Celauro v. 4C Foods Corp.

• Decision Date: 13 December 2010
• Docket Number: No. 600391–10.,600391–10.
• Citation: Celauro v. 4C Foods Corp., 2010 NY Slip Op 52264, 30 Misc.3d 1204, 958 N.Y.S.2d 644 (N.Y. Sup. Ct. 2010)
• Parties: Gaetana CELAURO, individually and as Sole Income Beneficiary of the Salvatore F. Celauro Revocable Trust and Salvatore F. Celauro Irrevocable Life Insurance Trust, et al., Plaintiffs, v. 4C FOODS CORP. and Celauro Sales, Inc., et al., Defendants.
• Court: New York Supreme Court

30 Misc.3d 1204

958 N.Y.S.2d 644

2010 N.Y. Slip Op. 52264

Gaetana CELAURO, individually and as Sole IncomeBeneficiary of the Salvatore F. Celauro Revocable Trust and Salvatore F. Celauro Irrevocable Life Insurance Trust, et al., Plaintiffs,

v.4C FOODS CORP. and Celauro Sales, Inc., et al., Defendants.

No. 600391–10.

Supreme Court, Nassau County, New York.

Dec. 13, 2010.

Robert & Robert PLLC, Farrel Fritz, P.C., for Plaintiffs.

Herrick Feinstein LLP, for Defendants.

TIMOTHY S. DRISCOLL, J.

This matter is before the Court for decision on 1) the Order to Show Cause filed by Plaintiffs on May 25, 2010, 2) the motion filed by Defendants on August 31, 2010, and 3) the cross motion filed by Plaintiffs on August 31, 2010, submitted October 1, 2010, following oral argument before the Court.For the reasons set forth below, the Court 1) denies Plaintiffs' Order to Show Cause; 2) denies Plaintiffs' cross motion; and 3) grants Defendants' motion and dismisses the Verified Complaint.

BACKGROUND

A.Relief Sought

In their Order to Show Cause, Plaintiffs seek an Order temporarily and preliminarily enjoining 4C Foods Corp.(“4C” or “Corporation”), its shareholders, officers, directors, employees, agents, and representatives from taking any action that would interfere with the transferability provisions of, including enjoining them from enacting any further Amendments to, 4C Food's Amended and Restated Shareholders Agreement dated April 4, 2005(“2005 Agreement”) relating to the transferability and/or sale of stock.

In their motion, Defendants move for an Order, pursuant to CPLR § 3212, granting Defendants summary judgment dismissing the Verified Complaint (“Complaint”) in its entirety, with prejudice.

In their cross motion, Plaintiffs move for summary judgment declaring that two particular provisions in the amendments(“Amendments”) to the 2005 Agreement are void as against public policy, invalid, unenforceable, impose an unlawful restraint on the right to sell personal property and, therefore, are illegal as a matter of law.

B.The Parties' History

In the Complaint, Plaintiffs seek a Declaratory Judgment that two provisions in the Amendments are illegal as a matter of law because they deprive Plaintiffs of the right to sell and/or transfer their stock in 4C, a closely held family corporation.The Original Shareholders Agreement and five separate amendments are referred to collectively as the “Shareholders Agreement.”

Specifically, Plaintiffs dispute the validity of 1) the portion of the Third Amendment that rescinds Article VI of the 2005 Agreement entitled “Applicable Sale Process,” and 2) the portion of the Fourth Amendment, and similar portions of other Amendments, entitled “Section 4.3—Transfers to Permitted Transferees.”Plaintiffs also seek to enjoin Defendants from taking any action that would interfere with the transferability provisions of the 2005 Agreement, including enjoining Defendants from enacting any amendments that restrict the sale and/or transferability of stock.

The Complaint alleges that Plaintiffs agreed to and executed the 2005 Agreement which provided that a shareholder (“Shareholder”), regardless of the type of entity that owned the stock, could freely transfer its shares to any “permitted transferee,” without intervention by 4C and/or the majority of the Shareholders.Article VI of the 2005 Agreement, titled “Applicable Sales Process,” permitted Shareholders to compel 4C and/or the other Shareholders to buy their shares at fair market value (“Put”).

Five Amendments to the 2005 Agreement were subsequently signed by all the Shareholders, except Gaetana and Nathan.Plaintiff alleges, inter alia, that 1) the Third and Fourth Amendments set forth new purported transfer restrictions that are unreasonable as a matter of law; 2) Plaintiffs were not given an opportunity to vote on and/or discuss the Amendments prior to their enactment and implementation; 3) with the exception of the First Amendment, Gaetana and Nathan learned of the Amendments after they were passed, via letter to their attention; 4) the Amendments“left Plaintiffswithout any ability to sell and/or transfer their stock [emphasis in original]”(Compl. at ¶ 81); and 5) the transfer restrictions have no valid, reasonable business purpose and were passed to destroy the property rights of Plaintiffs and other minority shareholders.

The Complaint contains two (2) causes of action.In the first, Plaintiffs seek a declaration that the provision in the Third Amendment that eliminates the rights under Article VI of the Original Shareholders Agreement, titled “Applicable Sale Process,” is void.In the second, Plaintiffs seek a declaration that Section 4.3 of the Fourth Amendment, titled “Transfers to Permitted Transferees,” unreasonably and illegally restricts a shareholder's ability to transfer shares of 4C.

Plaintiffs also seek an Order 1) enjoining the Defendants from enacting further amendments that restrict the sale and/or transferability of stock; 2) declaring invalid all other provisions of the Shareholders Agreement that interferes with the transferability of stock under the Original Shareholders Agreement; 3) enjoining Defendants from taking any action that would interfere with the transferability provisions of the Original Shareholders Agreement; and 4) awarding attorney's fees and costs.

4C is a closely held, family-owned corporation that manufactures and distributes food products throughout the New York metropolitan area.The business was established in 1935 by the father(“Father”) of Salvatore F. Celauro, Sr.(“Sal, Sr.”).Sal, Sr. is the late husband of PlaintiffGaetana Celauro(“Gaetana”).Upon the Father's death in 1961, Frank Celauro(“Frank”), the brother of Sal, Sr., became President of 4C and the owner of approximately 51% of the stock in that corporation.Upon Frank's death in 1978, his son, DefendantJohn Celauro(“John”) became the owner of approximately 56% of the stock.Sal, Sr., who owned approximately 26% of the stock, became the company's President and Chief Executive Officer.When Sal, Sr. semi-retired in 1990, John became President and Chief Executive Officer, and still holds those positions today.

In 2001, friction began to develop among certain key Celauro family members who were then operating the business.More specifically, plaintiffs allege that in 2001, Sal, Sr suspected that John was engaging in self-dealing activities, including waste and misappropriation of corporate assets and funds.Although Sal, Sr. attempted to resolve this problem within the family, his efforts were unsuccessful and he commenced a lawsuit in which he alleged misappropriation of corporate funds and other improper conduct.Following the death of Sal, Sr. in 2004, that lawsuit was pursued by his wife Gaetana.This lawsuit marked the onset of conflict and internal division for 4C as Gaetana, and later Nathan, commenced a series of contentiously litigated lawsuits (“Lawsuits”) in which they were pitted against an opposing shareholder faction headed by John.

Upon the death of Sal, Sr. in 2004, Plaintiff SFC Exemption Trust became the owner of 12.02% of the shares of 4C, and Sal Sr.'s Estate became the owner of 6.78% of the shares of 4C, which were subsequently transferred to Plaintiff SFC Insurance Trust in 2005.These two trusts give Gaetana an absolute power of appointment to determine who would receive the Trusts' 4C stock upon her death.In her will, she has set forth her planned exercise of that power of appointment by stating that, upon her death, Nathan J. Celauro(“Nathan”) will receive the corpus of the SFC Exemption Trust and the SFC Insurance Trust, totaling 18.80% of the shares of 4C stock.

The 2005 Agreement (Ex. 1 to OSC) was adopted on or about April 4, 2005 by the 4C family shareholders, including Gaetana.John affirms that the principal purpose of the 2005 Agreement was “to preserve the character and vitality of the Company as a closely held family business” and that the Shareholders entered into the 2005 Agreement “to maintain this exclusive family-owned status and safeguard the Company's prospects for themselves and their children”(J. Celaruo July 2010Aff. at ¶ 3).

The 2005 Agreement contained two relevant provisions with respect to the transfer and/or sale of 4C stock.Article II, § 2.7, titled “Sale of Stock,” contains an all-inclusive list enumerating the “five (5) * * * permitted methods for the Transfer of Shares.”To the extent pertinent here, Section 2.7 authorized shareholder transfers to “Permitted Transferees,” which, in keeping with the goal of retaining family ownership, contains a detailed definition of the family members and/or Trust and Estate beneficiaries to whom stock transfers could be made (2005 Agreementat pp. 7–8).John affirms that no new shareholders from outside the family have been allowed to acquire stock in 4C, and the only transfers of stock have been by inheritance, or on limited occasions many years ago, through a limited purchase by 4C at book value.

Alternatively, shareholder transfers and sales could be made pursuant to an “Applicable Sale” process, a separately standing transfer methodology described more fully in Article VI of the Agreement.The “Applicable Sales Process” method of transferring stock permitted certain shareholders, defined as “Applicable Shareholders,” to compel a purchase of their shares, a redemption procedure more commonly known as shareholder “put.”Specifically, Section 6.1 provides in part that “Applicable Shareholders” would have the right, but not the obligation, to sell all of their stock to the Corporations or to the Remaining Shareholders (2005 Agreement, Article VI, §§ 6.1–6.3, at pp. 20–24;see alsoArticle II, § 2.7(a)).The definition section of the 2005 Agreement provides that “Corporations” refers to 4C and Celauro Sales, Inc.(“CSI”)(2005 Agreementat p. 3).

The 2005 Agreement does not, however, confer upon all shareholders the right...