 NY2d 1040 ; see also Matter of 67 Vestry Tenants Assn. v Raab, 172 Misc 2d 214, 219 [Sup Ct, NY County 1997]). In general, judicial estoppel only applies where the court has relied on or adopted a party's prior inconsistent position in ruling in that party's favor (Herman v 36 Gramercy Park Realty Assoc., LLC, 165 AD3d 405, 4067 [1st Dept 2018]; Lory v Parsoff, 296 AD2d 535, 536 [2d Dept 2002]). Thus, unless the prior court unambiguously adopts the party's prior inconsistent statement in its ruling in that party's favor, judicial estoppel is inapplicable (Stewart v Chautauqua County Bd. of Elections, 14 NY3d 139, 149-50 ). Furthermore, it is well settled that Plaintiffs “can properly plead alternative arguments, as well as take hypothetical or inconsistent positions in asserting [their] claims” (WL Ross & Co. LLC v Storper, 156 AD3d 514, 516 [1st Dept 2017], citing CPLR 3014, Cohen v Lionel Corp., 21 NY2d 599, 563 ).17
In the 2018 Action, Robert and John secured a favorable judgment based on their position that the ROFR was not triggered because the “Letter of Intent” was not a bona fide offer. By contrast, in this case, Robert and John are taking the position that the transfers to the 2012 Joseph Trust and the 2020 Trust and Joseph's gift of one A Share to Christina triggered the ROFR under the Cross-Purchase Agreement and the Stock Redemption Agreement. Joseph attempts to paint this argument as contradictory, but it is not. While both cases deal with whether the ROFR is triggered, in the 2018 Action, the Court was not presented with the issue presented in this case (i.e., whether inter vivos gifts of A and B Shares without complying with the ROFR in the Stock Redemption and Cross-Purchase Agreements violate those Agreements). Their argument that the Cross-Purchase Agreement was abandoned was neither necessary to this Court's determination, nor was it adopted by this Court in its February 2019 Decision. As such, this critical element is missing and Robert and John cannot be judicially estopped from arguing that the Cross-Purchase Agreement is enforceable in this action. Here, because there are key differences between the two actions and because Robert and John did not secure a favorable disposition based on an argument relevant to the issues presented in this case, Robert and John are not judicially estopped from arguing that: (1) the ROFRS are operative; and (2) the ROFRs were triggered by Joseph's transfers.
E. Plaintiffs Have Sufficiently Alleged a Basis for the Imposition of a Constructive Trust
The elements needed to impose a constructive trust are: (1) a confidential or fiduciary relationship; (2) a promise; (3) a transfer in reliance thereon, and (4) unjust enrichment (Crown Realty Co. v Crown Heights Jewish Community Council,175 AD2d 151, 151 [2d Dept 1991]; Vitarelle v Vitarelle, 65 AD3d 1034 [2d Dept 2009]; Iwanow v Iwanow, 39 AD3d 476, 477 [2d Dept 2007]). “The constructive trust doctrine is given broad scope to respond to all human implications of a transaction in order to give expression to the conscience of equity and to satisfy the demands of justice ․ Performance of a wrongful act by the party unjustly enriched is not required. Rather, what is required, generally, is that a party ‘hold property under such circumstances that in equity and good conscience he [or she] ought not to retain it” (Iwanow, 39 AD3d at 477). The case law is clear that a constructive trust is an equitable remedy that may be imposed whenever necessary in order to “satisfy the demands of justice” (Booth v Booth, 178 AD2d 712 [3d Dept 1991], citing Mattera v Mattera, 125 AD2d 555, 556 [2d Dept 1986]). The four requisite elements “are not rigid, but are flexible considerations for the court to apply in determining whether to impose a constructive trust” (Booth, supra, 178 AD2d at 713, citing Hornett v Leather, 145 AD2d 814, 815 [3d Dept 1988], lv denied, 74 NY2d 603 ).
Here, Plaintiffs have alleged that they had a contingent interest in Joseph's B Shares and Paraco had a contingent interest in Joseph's A Shares based on the ROFRs which were superior to Christina's and the Trust's rights to those shares (i.e., the transfers were subject to compliance with the ROFRs). Plaintiffs have also alleged that Joseph and Christina had a fiduciary duty to the shareholders and Paraco, which was breached when Joseph unlawfully terminated the Stock Redemption Agreement and transferred the A and B Shares to the trusts and Christina without complying with the ROFRs. While the facts in this case do not fall within the usual fact pattern for a constructive trust (i.e., the plaintiff making a transfer of its property based on a defendants' fraud or breach of fiduciary duty thereby unjustly enriching the defendant), given the allegations concerning Plaintiffs' and Paraco's ROFR interest in the shares so transferred and Christina's and the trusts' unjust enrichment arising from the Joseph's alleged wrongful transfer of these shares, Plaintiffs have sufficiently alleged a claim for the imposition of a constructive trust on the shares so transferred (Agostini v Sobol, 2002 WL 34184952 [Sup Ct, NY County 2002], affd 304 AD2d 395 [1st Dept 2003]). It is well settled that a constructive trust may be sufficiently alleged even if all of the elements are not necessarily present (Simonds v Simonds, 45 NY2d 233 ; Robinson v Day, 103 AD3d 584 [1st Dept 2013]; Dolgoff v Projectavision, Inc., 235 AD2d 311 [1st Dept 1997]).
Based on the foregoing, it is hereby
ORDERED that the motion by Defendants for an Order dismissing the Complaint pursuant to CPLR 3211(a)(1) and CPLR 3211(a)(7) is denied; and it is further
ORDERED ADJUDGED AND DECREED that the Termination of Agreement dated October 31, 2019 (NYSCEF Doc. No. 17) is invalid and without force and effect.
The foregoing constitutes the Decision, Order and Judgment of this Court.
1. The Court has referenced certain facts from Joseph's Affidavit to provide some background but has not considered Joseph's factual statements to the extent their truth is essential to Defendants' motion to dismiss, except insofar as they comport with Plaintiffs' allegations.
2. Joseph contends that on December 12, 2019, Christina voted her share at a shareholders' meeting without objection from Robert or John (Joseph Aff. at ¶ 19). However, because this fact is only set forth in Joseph's affidavit and it is not supported by any documentary evidence, it has not been considered by this Court for purposes of this Decision. For the same reason, the Court has not considered Joseph's contention that he and his brothers “have regularly transferred shares among family members and their trusts without regard to the [Stock Redemption and Cross-Purchase Agreement]” and because Robert and John have never objected to these transfers, they “have waived any rights they may have with respect to th[ose] agreement[s]” (id. at ¶ 22).
3. Because these as well as many of the other “facts” summarized in the memorandum are not supported by documentary evidence and they are only supported by the statements made by Joseph in his affidavit (see Joseph Aff. at ¶ 18), they have not been considered for purposes of this Decision.
4. Because Defendants submitted the parties' settlement agreement (NYSCEF Doc. No. 13), and such an agreement constitutes documentary evidence properly considered on a motion to dismiss, the Court has considered this fact for purposes of this Decision.
5. Although Plaintiffs have alleged unjust enrichment and breach of fiduciary duty in connection with their claim for the imposition of a constructive trust on the A and B Shares transferred, there are no separate claims for unjust enrichment and breach of fiduciary duty alleged in the Complaint. Clearly, Joseph Armentano as CEO and majority shareholder in Paraco and Christina as Paraco's Vice President owe fiduciary duties to both Paraco and Plaintiffs since in New York, the fiduciary duty of corporate officers and directors runs to the corporation and its shareholders (Qureshi v Vital Tr., Inc., 173 AD3d 1076 [2d Dept 2019], Lindner Fund, Inc. v Waldbaum, Inc., 82 NY2d 219 ; Ench v Breslin, 241 AD2d 475 [2d Dept 1997]). Finally, as discussed infra, Plaintiffs have sufficiently alleged the unjust enrichment element for their constructive trust claim.
6. A transfer to a trust confers ownership of the asset to the trustee. The Court has no knowledge of the names of the trustees of the 2012 Joseph Trust or the 2020 Trust. Again, because Defendants did not provide the Court with the trust documents, it cannot accept Defendants' contention as true for purposes of deciding this motion to dismiss.
7. This mutuality argument is raised for the first time in Defendants' reply. As such, it shall not be considered by the Court (Shapiro v Kurtzman, 149 AD3d 1117 [2d Dept 2017]; Haggerty v Quast, 48 AD3d 629 [2d Dept 2008]; Matter of TIG Ins. Co. v Pellegrini, 258 AD2d 658 [2d Dept 1999]). However, even if the Court considers it, as discussed infra, the argument is without merit.
8. The unambiguous language supporting this interpretation is: (1) “No party (‘selling Shareholder’) to this Agreement shall sell, assign, encumber, allow a lien, or otherwise dispose of his ‘Class A’ voting Shares [Class B non-voting Shares], either in whole or in part, during his lifetime, without first making a written offer to sell all of his ‘Class A’ voting Shares [Class B non-voting Shares] in the manner set forth below” (NYSCEF Doc. No. 11 at § 1); and (2) “None of the Shareholders shall pledge, assign or otherwise encumber, transfer or present to be transferred the ‘Class A’ Shares [Class B Shares] by any means whatsoever except as herein set forth” (id. at §§ 9, 10). The “manner set forth below” requires a shareholder who wishes to sell his A Shares or B Shares to “obtain a bona fide offer to purchase such Shares from the third-party interested in purchasing such Shares” (id. at § 1).
9. The unambiguous language supporting this interpretation is “Upon the death of a Decedent, the Corporation shall purchase and the estate of the Decedent shall sell all the “Class A” voting Shares of the Corporation now owned or hereafter acquired by the Decedent” (NYSCEF Doc. No. 11 at § 4[A]). The Stock Redemption Agreement further binds the shareholders and their “heirs, legal representatives, successors, and assigns” (id. at § 12). Similarly, the Cross-Purchase Agreement requires that upon the death of a shareholder, the estate must sell the shares to the other surviving shareholders (id. at § 4[A]). The Cross-Purchase Agreement also binds the shareholders and their “heirs, legal representatives, and assigns” (id. at § 12).
10. While Defendants seek to justify Joseph's actions on the grounds that, inter alia: (1) a sale upon Joseph's death of all of the A Shares to Paraco would be contrary to law because the corporation would be controlling itself; (2) Robert and John cannot compel Paraco to purchase Joseph's A Shares; and (3) a transfer of the one share to Christina is necessary so that there would be a person leading Paraco in the event Joseph dies unexpectedly, these are all hypotheticals unsupported by any evidentiary record that shall not be addressed in the procedural context of a motion to dismiss.
11. A director is interested (1) if he is an officer or director of another corporation involved in the challenged or questioned transaction, (2) if he receives a direct financial benefit from the questioned transaction that is different from the benefit received generally by all shareholders, (3) even though he has no personal interest in the questioned transaction, he is controlled by a director who has an interest in the claimed transaction (Auerbach v Klein, 2008 NY Slip Op 50474[U], 19 Misc 3d 1102[A] at *11 [Sup Ct Suffolk County 2008], affd 66 AD3d 805 [2d Dept 2009]; Lippman v Shaffer, 15 Misc 3d 705, 711 [Sup Ct, Monroe County 2006], quoting Marx v Akers, 88 NY2d 189, 202  [“Directors are self interested in a challenged transaction where they will receive a direct financial benefit from the transaction which is different from the benefit to shareholders generally” ․ Where such self-interest exists, the burden shifts to the self-interested director to demonstrate the entire ‘fairness and reasonableness’ of the actions”]; Patrick v Allen, 355 F Supp 2d 704, 711 [SD NY 2015] [same]).
12. The cases cited by Defendants in support of this proposition are inapplicable to the current dispute because in those cases, no contract was formed as there was no consideration to support it. In Oscar Schlegel Mfg. Co. v Peter Cooper's Glue Factory (231 NY 459 ), the Court of Appeals ruled that mutuality did not exist because plaintiff failed to offer consideration (id. at 461). In Dorman v Cohen (66 AD2d 411 [1st Dept 1979]), the First Department ruled that the contract was “illusory for lack of mutuality of obligation” because plaintiffs were not bound to honor any portion of the agreement (id. at 415).
13. Furthermore, because: (1) Defendants seek to dismiss Plaintiffs' Fourth Cause of Action in which Plaintiffs request that the Court grant them a declaratory judgment that the purported Termination Agreement is invalid; (2) there are no issues of fact with regard to this claim; and (3) the Court is denying this branch of Defendants' motion, the Court shall declare that the Termination Agreement is invalid and of no force and effect (Jacobs v Cartalemi, 156 AD3d 635, 640 [2d Dept 2017] [“the proper procedure for the court is to deny the motion to dismiss the complaint (thereby retaining jurisdiction of the controversy) and then to declare the rights of the parties whatever they may be”]).
14. Given this Court's determination that the Stock Redemption Agreement was improperly terminated, Defendants' argument that Plaintiffs have no derivative action to pursue on behalf of Paraco since Paraco cannot enforce an ROFR in a terminated agreement fails.
15. In Bansbach v Zinn (258 AD2d 710 [3d Dept 1999], affd 1 NY3d 1 ), the Third Department held that the issue of demand futility could not be decided in the context of a motion to dismiss based on the factual issue over whether the directors on the board were so controlled by the president that demand would have been futile.
16. Although Joseph professes that there are three independent members on the Board, he has not provided any basis for why they are independent. If Joseph has no control over their appointment or removal, they may indeed be independent. But given Joseph's sole ownership of all the voting power in Paraco, it may well be that he has some control over their appointment and removal, which would fall under the umbrella of director interest (Bansbach, supra; Malkinzon, supra).
17. The Court does not merit Defendants' contention that Plaintiffs cannot argue that the ROFR in the Cross-Purchase Agreement is still operative since they argued the opposite in the 2018 Action. Plaintiffs' argument that the ROFR was no longer operative or that it had been waived was contained in their attorneys' memorandum of law submitted in support of their motion to dismiss filed in the 2018 Action. Indeed, Plaintiffs' counsel stated that for purposes of the motion to dismiss, they were accepting that the ROFR was still operative (2018 Action, Index No. 60203/2018, NYSCEF Doc. No. 15 at 4). This motion was withdrawn without being decided by this Court and Plaintiffs did not make that argument again in their motion for summary judgment in the 2018 Action. Because the claim was made as a part of counsel's legal argument, it cannot be construed as a prior judicial admission (Naughton v City of NY, 94 AD3d 1 [1st Dept 2012]; Mesler v PODD LLC, 89 AD3d 1533 [4th Dept 2011]; Rahman v Smith, 40 AD3d 613 [2d Dept 2007]). Even if the claim that the ROFR in the Cross-Purchase Agreement was inoperative had been made in Plaintiffs' affidavits, it would only be an informal judicial admission which is not conclusive of the facts admitted in the prior action and is merely evidence of the facts admitted and which may be explained away at trial (Wenger v DMR Realty Mgt., Inc., 90 AD3d 647 [2d Dept 2011]). Finally, the contention that the ROFR of the Cross-Purchase Agreement was inoperative was limited to the Cross-Purchase Agreement, so even if Plaintiffs were bound by this statement in this action, it is irrelevant to the viability of their claims with regard to the Stock Redemption Agreement.
Gretchen Walsh, J.
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Docket No: 57449/2020
Decided: February 10, 2021
Court: Supreme Court, Westchester County, New York.
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