Opinion
116200/05.
Decided March 11, 2008.
Attorney for Rafael Rodriguez: Michael Cirrito Esq., White and Cirrito.
Attorney for Dennis Estevez: David Newman Esq. and Jonathan Borg Esq., Day Pitney.
Attorney for Jose Estevez: Bruce Yukelson, Esq.
This Decision and Order disposes of two separate matters before the Court, which were initiated on or about November 22, 2005. One, a special proceeding, was commenced by Petitioner, Rafael Rodriguez ("Rafael"), under New York County, Index Number 116201/05 pursuant to New York Business Corporation Law ("BCL") § 1104-a to dissolve EB110 Realty Corp. ("EB 110"), a New York corporation in which he claimed to be a 50% shareholder. In such petition, Rafael named as respondent, Dennis Estevez ("Dennis") and Jose Estevez ("Jose"), his nephews, whom Rafael believed to be the other shareholders of EB 110. During the pendency of this matter, Dennis Estevez made a timely election pursuant to BCL § 1118(a), to purchase Rafael's shares of EB 110 (the "Stock").
On the request of the parties, made pursuant to BCL § 1118(b), the court stayed the dissolution proceeding and commenced a process to determine the purchase price for the Stock, which, under BCL § 1118(b), is the fair market valued of Rafael's "shares as of the date prior to the date on which" this proceeding was commenced, i.e., November 21, 2005 (the "Valuation Date"), after making such adjustments as required by such Section.
EB 110's principal asset is a building having a postal address of 156-160 East 110 Street, New York, NY, also known as Block 1637, Lot 43, (the "Building") which it acquired in late 1991. The Building has three portions, a one story, 125 x 100 foot parcel fronting on 110th Street and a one story, 25 x 100 foot parcel fronting on 110th Street which are separated by a four story, 25 foot wide residential building built about 60 feet deep. Immediately behind this residential building there is a single story portion of the Building built about 40 feet back to the lot line, bridging and connecting the portions which front on 110th Street. The combined area of all three portions is approximately 16,000 square feet. The occupant of the Building prior to and since the Valuation Date has been D R 110 Food Corp. ("D R"), a New York Corporation, presently wholly owned by Dennis, which operates a supermarket (the "Supermarket") at the Building. At least for a portion of the period that EB110 owned the Building, a laundromat occupied the 25 foot frontage portion of the Building.
The other matter before the Court is a derivative action, commenced by Rafael, as a shareholder of EB 110, under New York County Index No. 115200/05 against Dennis, D R and EB 110, to recover sums allegedly owing to EB110 by Dennis and D R. To the extent such sums are owing, they constitute assets of EB110, and thus must be taken into account in calculating the fair market value of EB110 shares on the Valuation Date.
Rafael also moved for the appointment of a temporary receiver for the Building, pending the resolution of both cases, and to consolidate both matters. The Court, without objection of the other parties, granted the motion to consolidate. The parties, in open court, subsequently entered into a stipulation (the "Escrow Stipulation") under which Dennis agreed to deposit $18,000 per month with his counsel to pay taxes and mortgage payments on the Building in lieu of having a temporary receiver appointed.
Dennis answered and cross-moved to dismiss Jose's claim as a shareholder, asserting that he earlier acquired Jose's shares of EB110. Dennis further claimed to own two thirds of the shares of EB 110, with Rafael owning the other third. While Rafael claimed to own 50% of the shares of EB110, he took no position as to how the other half was owned. Jose claimed ownership of 25% of the shares of EB110 with 25% being owned by Dennis and 50% by Rafael. As the claims of Rafael, Dennis and Jose aggregate more than 100% of the shares, and none of them agree as to the portion of shares held by the other, it became necessary for this Court first to resolve the ownership issue before considering Rafael's claims in the derivative action and the price for the buyout of his shares.
This Court held eight days of evidentiary hearings to revolve the conflicting ownership claims of the shareholders. Rafael, Dennis and Jose (hereinafter, collectively the "Claimants") each testified at such hearing and introduced evidence, produced other witnesses who also testified, and cross examined witnesses presented by the other Claimants. Following the hearing, all Claimants submitted post trial briefs, the last of which was dated May 18, 2006, submitting the ownership issue to this Court for decision. The parties subsequently engaged in settlement negotiations, during which the Court, with the parties' consent, agreed to forebear issuing its decision. The negotiations eventually broke down and the Court proceeded to complete hearing on all remaining factual matters, i.e. the derivative claims and the final fair market price for the purchase of the Stock. Such hearings were held on December 4 and 5, 2007 and the Claimants thereafter submitted post hearing briefs on such issues.
Simplifying the Court's task to determine the fair market value of the Stock as of the Valuation Date, the Claimants had on September 18, 2006 entered into a stipulation (the Value Stipulation") agreeing that the value of the Building on the Valuation Date was $9,857,500.00, that the mortgage on the Building as of September 15, 2006 was $1,033,540.
THE SOCIAL CONTEXT
The Claimants first hotly contest what is ordinarily a simple issue in corporate disputes, the ownership of shares in a closely held corporation. To resolve the claimants' claims and to evaluate conflicting testimony and evidence, it is important to understand several streams of the social and economic background of this dispute.
Rafael and Joaquin Estevez ("Joaquin") are first generation immigrants to the United States who, although not always appreciative of the law of their adopted country, have successfully made their way into retail trade; Joaquin went into the retail grocery and food trades and Rafael owned and operated a liquor store. Strong family relationships (Rafael was married to Joaquin's sister) and loyalties and strong patriarchal control of the family by Joaquin were the primary initial drivers of their behavior and that of their children. Joaquin had seven children: five sons, Emanuel, Gabriel, Jose, Dennis and Ramon, and two daughters. Over time, however, the acculturation of the American born and raised children and such children's marriages outside of the patriarchal circle of control have diluted the familial bonds of trust so as to have engendered this dispute. Relying instead on family bonds and trust, documentation of intra-family transactions was rare and Joaquin and Rafael assumed they could always re-shift and re-title their business assets at will for the "benefit" of the family. Lawyers and accountants were not "of" family and were used only when necessary so as to contain costs and not to reveal too much of the family's business to those outside of the family circle.
Doing business in poorer and drug prone neighborhoods was also dicey at best, and the families cooperated with each other to survive, especially with the limited capital available to them often cutting corners and ignoring legal requirements to meet day to day challenges of their businesses, which included the presence of drug dealers who threatened the personal safety of family members and reduced customer traffic so as to put economic pressure on the family enterprises.
Although the family businesses produced income to support a reasonable life style, they entailed long hard hours of work. As a result, the family's enterprises were initially marginal and their assets were apparently not worth fighting over until recently. The economic change which led to this dispute was the reduction of crime and the resulting enormous escalation of real estate values in the East Harlem area where the Building is located. The Building, acquired in late 1992for no more than the transactional costs of the acquisition over a mortgage, i.e. with effectively no equity, now has an equity of over $8 million. Obtaining a share of this jackpot has now overwhelmed the strength of family ties.
Based on the September Stipulation.
Real Estate Transactions in New York
To resolve properly the ownership dispute among the Claimants, it is necessary to understand the protocols New York lawyers use in the sale, financing and transfer of real estate. These protocols have been developed to assure that an acquirer of an interest in property acquires what he expected and that a mortgage lender has obtained an appropriate lien on the real estate to secure the mortgage against attack by the borrower or third parties. Lawyers are regularly involved in transactions involving real estate (other than those created by individual principals) as the documentation of such transactions is considered the practice of law, and where corporations are parties to a transaction it is required. Over the years, New York lawyers have adopted a format of the "sit down" closing for these transactions. In this case, there were four sit down closings, one for the purchase and initial financing of the Building, on February 28, 1992 (the "Acquisition") and three for the refinancing of the Building, the first occurring October 1, 1993 (the "1993 Closing"), the second occurring on November 9, 1995 (the "1995 Closing") and the third occurring on April 8, 1998 (the "1998 Closing").
In other places in the United States, the usual protocol for closing is an "escrow" closing where documents are delivered to an escrow agent with written instructions as to how to effectuate the transactions. In such states, the "sit down" closing is often referred to as a "New York Style Closing."
Under the usual protocols, representatives of the owner, and seller or lender or both as the case may be, attorneys for the parties and a representative of the title insurer assemble, sign documents, and money is transferred. Executed documents to be placed of record are taken by the title company for filing, the seller or borrower, as the case may be, takes the money, and the title company delivers to the lender or buyer a "marked up" title policy to insure that the property was transferred or the mortgage lien placed. In most cases, fees and expenses are paid at such time. To the extent there are liens or other mortgages on the property which are not to remain, a representative of the lienors may be present to receive the payment and satisfy the lien or the title company takes the payment, "insures over" the liens and arranged for their satisfaction.
Whether a mortgage is a good lien depends inter alia, on the power and authority of the persons signing the mortgage to bind the borrower. For a corporate borrower, that would require there being corporate power and authorization to borrow, and the authorization of the persons signing to do so on behalf of the corporation. The BCL sets forth the requirements and processes to achieve this result. To address these issues, it is good legal practice for the purchaser's or lender's counsel to review the counter party's corporate documents and resolutions to ensure they were in place, and to secure "estoppel" type certifications and title insurance. As the holders of corporate stock are the ultimate beneficiaries of any borrowing, and the ultimate losers if corporate property is wrongfully transferred, a unanimous consent of shareholders to a transaction, given to the counter party to induce them to enter into the transaction, will estop the corporation from later raising an issue as to whether it followed all BCL requirements.
And if they were not, to require the seller or borrower to take corrective steps to perform the corporate requirements and to document them.
Because the review of corporate documents is time consuming, and therefore expensive, for smaller transactions, many attorneys rely only on estoppel type certificates.
In addition to securing a lien on property as its security, lenders often seek personal guarantees of the principals of a corporation as a condition of lending, especially in cases where the corporation has no other assets. Some lenders also take a pledge or escrow of the shares as well as guarantees from affiliated entities or individuals as a further security for repayment.
As a result, at real estate closings, many different documents must be signed. With the exception of checks and notes, multiple copies of the documents are often signed so that the participants may keep a signed copy of documents relevant to their portion of the transaction.
Because most closing documents have possible consequences, they are usually prepared by the lawyers whose client is seeking to protect himself or itself from an adverse result. To the extent there is information (such as names, titles, addresses or similar data), it is provided by the attorney who represents the side having the information or by principal of such party.
At the end of the closing, the lawyers and the title company collect the papers relevant for recording or escrows and in most cases prepare a closing binder to memorialize the transaction. Closing binders when prepared, are usually prepared a week to a few months after the closing, and is usually sent to the client for that clients records. It is also common that a closing statement will be prepared showing the payments and adjustments at the closing. As a closing statement does not include documents, it may be and often is delivered at closing.
As a closing binder will generally include the final title insurance policy which is prepared after the closing, and may include copies of recorded documents to show recording information, and as recorded documents are not returned until after the closing, closing binders cannot be delivered at the closing. While closing binders are useful and may be required to comply with regulatory requirements of lenders, there is no legal requirement that such binders be prepared in a commercial real estate transaction.
Corporations are commonly used in New York to acquire commercial real estate to protect the "owners" from tort liability and to enable the "owners" to borrow at interest rates over the State usury ceiling. Lawyers incorporate most simple corporations through agents who do the actual filing, and provide the lawyer who retained the agent with a loose leaf minute book containing twenty-five numbered stock certificates, a several page stock ledger, and proposed by-laws and organizational minutes. This minute book either remains with the lawyer or is turned over to the principals of the corporation for further processing.
These protocols and processes are important to this case as certain of Dennis' claims are based on documents from the closings. Other claims of all Claimants are based on the certificates of stock of EB110. The relevance and importance of such evidence must be considered in the above transactional context.
FINDINGS OF FACTS
The following facts are found by this Court based on the testimony of witnesses and by this Court's evaluation of their credibility and, upon the Exhibits introduced into evidence and this Court's evaluation of their authenticity, meaning and the probabilities that the recitations in the exhibits reflect the actual facts, all within the context of this matter as discussed above.
With the exception of one witness whose testimony was basically irrelevant on the substantive issues, all testimony was presented through members of the Estevez and Rodriguez families, and through three lawyers, an accountant and an appraiser. The lawyers included Simon Soderakis, Esq. ("Soderakis") who represented both families from 1980 to the mid 1990's, Emmanuel Kessler, Esq. ("Kessler") who represented both families in the 1998 Closing and Bernard Helldorfer, Esq. (Helldorfer") who represented Dennis in 1984. The accountant was Aaron Goldstein ("Goldstein"), a partner of Liss, Okin, Goldstein Oken (the "Accountants") who served as accountants for both D R and EB110 since their incorporation. The appraiser was Daniel Lane ("Lane") who was retained by Rafael to determine the rental value of the Building in connection with the derivative action. While in many areas the testimony was consistent or unchallenged, there were areas in which testimony of witnesses was in conflict. As trier of fact, this Court found the testimony of Soderakis, Kessler, Helldorfer, Goldstein and Lane credible. This Court, as trier of fact, also found some but not all of the testimony of other witnesses credible.
In addition to testimony, the Claimants also introduced documentary evidence. While corporate books, records and minutes would have been most persuasive, none were kept. EB110 did not even have its own bank accounts, its funds being run through D R. The documentary evidence consisted of Federal Corporate Tax Returns (the "Federal Returns"), three purported stock certificates and certain documents purportedly executed at the Acquisition and at the 1993, 1995 and 1998 Closings. Some of these documents were in conflict.
Based on the testimony and evidence, the following were found by this Court to be the credible and accurate facts upon which the Court has made its decisions.
A. The Sublease
Prior to 1989, male members of the Estevez family operated several food markets. The family were apparently successfully enough for Krasdale Foods, Inc. ("Krasdale"), their supplier of groceries, to ask them in late 1989 to take over the Supermarket which a prior operator could no longer operate. They acquired the Supermarket and its inventory for cash and notes payable of $1.5 million and entered into a thirty-seven page sublease (the "Sublease") of the Building on September 1, 1989. Joaquin put up $400,000 and of the remainder of $550,000 was paid by a note of D R and $550,000 by a note of another family owned corporation. Because of the demographics of the area in which the Supermarket was located, it could only operate successfully if it were licensed to redeem food stamps. As Joaquin, Jose and Ramon had all been convicted of fraud felonies relating to the Federal food stamp program and therefore could not own a business which could qualify for a federal food stamp license for five years, Joaquin determined that the Supermarket would be owned by a new "clean" corporation, D R. Although neither Dennis and his younger brother Gabriel had been convicted of the food stamp fraud, they were only 20 and 18 at the time. Thus, Juan Rodriguez ("Juan"), Rafael's brother, who had no food stamp fraud convictions, was designated President and owner of the stock of D R. Although Juan executed the Sublease as President of D R, he apparently had little other relationship with the Supermarket, and withdrew from the scene in 1992. While Ramon was initially involved at the Supermarket, he later left to put his major efforts toward a different family store, leaving Dennis and Jose to run the Supermarket's day to day operations, but continued to be at the Supermarket at least weekly to help in its operation. In 1992, the owner of the Building had financial problems, and was contemplating bankruptcy, leading to the possibility that the Sublease would terminate, which would force the Supermarket to close. To keep the Supermarket in business, Krasdale proposed that the Estevez family acquire the Building and offered to finance its acquisition with a mortgage for the purchase price, with interest at 16% per annum. Krasdale conditioned this offer on the purchasers' advancing "closing costs" of $100,000 in cash. Joaquin, having insufficient liquid funds, asked Rafael to put up the cash which Rafael did, delivering the cash to Ramon, who in turn delivered the cash to Krasdale's cashier. Neither Joaquin nor any of his sons invested any cash or other monies for the Building. Rafael's $100,000 came from cash receipts from his liquor store which had not been reported to tax authorities, a violation of Federal, State and New York City tax laws. Ramon got a receipt from Krasdale for such payment which he placed in the files of EB110 at the Supermarket. No such receipt was produced at the hearing. Rafael also paid Soderakis' fee for the closing with a check from his personal funds which check was introduced into evidence.
Their testimony was that they had improperly redeemed food stamps for non-food items sold at their store.
Using Juan as a "straw" to secure a Federal Food Stamp Licence probably violated rules relating to such licenses.
There were significant transactional expenses for the purchasers account. The use of cash is best explained by the apparent desire of the seller to evade the since-repealed New York State Capital Gains Transfer Tax imposed on sales of commercial real estate for more than $1,000,000. Under such tax a copy of the contract for such a sale was required to be submitted to the New York State Tax Commission for pre-clearance at least 20 days prior to the closing. Soderakis, who understood the tax problem, testified that seller refused to sign a contract. Using cash to fund some transfer costs would also keep the reported transaction below $1 Million thus avoiding both filing for pre-clearance and the tax.
The Acquisition took place at Krasdale's office. Soderakis represented EB110 at the Acquisition as well as Krasdale as mortgagee. The only "family" members present at the Acquisition and who signed documents were Ramon and Rafael, who executed a mortgage and mortgage note, respectively as President and Secretary of EB110 and executed personal guarantees. Soderakis caused EB110 to be incorporated shortly before the Acquisition so that the 16% interest rate charged by Krasdale would not be usurious. See New York General Obligations Law § 5-501 and § 5-502.
Soderakis' closing statement does not recite who was present for EB110. Dennis' testimony that he was present at the Acquisition was in direct conflict with the testimony of Ramon, Rafael and Soderakis that neither Dennis nor Jose were present. This Court, as finder of fact, finds Dennis' testimony that he was present not credible.
Some time prior to 1995, when EB110's mortgage was refinanced, Ramon withdrew entirely from D R and transferred his 50% ownership interest in EB 110 equally to Jose and Dennis.
Both Ramon and Jose corroborated this "transfer" of a 25% interest each to Jose and Dennis, which was consistent with other testimony that Joaquin effectively controlled the family enterprises, notwithstanding that such control may have violated Federal food stamp license prohibitions that he not be involved in running a Supermarket licensed to accept food stamps. Dennis disputed this scenario and claimed Juan entered into a written contract to transfer all D R shares to Dennis. However, this Court as finder of facts rejects Dennis' view, based on the testimony of Juan who denied such transaction, the fact that the purported transfer documents were unsigned and incomplete, the fact that such transfer was inconsistent with the testimony of others and the fact that at that time the consistent behavior of family members was to avoid all written agreements relating to the transfer of ownership interests.
In 1998, Jose was arrested on Federal felony drug charges and in 1999 he was convicted on such charges and sentenced to five years in jail and ceased to be active in the operations of the Supermarket. Just before he surrendered to begin his sentence, he signed over his interests and rights in D R to Dennis.
Through the 90's, the Estevez and Rodriguez family never reduced to writing who owned what. Ramon believed the 50% interest in EB 110 he received at the Acquisition was owned by him for the benefit of the Estevez family, subject to Joaquin's determination as to who was to have what and felt that he would sign over his interests at any time his father asked him to. Before the Acquisition, Joaquin told Ramon, as the older brother, that Rafael would have a 50% interest in the Building when it was acquired. Jose and Dennis, the younger brothers, were not present at such discussion. No Claimant called Joaquin to testify, although he was apparently available.
While EB 110 was duly incorporated, its minute book and corporate stock ledger are blank. Although Stock Certificates No. 1 through 4 were removed from the Stock Certificate book of EB110, the stock certificate stubs in such book and the stock ledger were also blank. The ownership dispute here, therefore, cannot not be resolved by the usual method of reviewing the corporate books and records, since virtually for all purposes, there are none.
The sole written records are the Federal Returns and documents prepared in connection with the Acquisition and various Closings.
The original Stock Certificates No. 1, No. 2 and No. 3 of EB110, (collectively the "Certificates") were produced at the hearing by Kessler who had held them in escrow. All were dated February 5, 1992. Stock Certificate No. 4 was blank. The Certificates purport to show Rafael, Dennis and Jose to each hold ten shares. Certificates No. 1 and No. 2 were signed by Rafael, as President and Ramon, as Secretary at the Acquisition; Certificate No. 3 was signed by Dennis, as President and Jose, as Secretary. The first name of the holder of Certificate No. 2 was "whited out" and the name "Dennis" was typed over the white out in a type-face different than the type face used 'on Certificate No. 1 and on the remainder of Certificate No. 2. All typing on Certificate No. 3 was in the same type-face as the name "Dennis" on Certificate No. 2. Rafael disputes the authenticity of Certificate No. 3.
Soderakis, a disinterested witness, testified that his office prepared only two Certificates (No. 1 and No. 2) at the time of the Acquisition, each for 10 shares, respectively, in the name of Ramon and Rafael, and that the name "Dennis" on Certificate No. 2 and material on Certificate No. 3 were typed in a type-face which his office did not possess, and that his office did not prepare Certificate No. 3.
Soderakis testified he was "persnickety" about type faces and testified as to the different type faces with apparent expertise, and that if a typing error was made in a stock certificate, he would not have used "white out" but would have instead voided the certificate and prepared a new one.
Soderakis' testimony is corroborated by the fact that Ramon and Rafael, the only family members present at the Acquisition, signed Certificates No. 1 and No. 2 as officers, and Ramon testified that there were to have been a total of 20 Shares, ten for Rafael and ten for "the family." Although Certificate No. 3 purports to be dated as of the date of the Acquisition and recites that Dennis was President and Jose was Secretary, this Court finds as finder of fact that Certificate No. 3 was prepared and signed at a later date, and that Certificate No. 2 which was issued at the Acquisition, was later altered to substitute to substitute the name "Dennis" for "Ramon." Jose testified that the only time he remembered signing a Certificate was at the 1995 Closing. Although he could not remember what Certificate he signed, the only Certificate signed by him as an officer of EB110 is Certificate No. 3.
Neither Dennis nor Jose were present at the Acquisition. This is a key finding as Dennis bases his claim of 2/3 ownership on there being 30 shares outstanding rather than 20. Other than the original issue at the Acquisition, there was neither reason, documentation or authorization for the issuance of additional shares. As Certificate No. 3 was signed by persons not present at the Acquisition, it could not have been issued as part of the Acquisition.
Ramon, who testified that Soderakis prepared two share certificates and that he signed both at the Acquisition, believed that Dennis was the name that he been there at that time, but also testified, inconsistently, that he, Ramon, had half the shares at such time. Ramon's testimony indicated that he had less than even a rudimentary understanding as to how corporations work, and testified that he merely signed what Soderakis put before him.
While no evidence was introduced which would establish the exact date either when Certificate No. 2 was altered, or when Certificate No. 3 was prepared, the use of the same type face for both the alteration to Certificate No. 2 and to fill in the blanks in Certificate No. 3 is some evidence that both events were roughly contemporaneous. Other evidence, including Jose's testimony that he first became secretary of EB110 at the time of the 1995 refinancing closing (he signed Certificate No. 3 in such capacity) leads to the conclusion that such events occurred in 1995.
Since EB110 was incorporated, all certificates have been held either by Soderakis or Kessler in escrow for the various lenders. Although there is evidence that Certificates were brought to the 1995 and 1998 Closings, each Claimant denies studying them. The "white out" was only apparent to all Claimants (and the Court) after the certificates were brought to the Court by Kessler during the hearings. Kessler himself, who had advised counsel for the lender as to the ownership of EB110 based on the certificates, did not notice the name change or white out until it was brought to his attention a few weeks before his testimony. This Court finds that Certificates Nos. 1 and 2 were issued at the Acquisition, and that Certificate No. 2 was modified and Certificate No. 3 was prepared and signed some time in 1995, most likely at the 1995 Closing.
Witnesses testifying before Kessler saw only photocopies of the Certificates and on such photocopies, neither the white out or the name "Ramon" under the white out are apparent.
B. 1993 Closing
The note and mortgage executed at the Acquisition were modified at the 1993 Closing when Krasdale consented to the substitution of a replacement promissory note with a slightly reduced principal and interest rate and a loan modification agreement to keep the Supermarket in business because it was in financial trouble. Ramon and Rafael were at the 1993 Closing and signed the replacement promissory note and loan modification agreement as President and Secretary, the same corporate capacities as they signed the original Promissory Note and Mortgage on behalf of EB 110 at the Acquisition, and both personally guaranteed the replacement promissory note. Neither Jose nor Dennis were present or signed any document or guarantee at the 1993 Closing. As personal guarantees of stockholders are routinely sought and obtained for loans to corporations which have been formed to avoid usury laws, the failure of Dennis or Jose to execute stockholder guarantees constitutes evidence that Krasdale and Soderakis, as well as Rafael and Ramon believed Rafael and Ramon were stockholders of EB110 at such time and that Jose and Dennis were not.
The interest rate was reduced from 16% to the greater of 8% or two percent over prime.
This Court does not find that the signature and capacity of signatures shown documents to be conclusive. However, this Court gives more weight to guarantees than to other documents signed at the various closings because businessmen (as all the "family" members are), however unsophisticated, can be at least expected to be careful in signing personal guarantees. Lenders similarly focus on securing such guarantees from shareholders.
Dennis testified that he was unaware of the 1993 Closing, a fact which further corroborates that Dennis acquired his stock interest in EB110 after such date.
C. Ramon's transfer of shares to Dennis and Jose
In early 1995, Ramon phased out his relationship with the Supermarket and transferred his ownership position in EB 110 to Dennis and Jose equally, and ceased to be Secretary of EB110. This transfer is consistent with Ramon's phasing out of the Supermarket at that time and the family's way of holding and transferring interests. While there was neither documentation nor consideration for this transfer, this Court finds Ramon's testimony credible and consistent with other evidence, the Court finds that upon or after such transfer Certificate No. 2 was modified and Certificate No. 3 was prepared. Jose's recollection that he and Dennis became 25% stockholders in 1995 and that Dennis signed his own stock certificate at the 1995 Closing is consistent with this conclusion.
The "family's" concept of property ownership and shifting ownership at will is generally incompatible with the New York State and Federal gift tax laws which require the reporting of all gifts of property, other than between spouses, in excess of small annual exclusions. Although the New York Gift Tax was repealed by Laws 1997, c. 389, effective for gifts made after January 1, 2000, all filing and tax obligations incurred for transfers prior to such date continue. L. 1997, c. 389, § 35. The Federal Gift Tax, however, has been in force at all times relevant to this controversy. The alacrity by which the various witnesses discussed the shifting of ownership interests and the lack of record keeping makes it clear to this Court that the "family" did not address or consider Gift Tax issues at the time of these transactions. This Court also believes that no federal or state Gift Tax returns were filed with respect to these transfers as such returns would have clearly supported the contentions of one or more of the Claimants, and no party sought to introduce such a return.
D. The 1995 Closing
At the 1995 Closing, EB110 refinanced the mortgage on the Building, with a lender unaffiliated with Krasdale as part of a change of supplier from Krasdale to Associated. At such Closing all Claimants were present and were jointly represented by Soderakis. The lender was represented by separate counsel.
The documents executed and delivered at the 1995 Closing corroborate the Court's finding that Ramon's shares had been transferred to Jose and Dennis by such time as such documents were signed on behalf of EB110 by Dennis and Jose as President and Secretary, respectively (Rafael signed as Vice President), and no documents are signed by Ramon in any capacity. Interestingly, in some of the documents signed, Dennis is described as President and Secretary and in others Jose is described as Secretary.
No corporate minutes of EB 110 showing resignations or elections of officers exist.
While some of these closing documents support Dennis' view of the stock ownership of EB110, this Court, in weighing such evidence, in light of the witnesses' testimony, does not find such evidence to outweigh other evidence to the contrary as discussed above. At the 1995 Closing, many documents which were reviewed by Soderakis, who represented all Claimants, were signed. As there was a new lender, it is probable that such lender's counsel prepared many of such documents. These documents were placed in front of the Claimants for signature, and all Claimants signed such documents without reviewing them or paying attention to their contents, or the capacity in which they signed them. Because Soderakis, as borrowers' counsel and their agent, "passed" on such documentation, such documents may estop EB110 and the Claimants as the borrowers and guarantors vis a vis the lender, but do not similarly bind or estop the Claimants inter sese as no Claimants had separate counsel acting as his agent to review the documents prior to signing them; elements of estoppel do not exist as between the Claimants. This Court accordingly, finds that the Claimants, who understood that the documents were necessary for the financing, and relying on Soderakis to protect them, signed them solely for the purpose of effectuating the refinancing. They did not do so with the intent to change their respective rights as among themselves or to waive any of such rights.
Jose testified there were about a hundred documents.
E. The 1998 Closing
At the 1998 Closing, the mortgage on the Building was again refinanced, this time by Commercial Capital Corporation, with the loan guaranteed by the Federal Small Business Administration ("SBA"). Rafael, who had retained Kessler on other matters, introduced Dennis to Kessler and suggested that he retain Kessler for the closing. Kessler who had not previously represented EB110, represented EB110 and Claimants at the 1998 Closing. Dennis supplied Kessler and loan consultants who were to prepare documentation with information necessary to prepare closing documents. Extensive documentation was prepared by the lenders' counsel and submitted to Kessler and the Claimants at the Closing for signature. While some information was provided by Dennis, Kessler, who had only met Dennis and Jose shortly before on the introduction of Rafael, assumed each Claimant had a one third interest from the Certificates. As the loan was to be guaranteed by SBA, even more extensive documentation was required than in prior Closings. The Claimants each signed what was put in front of them without reading the contents. Among the documents by the Claimants signed at the 1998 Closing was a loan Agreement which in Paragraph 10 stated that:
"Guarantors, Dennis I. Estevez, Rafael Rodriguez, and Jose M. Estevez, are the sole directors and officers of EB110 realty corp. Dennis I. Estevez hold the office of president, Rafael Rodriguez holds the office of vice-president and Jose M. Estevez holds the office of secretary and treasurer for said corporation, and each possess a (33 1/3%) interest in said corporation. All are fully authorized by the shareholders and Board of Directors to execute the loan documents herein."
Another document signed by all Claimants, however, is a certificate that all Claimants are the sole officers and directors of D R and that Rafael was Vice-President of D R. Claimants agree that Rafael had no interest in and was neither an officer nor a director of D R. Further, another document signed attests that the Supermarket was acquired in 1995, which all Claimants agree happened in 1989. There was also another document executed at the 1998 Closing by "EB110 Food Corp." There is no such corporation.
Dennis picks certain recitals in these documents signed by all Claimants as conclusive evidence that Dennis, having purchased Jose's shares, now owns 2/3 of the shares and Rafael owns one third. This Court disagrees. While the recitations may have again bound the shareholders and EB110 to the terms of the mortgage as against the Lender and the SBA, as it was passed on by Kessler, their counsel, as an estoppel, they again did not necessarily constitute a waiver or transfer as of interests among them as Kessler represented all three and could not have thus acted as separate agent or counsel for any one shareholder, and the elements of estoppel do not exist. Instead, this Court finds that recitations as to equal thirds ownership is an error introduced by Kessler, based on his uncritical reading of the Certificates, which was not caught by the Claimants, who relied on documentation prepared by trusted counsel, and were instead focused on consummating the refinancing.
Dennis asserts that because those recitations in the documents which supported his theory of an original 1/3 ownership were made years ago, Rafael's raising his claims now is an improper attempt to take advantage of rising value, and questions why Rafael sat on his hands. The Court finds Rafael's failure to act until Dennis approached him to buy him out in 2004 blameless under the circumstances.
Rafael reasonably relied on his relatives, on counsel and accountants to protect his interest. After the Acquisition and the Closings he left all documents with them, and did not receive any closing documents or closing binder. Kessler prepared only one closing binder for the 1998 Closing and delivered it to Dennis. Rafael signed what counsel told him to sign at the Acquisition and the Closings where counsel directed him to sign, just as Ramon, Jose and Dennis testified they did. Rafael never saw Certificate No. 3 until Kessler showed it to him in 2004. His original language was Spanish. Although he speaks in heavily accented English, he is not fully literate in written English and he did not understand all of the fine points of law until he sought counsel after becoming concerned with Dennis' assertions and actions in 2004.
F. Income Tax Returns
Federal Returns for EB 110 fiscal years ending 1991 through date have been prepared by the Accountants, from information initially supplied to them by Ramon and later by Dennis who respectively signed the Returns for which they provided information. Federal Returns for EB110 fiscal years ending in 1992 through 2004 were introduced into evidence (the "Evidentiary Returns") and certain information contained in subsequent Federal Returns but not the Returns themselves, were also introduced into evidence through Goldstein's testimony. All Evidentiary Returns identify Rafael as a 50% owner of EB110. The Evidentiary Returns for 1991 through 1994 also identify Ramon as a 50% owner of EB 110. The Evidentiary Returns corroborate both Rafael's claim of 50% ownership and Ramon's testimony that he transferred his share interests equally to Dennis and Jose in 1995 prior to the 1995 refinancing, and that such transfer did not dilute Rafael's interests. The Accountant's file, containing a "post-it" on their copy of the 1996 Federal Returns which notes "corrected with proper ownership," corroborates this conclusion. On September 18, 2006, Goldstein testified that no Federal Returns had been filed for tax years ending after 2004. Such failure to file coincided with this dispute, where signing a Federal Return might place Dennis between the rock of conceding Rafael's claim if the Return recited Rafael's 50% ownership and the hard place of perhaps knowingly signing a false Return, if the return did not. Share Ownership of EB110 from early 2004 to date
The EB fiscal year ended August 31.
Federal tax law requires a corporation to report the existence of 50% or greater ownership and the name of such owner on each annual Return, a requirement known to Goldstein as an accountant. In December, 2007, Dennis submitted an affidavit asserting that he had since filed all required Federal Returns for EB110, asserting that the failure to file returns subsequent to the Evidentiary Returns was as a result of a misunderstanding between him and the Accountants. To corroborate such filing he submitted evidence of mailing of such Returns but did not provide copies of the Returns. In December, 2007, Goldstein corroborated that these subsequent Federal Returns were filed. Accordingly, there is no evidence from such subsequent Returns as to the share ownership of EB110. Dennis' failure to produce copies of such subsequent Federal Returns leads to the inference that they would not have supported at least some of the positions he took in this litigation.
Based on the foregoing, this Court finds that as a matter of fact, the shareholders of EB110 by early 2004 were Rafael 50%, Dennis 25% and Jose 25%.
In 2004, Dennis sought to buy Jose's and Rafael's stock of EB110. Before making offers, Dennis had the Accountant prepare a pro-forma analysis of the tax impact of such a buyout, assuming the Building to be worth $4 million. Using such analysis, Dennis offered both Jose and Rafael the opportunity to sell their interests for cash amounts higher than they would be left with had they sold for the higher value of the building shown on the pro-forma analysis, but paid the required Federal, State and New York City capital gains taxes. Jose acknowledges that he agreed to sell his interest to Dennis for $500,000 cash, the amount offered to him. Rafael rejected Dennis' proposal apparently because it was based on Dennis' assertion that Rafael had a 1/3 interest in EB110. While Rafael may have counter- offered to sell his interest to Dennis at $650,000, no such transaction occurred.
The obvious implication was that neither Jose nor Rafael would report the sale to the proper taxing authorities or pay tax on the proceeds.
$650,000 was an amount proportionally roughly equivalent to a sale of a ½ interest on the same assumptions as Dennis' offer to purchase a 1/3 interest. The discussion broke down apparently because Rafael wanted to be paid in cash. While his asking price is evidence that he may have had no intent to report such transaction for tax purposes, the transaction did not occur.
Jose admits he agreed to sell his shares to Dennis for $500,000 in cash, but denies that such payment was in fact made, and accordingly Jose claims that he still owns 25% of the shares of EB110. Dennis introduced into evidence documents executed by Jose, acknowledging the receipt of the cash and assigning his shares to Dennis. Jose does not deny that he signed such documents, but asserts that he did not read them before signing and signed with the expectation that the cash would be subsequently paid. Dennis asserts that he delivered the $500,000, in cash, in a briefcase, in a car, to Jose, an event which Jose denies occurring.
This Court finds Dennis to be credible that the $500,000 was delivered and finds Jose not to be credible on this issue. Jose's signature on the receipt and transfer documents corroborates Dennis' testimony that Jose had received the funds. Such documents, unlike those documents executed at the Closings which had been prepared by lawyers representing all Claimants, were prepared by Helldorfer who represented only Dennis with whom Jose had no relationship and on whom he had no basis to rely. The signed payment receipt was also, unlike the extensive documentation executed at the Closings, a simple document clear in both its substance and terms. Jose further testified as to his anger at Dennis for failing to live up to promises made to help Jose's family while he was incarcerated by paying his family $6,000 per month from the laundromat. Jose testified his family only received $2,000 per month and some groceries. This anger is magnified by Jose's belief that he took the conviction for drug dealing to protect Dennis who knew that the local dealers were using the Supermarket for their activities having gained use of the Supermarket through the intimidation of the Estevez family. Such anger and Jose's alleged experience with Dennis' failure to keep his word is inconsistent with Jose trusting Dennis by signing a receipt for an untraceable cash payment without having received payment.
To show that he had funds available to make the $500,000 payment Dennis introduced evidence of a loan by Associated (the company which succeeded Krasdale as the supplier to the Supermarket) to D R which he asserted provided $300,000 of such funds and testified that the remainder came out of the D R till. While both sources of funds reeked of improper activities, such testimony was credible to the Court as consistent with Dennis' other activities. Accordingly, Dennis' Cross Motion to dismiss Jose as a party to the dissolution proceeding is granted.
If D R provided funds for Dennis' personal purchase of Jose's EB110 shares out of borrowing from Associated, such funds could only be a dividend or loan from D R. The D R Federal Returns for such period do not disclose either a dividend or loan to Dennis. Further, Dennis effectively testified that the remainder of the funds were skimmed from D R. Such amounts were also not reported as loans or dividends. While these actions constitute tax fraud, they are consistent with the respective tax evasion motives and activities of the Claimants as discussed above. Further, Dennis' testimony that he took the $300,000 loan from Associated in six separate $50,000 checks the same day which he deposited over time is also evidence of his evasion of reporting requirements under Federal anti-money laundering laws.
Other Credible factors
The Claimants introduced evidence of criminal activity by the other Claimants and certain witnesses some of which resulted in convictions, to impugn the credibility of opposing witnesses. Other evidence was introduced to show that witnesses filled out false personal financial statements in connection with their own home financings and the 1998 closings. The Court also heard much testimony from which at least a strong inference of evasion of Federal and State tax laws and Federal food stamp licensing rules could be drawn.
As required, this Court has considered and weighed such testimony and disclosure and has taken it into account in evaluating the credibility of witnesses in this matter.
The Derivative Action
In the Derivative Action, Rafael sued in the name of EB110 to recover, for its benefit, claims EB110 allegedly had against Dennis and D R. The September Stipulation expressly excluded these claims from any agreement of the parties as to share evaluation and accordingly this Court must address them. Rafael asserts that because Dennis, being in effective control of EB110, had the obligation to manage its affairs properly and to obtain for its benefit a proper return on its assets and that Dennis' failure to do so and his self dealing through his wholly owned and controlled vehicle, D R, renders both him and D R jointly and severally liable for such claims. The evidence clearly establishes that Dennis exercised effective control of both EB110 and D R at least after Jose's incarceration and that Dennis failed to maintain separate records and accounts, commingled their funds and failed to file timely Federal Returns. Dennis' testimony does not controvert these findings. Accordingly, this Court finds that to the extent that derivative claims may be asserted against D R, they may be also asserted against Dennis and that Dennis and D R are jointly and severally responsible for such of the derivative claims asserted as may have been established, and that judgment on such claims may be entered against both.
The obligation is the same regardless the size of Rafael's holdings.
The derivative claims are for moneys owing from D R and EB110 arising out of loans, shortfalls of rental payments under the Sublease, fair market rent payments for periods after the expiration of the Sublease, and for reimbursement of tax and/or mortgage payments required to be made by D R.
Rafael also seeks interest on the derivative claims, from and after the time of their accrual until the time of judgment as pre-judgment interest, at the rate of 18% compound interest for tax delinquencies unpaid and at the "statutory" rate of 9% simple interest for all claims and attorneys fees for his successful pursuit of the derivative claims.
The Court will address below each of Rafael's derivative claims, whether such claims have been established, the size of recovery thereon and what pre-judgment interest, if any, should accrue on such amounts and until when. The court will also address Rafael's claim for legal fees.
While the application of the business judgment rule could have protected Dennis from second-guessing-liability at least in part had he acted to rent or sell the Building in an arms length transaction to an unrelated party, Dennis instead continued the tenancy of D R, a corporation wholly owned by him. Dennis also made no attempt to rent the laundromat area separately. While a rental relationship between D R and EB110 is permissible under the BCL, the BCL subjects such transactions to great scrutiny because of the inherent conflict of interest. True to the tradition of EB110, there were no appraisals, minutes or consents of directors or shareholders approving the continuation of D R's tenancy or occupancy after the end of the Sublease or setting rent thereon, as are required by the BCL where a corporation enters into a transaction with an interested party. Based on the relationship between D R and EB110 and the testimony presented, this Court finds that all three derivative claims have been established and that by reason of Dennis' self dealing, both Dennis and D R of which Dennis is the sole owner, are jointly and severally liable to EB110 such claims. The Court will address the size of the recovery on such claims below.
Loan to D R
Rafael seeks to recover $299,000 and interest thereon as a derivative claim by reason of an outstanding inter-corporate loan to D R. EB110's Federal Returns for 2000 through 2004 show such loan as an asset of EB110 and statements annexed to such Returns show that such amounts were due to "EB110." Goldstein, who prepared such Returns as well as the returns for D R and signed them as "Preparer" testified that these "loans" arose from proceeds of refinancing of the Building which exceeded the prior balances and costs of the refinancings, which were delivered to D R for its corporate purposes, EB110 having no bank accounts.
These loans are shown on Schedule L to the Federal Returns which set forth the balance sheet of the corporation as shown on its books as at the beginning and end of each tax year. There are no other financial records of EB110 and no testimony was introduced to counter these statements.
Federal Returns for both EB110 and D R for 2000-2004 were prepared from information supplied by Dennis, who signed such Returns. Federal tax law also requires a professional preparer of Federal Returns to sign them as such.
Dennis raises two objections to this claim, first that there is "no explanation of the origin of such moneys" and second that "if they were proceeds of the two refinancings, they must be excluded from the damage calculation by reason of the statute of limitations."
To support his position as to the source of the monies, Dennis pointed to the closing statements of the 1995 Closing and the 1998 Closing which show respectively, net mortgage proceeds of $111,400 and $77,920 being directly paid to or for the benefit of D R for a total of $189,320. Such "evidence," however must be balanced against the more credible testimony of Goldstein, who as accountant for both D R and EB110, was in a position to properly allocate closing costs and other payments which may have been made at the time of these closings for the respective benefit of the two corporations. Dennis, having left Goldstein's statements as to the source of funds unchallenged in cross examination, cannot now counter Goldstein's testimony by citing closing documents not prepared by EB110 counsel which are by themselves equivocal. Accordingly, this Court, as finder of fact, finds that Rafael has established that $383,062 was owing to EB110 by D R as of September 1, 1999, $353,062 was owing to EB110 by D R as of August 31, 2000, $304,644 was owing to EB110 by D R as of August 3, 2001, and $299,505 was owing to EB110 by D R as of August 3, 2002 and such amount was still owing to EB110 by D R as of August 3, 2004, and that there was no evidence indicating that such loan was subsequently reduced or paid.
For example, payments to title companies for the two closings on loans of similar sizes were respectively $42,037 and $9,264. As it is common for borrowers to advance funds to the title company to cover unpaid tax claims so that they will insure over such liens (which would be acceptable to lenders) at the closing, the greater of such amounts could well have represented additional payments on behalf of D R which had the obligation to pay taxes under the Sublease.
Dennis' reliance on the six-year statute of limitations to disclaim that he owes the $299,505 is also misplaced. By signing Federal tax returns for tax years 2004 through 2006, within six years of the commencement of the derivative action, Dennis "reaffirmed" the debt. Further, the 2000 Federal Return of EB110 shows a partial payment of the debt, reducing it from $353,062 on September 1, 1999 to $304,604 on August 31, 2000and the 2001 Federal Returns shows a further reduction to $299,505 by August 31, 2000. As partial payments also act to extend the time when the statute of limitations begins to run, Dennis' statute of limitations defense is unavailing. Accordingly, this Court finds that Rafael has established his derivative claim in the amount of $299,505 with respect to this loan.
Enforcement of the Lease. In his Affidavit in Support of his Cross Motion of January 27, 2006, Dennis stated that "no lease was ever entered into between EB110 and D R for the Supermarket." Such statement, while perhaps factually true, is legally irrelevant, except to bind Dennis. The Sublease was entered into on September 1, 1989 between D R as subtenant and T.F. Realty (110) Corp. as overtenant, for a term ending August 31, 2004. Net rent was set initially at $125,000 per annum and increased every three years, with a final rent for the period of September 1, 2001 through August 31, 2004 of $183,013 per annum. The sublessor under the Sublease, entered into a lease agreement (the "Prime Lease") the same day as lessee with Durso Supermarkets, Inc., the then fee owner of the Building as lessor for a term ending August 31, 2009, for a fixed net annual rent of $100,000 for the entire 20 year term.
When EB110 acquired the Building in 1992, the Sublease was not cancelled and EB110 succeeded to the landlord's position. Because at such time the Sublease was in force, no further action of EB110 was required for the Sublease to continue to bind both EB110 and D R. No evidence was submitted that the Sublease was subsequently modified or terminated by the parties thereto. Thus the Sublease became the operative lease between D R and EB110 from the Acquisition through August 31, 2004, the end of its term.
Although not discussed by the Claimants, this Court observes that Frederick Schulman signed the Prime Lease as Executive Vice President of the fee owner and Vice President of T.F. Realty (110) Corp., being evidence that the Prime Lease was a matter of financing or structuring the ownership interests in the Building. As the Prime Lease was signed by the same individual for both parties and there is no evidence that it was not eliminated, merged or terminated at the time of the Acquisition. As the Sublease was acknowledged by the over landlord (the fee owner) it was effectively "non-disturbed" and continued in force after the Acquisition.
Dennis, being in charge of both EB110 and D R, had the obligation to see that the terms of the Sublease, including payment of Sublease rent, were observed. The Accountants' notes relating to EB110 corroborate such facts. Rafael asserts that Dennis failed to carry out such obligations in two ways i.e., 1) by failing to pay net rent in full and 2) by failing to pay taxes and similar imposts. Although EB110 kept no books of account or checkbook, the amount of net rent actually paid may be determined from EB110's Federal Returns or from the books of D R. It is more difficult to determine the extent of any failure by Dennis to cause tax and other payments to be made by D R as the status of tax and water payments were and are at least in part in dispute with city agencies during the term of the Sublease. Fortunately, the uncertainty relating to tax and water payments may, because Dennis has elected to buy the Stock, and will, upon such purchase, become the sole owner of both EB110 and D R, be simply addressed. As the value of the Stock is to be based on the net asset value of EB110, setting off EB110's derivative claim against Dennis and D R for not causing taxes, and other tenant obligations to be paid on the asset side against the equal accrued obligations of EB110 for such items on the liability side, will result in the proper result of value of EB110 being ascertainable without calculating the specific amounts of such items. Thus, to determine the derivative claim relating to failure to meet lease obligations through August 31, 2004, the end of the Sublease, this Court need only address the difference between the net lease payments actually made and those required to have been made.
Such Federal Returns require the disclosure of rental income for the tax year covered.
Goldstein testified (without challenge) that from December 1, 1999 through August 31, 2004, D R paid EB110 a total of $559,263 in rent. Section 2.02 of the Sublease provides that the net rent for the year commencing September 1, 1999 and ending August, 2000 was $166,375 per annum and for the remainder of the term rent was $183,013 per annum. Rent was payable in equal monthly installments, in advance on the first day of each month. Thus, the aggregate net rent payable over such period payable was $840,245.26. Rafael seeks the difference between net rent payable and net rent paid for such period from Dennis and D R, together with pre-judgment interest.
Rafael concedes that collection of any rental shortfall prior to this date would be barred by the six year statute of limitations.
Rafael miscalculated the amount to be $840,246.26.
Dennis' response was that EB110 and D R at the 1998 Closing entered into a 25 year lease for the Building, commencing March 2, 1998, at a fixed annual rental of $180,000 for the entire 25 year term, and attempted to place a copy of such lease in evidence. The purported lease is a three page "Blumberg" form printed lease (the "Blumberg Lease"), signed by Dennis and Jose, but neither acknowledged nor witnessed. Under the Blumberg Lease, rent for the period between December 1, 1999 and August 1, 2004 would have been $840,000, an amount seemingly identical to the amount payable under the Sublease.
However, the Blumberg Lease and the Sublease differ in an overwhelmingly significant economic aspect; the Sublease is a "net lease" and the Blumberg Lease is a "gross lease." Under the former, the tenant pays real estate taxes and to heat the Building and under the latter, the landlord bears the costs of taxes and heating. Thus, if the Blumberg Lease were valid and had replaced the Sublease it would mean that EB110 had agreed to reduce its income by the amount of the real estate taxes and heating costs of the Building from March 1, 1998 through August, 2004 and would have further locked itself into a fixed gross rent for 25 years.
Cf. the 20 year fixed rent Prime Lease which was a net lease.
Dennis contends that the reason the Blumberg Lease was entered into was that SBA and the lender at the 1998 closing required EB110 and D R "to enter into a new lease which would run for the entire term of the note and mortgage" which was 25 years.
Rafael contends that the Blumberg Lease is a nullity. Further, under BCL § 909, a "lease . . . of all or substantially all of the assets of a corporation, if not made in the ordinary course of business actually conducted by such corporation" may only be authorized by the authorization of the board and subsequent approval of the shareholders of a corporation. There is no evidence either occurred. Further, BCL § 713 requires that where there are "interested directors," as there clearly were here, a contract entered into by a corporation must be approved by unanimous vote of the uninterested directors and/or vote of the shareholders. No minutes of any such approval exist or was there any evidence that Rafael approved or was even aware of the Blumberg Lease at the time. Accordingly, as Rafael was a 50% shareholder, the Blumberg Lease could not have been approved by the shareholders.
In addition, no copy of the Blumberg Lease was contained in the closing binder for the 1998 Closing, and as a result, when the Blumberg Lease was introduced into evidence, it was introduced, "subject to connection" and no connection was made. Finally, Jose testified that he had been solicited by Dennis to enter into a false long-term lease between EB110 and D R for the purpose of defrauding Rafael and that he declined to do so.
BCL § 713(2)(b) further requires that the proponent of a contract has the burden to "establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board, a committee or the shareholders." Based on the failure of the Blumberg Lease to provide any escalation over a 25 year period, either for taxes or heating or for any rent increases, and for its substantial reduction of effective current income to EB110, by reason of the assumption of the obligation of taxes and heating costs, this Court finds that Dennis cannot establish that the Blumberg Lease was fair and reasonable as is required to validate such transaction under BCL § 713(2)(b).
While Dennis attempted to introduce the Blumberg Lease into evidence, it is also clear that Dennis acted at all times after it was purportedly executed in 1998 as if the Blumberg Lease did not exist (at least until this litigation arose). For EB110 tax years ending 1999 through 2004, a period following the supposed execution of the Blumberg Lease, EB110's Federal Returns show no indication that EB110 paid any real estate taxes or heating costs, notwithstanding that if the Blumberg Lease were in force such items were payable by EB110.
The Court also notes the careful locution of Dennis' counsel in its affidavit that the "SBA and Commercial Capital corporation n/k/a Newtele Small Business required EB110 and D R to enter into a new lease ("Lease No. 2") which would run for the entire term of the note and mortgage. (A true and correct copy of Lease No. 2 [the Blumberg Lease] is annexed hereto as Exhibit "4")." Such locution avoids a direct statement that the lender required EB110 to enter into the Blumberg Lease, which if true, might have explained and supported its provenance and even provided some evidence that it was fair and reasonable as it could have been required to obtain the favorable SBA loan. While this Court finds it not improbable that a lender under the circumstances might have required a lease coterminous with the loan to be in place, with rent sufficient to support the loan interest and amortization, this Court does not believe that a careful lender, especially one subject to SBA requirements would impose a three page gross lease for a 25 year term without escalations as to unknown and unknowable, but probable inflationary, costs such as heat and taxes in connection with a loan. SBA guaranteed loans are in the nature of institutional loans and the testimony illustrated that extensive documentation was prepared by the lender and executed by the borrower. To the extent a lease from D R would have been required to support the credit, in lieu of a D R guarantee, in such a transaction, the lease form ordinarily would have been provided by the lender. This Court does not find credible that lease in the form of the Blumberg Lease was prepared by or imposed by the lender.
Dennis' counsel's suggestion in his post trial brief that this Court might read an escalation factor into the Blumberg Lease, with escalations similar to those in the Sublease, is an implied concession that the Blumberg Lease makes no sense as an economic matter (which this Court finds it does not).
Accordingly, for all of the reasons above, this Court finds that both as matters of fact and law, the Court may not consider the Blumberg Lease in determining the derivative claim for unpaid rent through August 2004, or the derivative claim for fair market rent thereafter. As a result, this Court rejects Dennis' contentions with respect to unpaid back rent and finds that Rafael has established a derivative claim for back rent against D R and Dennis in the amount of $280,982.26, the difference between $559,263, the rent paid, and the $840,245.26, the rent payable through the end of the Sublease term. Rafael's claim for prejudgment interest on this amount will be addressed below.
Fair Market Rent Claims. After the Sublease expired on August 31, 2004, there was no lease in force between EB110 and D R. However, D R continued to use and occupy the Building.
As Dennis continued to maintain control of both corporations, he was obligated to act in the best corporate interests of EB110 so as to protect all of its stockholders. This derivative action contends that Dennis should have done so by renting the Building at its fair market value after the Sublease expired. Dennis instead permitted D R to remain in occupancy, and did not seek a tenant for any part of the Building. Rafael asserts D R and Dennis should, as a result, be liable to EB110 for the fair market rental of the Building from September 1, 2004, less any rent actually paid during such period. This Court concurs but with the limitation that the obligation under this claim end on the Valuation Date. Whether D R could have afforded to pay a fair market rent is not relevant as the concept of a fair market value presumes the existence of a potential tenant willing and able to pay such rent.
After the Valuation Date, Dennis, as owner of all EB110 shares and all D R shares, will have the benefits and burdens of all corporate rights of both corporations, and subject to tax and corporate laws, may do what he wishes as to transactions between them provided he has paid for the Stock.
Rafael asserted that the rental valuation of the Building should be based on a putative store lease for the Building. As Manhattan store leases are commonly net leases at least five years with increases at three or five years intervals, as illustrated by the Sublease itself, this Court determined that it was appropriate to consider such a format to determine the fair market rent under the derivative action and directed the Claimants in October, 2007 to use such model at the evaluation hearing. No objection was raised to this directive. At such time, after consulting with the Claimants as to the time needed by them to prepare and secure witnesses, appraisers and experts, the Court scheduled a hearing which was held on December 3 and 5, 2007.
To establish the fair market rent, Rafael introduced the testimony of Lane who was qualified as an expert witness in appraisal, and Lane's written appraisal of the Building prepared for the purpose of the hearing (the "Appraisal"). Neither Jose nor Dennis called witnesses or offered any other appraisal into evidence, confining their efforts on this issue to the cross examination of Lane. Dennis, however, included as exhibits to his post-trial memorandum, appraisals of two other appraisers. One was made by Goodman-Marks Associates, Inc.("Goodman-Marks"), dated July 27, 2006, which found the fair market value of the Building to be $9,375,000 as of July 25, 2006 on a sales comparison basis, the second was made by MJC Consulting Services, Inc., dated December 31, 2003, which found the value of the Building at such date to be $4,000,000. Jose and Rafael objected to the consideration of either of such appraisals as neither had been offered as evidence at the hearing, or been subjected to voir dire nor had the persons preparing them been subjected to cross examination nor did any adverse party have an opportunity to counter the content of such appraisals with rebuttal evidence or witnesses. Further, the stated purposes of these two other appraisals were to establish sale values for the Building and not its fair market rent. The Court concurs with all of those objections and did not consider such appraisals in ascertaining the fair market rent.
Dennis also attempted to introduce evidence of an agreed upon fair market rent value proposed by Rafael during unfruitful settlement negotiations. Both other Claimants object to such attempt. The public policy to promote settlements makes such evidence privileged and not admissible should settlement negotiations fail. Civil Practice Law and Rules ("CPLR") § 4547. Thus, the Court will not consider any value proposed in the settlement discussions to be relevant evidence in making its determination of fair market rent. Accordingly, the only evidence as to fair market rent value before the Court was Lane's appraisal, his testimony and his opinions as an expert witness. As Lane was an expert witness, the Court may also consider the basis upon which Lane reached his opinion.
While competing appraisals are common in the litigation of evaluation disputes, it is not unknown that only a single appraisal is introduced into evidence in such a dispute. The Court may not, however, accept such single appraisal as conclusive and must make its own findings of facts in determining the valuation, evaluating the credibility and accuracy of the appraiser and his testimony, including the basis of his opinions, and address such matters in the Court's findings of fact. Adirondack Hydro Dev. Corp. v. Warrensberg Board Paper Corp., 205 AD2d 925 (3rd Dept. 1994); Dempster v. Dempster, 236 AD2d 582 (2nd Dept. 1997); Ferraro v. Joel R. Brandes, P.C., 257 AD2d 596 (2nd Dept. 1999).
Determining a fair market rental value of the Building is not easy as finding comparables in the relevant East Harlem market is difficult. Rents for commercial spaces, unlike sales prices of real estate, are usually not a matter of public record and extracting rental information from private sources is difficult; appraisers have no subpoena power. Further, because commercial leases are complex and represent many economic trade-offs, rents actually paid even at similar sites cannot be truly comparable without considering, inter alia, such factors as "free" rent concessions, improvement allowances, percentage rent, whether demolition rights are retained and, the duration of the lease.
To form his opinion, Lane selected a series of other rentals in the East Harlem vicinity and adjusted them for size, location, date of lease commencement and other matters. While it is proper for an appraiser to make adjustments to his comparison properties based on his experience in order to formulate his expert opinion of value, the amount of the adjustments and the particular factors, however, being matters of expert opinion may of course be questioned. If competent evidence has been introduced that the choice of comparables or the size or choice of the adjustment factors should be different, the Court would have to make its own findings of facts from such conflicting evidence. Here, although Dennis challenged the size of the adjustment factors used by Lane, Dennis offered no evidence that different percentage adjustments were more appropriate or that there was any basis to question the adjustment factors used by Lane. Accordingly, this Court accepts both the adjustments and the adjustment methodology employed by Lane.
Had Dennis offered expert testimony of a different appraiser who used different types or sizes of adjustments to Lane's comparables, the court would have had to make its own findings of fact on such matters, based on the conflicting testimony.
The Goodman-Marks appraisal, although not in evidence, uses the same adjustment methodology and the adjustments used in such appraisal, fall in similar ranges to the adjustment factors used in the Appraisal.
Dennis challenged Lane's selection of comparable leases and his failure to include other supermarket sites in the East Harlem area. In his appraisal Lane considered fifteen commercial lease transactions in the East Harlem area entered into between June 2002 and January 2007, involving premises between 800 square feet and 6000 square feet. Lane appraised the Building as divisible into two segments, one of 2500 square feet, where the laundromat was once located, and the other, a 13,500 square ft. segment comprising the Supermarket and the "back building" and evaluated their fair market rents separately. Lane recognized the disparity between the size of the larger unit at the Building and the selected comparables and adjusted the comparables for size in his appraisal. Dennis challenged the Appraisal for failing to consider other large supermarket sites in the East Harlem area as comparables, and identified five such sites. Lane testified that he had no data and made no inquiry as to such sites, having obtained his information from certain brokers, owners and other appraisers. Dennis, however, introduced no evidence to show that any of such five sites were rental, rather than owner occupied properties, or were rented at any time relevant to when the fair market rental value of the Building was to be determined. Dennis further presented no evidence that an inquiry by Lane would have produced an appropriate comparable. Accordingly, even if one or more of the five sites discussed by Dennis had been leased in an arms length transaction during a relevant period Dennis presented no evidence as to their rental or that the information was or should have been available to Lane. Dennis also questioned Lane's choice of comparables on a geographic basis, claiming some were too distant to be relevant. While there are undoubtedly closer store premises in the East Harlem area, Dennis offered no evidence as to the level of rent of nearer premises or whether they were leased at a relevant time.
The Goodman-Marks appraisal which Dennis attempted to introduce acknowledges that "rental rates concerning single user buildings such as the subject are scare because these types of building are typically owner-occupied."
The difficulty of obtaining appropriate comparables is also illustrated in the Goodman-Marks appraisal which used six comparables to appraise possible rents at the Building as of late July, 2006. None of those six comparables of ten year leases were for spaces larger than 4,400 square feet with the average being 2,608 square feet.
Lane's appraisal expressed his opinion and conclusion as to fair market rent as of September 2004, September 2005, September 2006 and September 2007. In October 2007 the Court had directed the parties to address the valuation on the assumption that, following usual commercial practices, a commercial lease would have net rental increases at three to five year intervals. Accordingly, Lane's evaluation of fair market rentals in 2005, 2006 and 2007 are irrelevant to this analysis. This Court, therefore agrees with Dennis that the sole relevant rent to be considered is the rent as at the time a putative lease would have been executed, i.e. 2004. Accordingly, this Court has disregarded the six comparable rentals used in the Appraisal solely to calculate the fair market rental for 2005, 2006 and 2007. Dennis further argues that because a lease commencing September 2004 might be negotiated as much as six months earlier, the fair market should have been ascertained as of March or April 2004. The Court appreciates that while if Dennis had set the rent at such earlier date, based on a fair market appraisal as of such date, it would have been sustainable, he did not. Thus, this Court finds that the fair market rent for the short period between the end of the Sublease and the Valuation Date is the fair market rent as at September 1, 2004.
Lane also concluded that the Building should be analyzed as two rentals units, the supermarket portion and the laundromat portion. For the laundromat space, he found that adjusted rents of nine comparable leases ran from $31.98 to $104.48 a square foot gross. Using such comparables, Lane concluded that the fair market rent for the laundromat segment as of September 1, 2004 was $60.00 gross per square foot. For the Supermarket portion he found that adjusted rents of nine comparable leases ran from $26.65 to $76.62 per square foot gross. Using such, Lane concluded that the fair market rent for the Supermarket segment as of September 1, 2004 was $45 gross per square foot. Translating "gross" to "net" using the Building's transitional and actual assessment to calculate taxes and a vacancy and collection allowance, Lane found the net fair market rent of the Building on September, 2004 to be $676,300, or an average of approximately $42.24 net per square foot. This translates to a fair market net monthly rental of $56,358.33.
Lane's appraisal assumed that the former laundromat portion of the Building could be leased separately and at a higher rent. Dennis introduced no evidence to contradict Lane's assertion and effectively supported such assertion by complaining that because D R was not using such space, he should not be responsible for paying rent on it. However, although he controlled EB110, he made no effort to rent the laundromat space after the end of the Sublease. Prior to the end of the Sublease, the entire Building was leased to D R for fifteen years under the Sublease. No evidence was offered that rents were at any time paid to EB110 from the laundromat space. Thus, whether or not Dennis or D R used the laundromat space, they are liable for the fair market rent on the whole Building after the end of the Sublease. Applying Lane's estimates to the period of September 1, 2004 to November 21, 2005, during which period 15 monthly payments of rent would have been due, this Court finds that fair market net rent of $845,375 was payable during such period.
Pursuant to the Escrow Stipulation, D R and Dennis agreed to deposit $18,000 per month, commencing March 1, 2006 in escrow with Dennis' counsel to be used to keep the mortgage current and to pay for outstanding tax obligations and other tax obligations as they may accrue. Dennis' counsel still holds this escrow. This stipulation did not fix fair market rent, but agreed that amounts paid into the escrow would constitute an offset against rent. However, only one monthly payment of $18,000 was made into this escrow. While Dennis introduced no direct proof or evidence of any other payment of rent being made, he swore in his affidavit of December 26, 2007 that the mortgage was current, thus effectively stating that some payments on the mortgage on the Building had been made by D R since the end of the Sublease. Such statement is corroborated by the EB110 Federal Returns for such period showing rent payments (which traditionally reflected payments made by D R on EB110's mortgage). Accordingly, such rents must be subtracted from the fair market rent for the period to fix the derivative amount owing by Dennis and D R to EB110. Goldstein testified that the EB110 Federal Returns for fiscal years ending 2005 and 2006 respectively show rent income (which was received from D R) of $114,840 and $112,797. Using the assumption that the 2006 rent through the Valuation Date (November 21, 2005) was paid monthly, in advance on the first day of each month, as regularly provided in commercial leases in New York, monthly payments of such rent for September, October and November 2005 will be credited. This Court therefore finds that D R paid EB110 rent of $114,840 in fiscal year 2004 — 2005 and rent of $24,199.25 from September 1, 2005 through November 21, 2005 or an aggregate of $139,039.25. Thus, the rent shortfall for the post-Sublease period is the difference between the fair market net rent which would have been payable, i.e., $845,375 and the net rent paid, i.e., $139,039.75 or $706,335.75. Rafael's claim for prejudgment interest will be addressed below.
Again, because Dennis will own both corporations and had stipulated the value of the building net of the mortgage as of the Valuation Date, this Court need not address what mortgage payments had been made. To the extent D R or Dennis made any payments to reduce the mortgage below the amount in the stipulation, Dennis will have built up equity, and will reap the benefit of the payment. as the value and the mortgage offset were fixed as of about the Valuation Date.
PreJudgment Interest
Rafael seeks prejudgment interest on the derivative claims. Two different types of derivative claims have been sustained by this Court, one relating to the inter-corporate loan owed to EB110 from D R and the other, for unpaid rent claims, which includes unpaid Sublease rent through the end of the Sublease, and unpaid fair market net rent thereafter. Prejudgment interest is properly payable on derivative claims from the time each claim arose. See Lewis v. S.L. E., Inc., 831 F.2d 37 (2d Cir. 1987) (applying New York law). Ordinarily, prejudgment interest runs through the date of judgment. Here, because the Stock is to be purchased as of its value on the Valuation Date, and because the derivative claims are principally relevant to such calculation, it is appropriate to calculate this interest through such date only, to fix the proper price for the Stock. As post Valuation Date interest through the closing of the sale of the Stock to Dennis under the BCL is to be set under different standards, calculating post Valuation Date interest separately is appropriate.
Accordingly, the Court finds Rafael's claim for pre-judgment interest on the loans to be valid. As EB110's Federal Returns from 1999 through 2004 report no interest income to EB110 there is evidence that no interest was paid on these loans. As such loans were bookkeeping entries, the loan is a demand loan, and has been always payable. Interest, being immediately payable at all time, is payable to the extent not excluded by the six year Statute of Limitations, and accordingly Rafael's request for interest from December 1, 1999, a date within the six years of the date this action was commenced, is proper. Accordingly, this Court will reward pre-judgment interest from such date, but, as was explained above, only through the Valuation Date, on this amount at the statutory rate of 9%. CPLR § 5004 and § 5001(a). Rafael introduced no evidence, however, as when partial payments on the loans were made during any particular year. Having not established the time of partial prepayment, the calculation of prejudgment interest will assume the repayments in such years were made at the earliest date in such fiscal year. Accordingly, prejudgment interest with on the loans will be calculated on the balances of the loans until the Valuation Date at 9% per annum. With respect to the unpaid Sublease rent and unpaid fair market rent after the end of the term of the Sublease, the calculation is different. Although Goldstein's testimony that certain rents were paid during periods after November 23, 1999, the earliest statute of limitation date, there was no direct evidence as to when during such fiscal years, actual payments of rent were made. However, this Court finds it proper to assume, and will assume in computing prejudgment interest, that rent actually paid was paid in equally monthly installments in advance on the first day of each month, the same time rent was required to be paid under the Sublease. To calculate prejudgment interest on underpayments of fair market rent for the period after the expiration of the Sublease, the Court will apply the same rule. Thus, the actual rent paid during such period will be deemed to have been paid in equal monthly installments, in advance, on the first of each month, and the rent payable (the fair market rent) shall be deemed to have been payable in equal monthly installments, in advance, on the first of each month. Pre-judgment interest shall be calculated on the difference of each monthly payment, from the first of the relevant month through the Valuation Date at the statutory rate of 9%. CPLR § 5004. The sum of the amounts found to be owing on such claims together with prejudgment interests above computed shall be the "Derivative Claims Receivable."
Interest received must be reported in Federal Returns.
Rafael also seeks compound prejudgment interest at the rate of 18% for tax delinquencies unpaid. As this Court has addressed tax and mortgage delinquencies by finding that they may be ignored, in property setting the price for Rafael's shares, the Court need not address either the calculation of interest on their amount or the rate of such interest, or award prejudgment interest on such amounts.
Summation of Valuation
As this Court found that as of Valuation Date the Stock constituted 50% of the issued and outstanding shares of EB110, this Court must proceed to fix the value of the Stock as of such date.
The Value Stipulation fixed the unencumbered value of the Building as of the Valuation Date at $8,803,959.89. Accordingly, this Court need only add to such sum the value of the Derivative Claims Receivable as above found and divide by two to determine what the price of the Stock would have been on the Valuation Date. The amount to be paid for the Stock shall be such price plus post judgment interest thereon, from the Valuation Date through the date when payment of such amount is made, as calculated as provided below.
Motion For Temporary Receiver
At the commencement of these proceedings Rafael moved for this Court to appoint a temporary receiver for the Building, claiming that Dennis, by failing to pay real estate taxes, water bills and the mortgage, and by failing to file Federal and State Corporate Income tax returns was putting EB110 and the Building at jeopardy, and by failing to pay fair market rent, was dissipating the assets of EB110. After the Court explained the expenses and complications involved in a receivership, the Claimants entered into the Escrow Stipulation. However, only one payment was made under the Escrow Stipulation. On December 5, 2007, upon becoming aware of Dennis' failure to comply with the Escrow Stipulation, Rafael renewed his motion for a temporary receiver.
This Court finds that Dennis violated the Escrow Stipulation. However, this Court also finds that Dennis has established that since the time of the Escrow Stipulation, most of the water and tax liens on the Building have since been paid or resolved and Federal and State Returns for EB110 have been filed, substantially reducing the risk of a tax foreclosure of the Building and the dissolution of EB110 for the failure to pay New York State Franchise Taxes. Although Dennis has not produced copies of the Federal Returns subsequent to the Evidentiary Returns, he has submitted evidence that they were filed. Further, by this Decision and Order, the process of this Court necessary to determine the price for the purchase of the Stock has been completed.
The appointment of a temporary receiver is a provisional remedy to maintain the status quo while resolving a dispute, and is discretionary to this Court. As this Decision and Order goes far to the final resolution of the dispute, and will fully resolve the dispute if Dennis promptly buys the Stock at the price and time fixed by the Court in this Decision and Order, the need to preserve the status quo while litigation runs its course may be unnecessary. Further, as this Court has found that Dennis owns a 50% interest in EB110, which, even after reflecting the award in the derivative action, is of substantial value and provides ample security for Dennis' performance of his obligation both to continue to pay the taxes and mortgage and to purchase the Stock.
Appointing of a receiver in compliance with the guidelines and requirements of the Office of Court Administration is a slow process. Thus, to the extent the Stock is purchased within the time set herein, such sale could well occur before a temporary receiver could take possession of EB110, if the Court were to grant the motion for a receiver. Further the presence of a temporary receiver, while the purchase of the Stock proceeds towards consummation, may raise additional issues to be litigated. For all of these reasons, the Court does not find that Rafael has at this time made a sufficient showing of irreparable harm for this Court, in the exercise of its discretion whether to appoint a temporary receiver denies Rafael's renewed motion for such receiver. To the extent, however, that Dennis or Jose elects to set aside or seek a revision of this Decision and Order by reargument, Rafael may renew his request for a receiver to this Court. In the event either Jose or Dennis elects to appeal this Decision and Order, this Court expects that such appellant would be required to post a bond to stay the execution of this Order and Judgment, thus also protecting Rafael's interests during the pendency of the appeal.
POST VALUATION DATE INTEREST
CPLR § 5004 sets forth the "statutory" rate of interest upon a judgment and provides: "Interest shall be at the rate of nine percent per annum, except as otherwise provided by statute."
BCL § 1118(b) provides:
"In determining the fair value of petitioner's shares, the Court in its discretion, may award interest from the date the petition is filed to the date the payment for the petitioner's sale [sic] at an equitable rate upon judicially determined fair value of his shares." This provision recognizes that, although following a § 1118(b) election, Rafael will be paid for the fair value of his Shares as of the Valuation Date, he must await the completion of Court procedures, before he can receive his money and reinvest it. This section has been construed to require the payment of interest from the Valuation Date. See, e.g.: In Re Blake v. Blake Agency, Inc., 107 Ad2d 139 (2nd Dept. 2985); In Re F.P.D. Realty Corp. V. Truway Private Taxi Corp., 267 AD2d 111 (1st Dept. 1999); Hall v. King, 177 M.2d 126 (Sup.Ct., NY Co., 1988). The rate is to be the rate which is found to be equitable by the Court. Thus, § 1118(b) "otherwise provide[s] by statute" the interest to be fixed under CPLR § 5004.
Under BCL § 1118(b), the Court may fix interest in the context of in an amount other than the "statutory" rate where the Court makes a finding that such deviance is warranted by the equities, provide that the court specifies the facts and circumstances to support such decision. Balk v. 125 West 92nd St. Corp , 24 AD3d 194 (1st Dept. 2005). However, here, no party has introduced any evidence or advanced any argument as to any equities or facts or circumstances requiring or permitting this Court to deviate from the ordinary "statutory" rate of interest of 9% set forth in CPLR § 5004. Accordingly, this Court sets the interest rate on the amounts accruing to Rafael to be 9% on the valuation as of the Valuation Date until the purchase price for Rafael's shares shall have been paid.
Attorneys Fees
Counsel for Rafael has requested that this Court award counsel attorneys fees as a result of the successful recovery of the derivative claims. Such an award is permissible and common for such actions under BCL § 626(c), and this court finds that it is appropriate and proper to make such award. Because in this dispute Dennis must purchase the Stock and such sale may be consummated before the Court is to determine and seen to the payment of counsel's fees, and because the price to be paid for the Stock shares would be affected, depending on when such fees are paid, this Court must establish a proper approach as to how the fees are to be paid.
The Court will first determine the amount of fees to be paid to counsel, based on the services actually performed and the amount of time expended. As this dispute has involved questions as to how much of the shares are owned by each Claimant and other issues relating to the dissolution as well as derivative, the Court will award fees only as they relate to services rendered in connection with the derivative claims, for which counsel fees are properly payable by the Corporation.
To the extent the Stock shall have been purchased by Dennis in accordance with his Decision and Order, prior to the this Court fixes attorneys' fees, one half of such fees shall be imposed against Dennis and D R. To the extent the Stock has not been purchased at such time, the Court will award the entire fee to counsel and the purchase price for the Stock shall be reduced by one half of such fee award in this Decision and Order accordingly so that economically, Dennis and Rafael will bear such counsel fees equally.
Judgments and Decretals
As a result of the foregoing, this Court hereby finds that although Rafael has established certain claims against both Dennis and D R under the derivative action, such claims in the context of the purchase of the Stock in the circumstances of this dispute should be addressed in the adjustment of the purchase price for the Stock as set forth in this Decision and Order. Accordingly, this Court will forebear from ordering a separate judgment on the derivative claims at this time, reserving the power to enter such a judgment, on the application of Rafael, should Dennis not proceed as set forth below to purchase the Stock on the price and terms therewith set forth.
IT IS ORDERED AND DECREED that the purchase price for the Stock (the "Purchase Price") shall be fixed at the sum of $4,411,980 (one half of the equity value of the Building as agreed in the September Stipulation), plus one half of the Derivative Claims Receivable (as calculated in accordance with this Decision and Order), together with interest on such sum accruing at the rate of 9% per annum from November 21, 2005.
AND IT IS FURTHER ORDERED AND DECREED that Dennis shall purchase the Stock for the Purchase Price, payable in cash, certified or bank check drawn on New York Clearinghouse Funds immediately available on delivery of the Stock to Dennis endorsed in blank with all New York State transfer taxes having been paid, such transaction to occur not later than thirty days from the service date of Notice of Entry of this Decision and Order. Such closing shall occur during business hours at such place in the City and County of New York as may be fixed by the party serving Notice of Entry, or, in the event Dennis wishes to finance some or all of the Purchase Price with a loan from a bank trust company or the mortgagee of the existing mortgage, at the office of such lender, or its counsel, at such address in the City and County of New York as Dennis shall designate by notice ten days prior to the closing and during business hours.
AND IT IS FURTHER ORDERED AND DECREED that in the event Dennis fails to complete the purchase of the Stock in accord and with this Decision and Order, Rafael may reapply to this Court to enter judgment on the derivative claims occurring through the Valuation Date, and any derivative claims accruing thereafter, and for the appointment of a temporary receiver to sell the Building and to pay the proceeds of such sale to Rafael in the amount of the Purchase Price, and thereafter, after paying the costs and expenses of sale and the receivership in such amounts as may be approved by this Court, and accounting for counsel fees relating to the derivative action claims, transmit the remainder of the proceeds of sale to Dennis.
AND IT IS FURTHER ORDERED that the Claimants shall jointly direct, instruct and cause any escrowee or depository of Certificate No. 1 to present such certificate at the closing to effectuate the transfer, provided that from and after the transfer, the certificate for the Stock showing the transferee as owner, shall be redelivered to the escrow or depository agent who may continue to hold such shares in accordance with any existing agreement or escrow.
AND IT IS FURTHER ORDERED the Dennis and D R shall each at the closing of the purchase of the Stock deliver to Rafael an indemnity and hold harmless with respect to any and all obligations incurred by Rafael as a guarantor of any obligation of EB110 or at or in connection with the 1998 Closing, in form and substance reasonably acceptable to Rafael's counsel, and Rafael shall deliver to Dennis an indemnity and hold harmless from any claim or lien against Rafael's shares being transferred in form and substance reasonably acceptable to Dennis' counsel, AND IT IS FURTHER ORDERED that attorneys fees shall be granted to the law firm of White, Cirrito Nally, LLP for services in connection with the derivative action in such amount as may be fixed by the Court in accordance with this Decision and Order upon application therefore and on at least 20 days on notice to all Claimants setting forth in detail in such notice a schedule of services performed and time spent and disbursements incurred in connection with the derivative action herein, and judgment on such award shall be, by further order of this Court, entered against Dennis and D R, jointly and severally.
This is the Decision, Judgment and Order of the Court. DATED:MARCH 11, 2008