Nathan J. Celauro Celauro Revocable Trust v. 4C Foods Corp. (In re Celauro)

• Decision Date: 28 May 2013
• Docket Number: No. 500373/12.,500373/12.
• Citation: 972 N.Y.S.2d 142,2013 N.Y. Slip Op. 50875,39 Misc.3d 1234
• Parties: In The Matter of the Application of Nathan J. CELAURO, indivdually; Nathan J. Celauro as Preliminary Executor of the Estate of Gaetana Celauro, the Deceased Sole Income Beneficiary of the Salvatore F. Celauro Revocable Trust and Salvatore F. Celauro Irrevocable Life Insurance Trust; Nathan J. Celauro as vested beneficial owner of the shares of 4C Foods Corp. held by the Salvatore F. Celauro Revocable Trust and Salvatore F. Celauro Irrevocable Life Insurance Trust; Nathan J. Celauro as Trustee and Linda Celauro as Successor Co–Trustee of the Salvatore F. Celauro Children's Trust f/b/o Nathan Celauro a/k/a the Nathan J. Celauro Ir revocable Trust u/a dated December 26, 1991, Petitioners, v. 4C FOODS CORP., Respondent, For a Determination as to the Fair Value of Petitioners' Shares Under Article 4 of the Civil Practice Law and Rules and sections 623 and 806 of the New York Business Corporation Law.
• Court: New York Supreme Court

39 Misc.3d 1234

972 N.Y.S.2d 142

2013 N.Y. Slip Op. 50875

In The Matter of the Application of Nathan J. CELAURO, indivdually; Nathan J. Celauro as Preliminary Executor of the Estate of Gaetana Celauro, the Deceased Sole Income Beneficiary of the Salvatore F. Celauro Revocable Trust and Salvatore F. Celauro Irrevocable Life Insurance Trust; Nathan J. Celauro as vested beneficial owner of the shares of 4C Foods Corp. held by the Salvatore F. Celauro Revocable Trust and Salvatore F. Celauro Irrevocable Life Insurance Trust; Nathan J. Celauro as Trustee and Linda Celauro as Successor Co–Trustee of the Salvatore F. Celauro Children's Trust f/b/o Nathan Celauro a/k/a the Nathan J. Celauro Ir revocable Trust u/a dated December 26, 1991, Petitioners,

v.4C FOODS CORP., Respondent, For a Determination as to the Fair Value of Petitioners' Shares Under Article 4 of the Civil Practice Law and Rules and sections 623 and 806 of the New York Business Corporation Law.

No. 500373/12.

Supreme Court, Kings County, New York.

May 28, 2013.

Michael Schoenberg, Esq., James M. Wicks, Esq., Farrell Fritz, P.C., Uniondale, for Plaintiff.

Christopher J. Sullivan, Esq., Herrick, Feinstein, LLP, New York, for Defendant.

DAVID I. SCHMIDT, J.

Upon the foregoing papers, petitioners Nathan J. Celauro, individually, as preliminary executor of the estate of Gaetana Celauro and as the vested beneficial owner of shares of the respondent 4C Foods Corp. held by certain trusts, moves for an order: (1) pursuant to CPLR 2221 granting leave to renew respondent's motion to dismiss the Petition that was granted in this court's order dated December 5, 2012, and upon renewal, denying respondent's motion to dismiss the petition; and (2), pursuant to CPLR 3025, granting petitioners leave to file and serve an amended petition.

Petitioners' motion is denied with respect to petitioners' claims pursuant to Business Corporation Law §§ 623 and 806. With respect to the proposed causes of action premised on the breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty, the motion to amend is denied, but with leave to file an amended pleading containing such causes of action upon the following events: (1) Nathan J. Celauro, as the executor of the estate of Gaetana Celauro, is barred from transferring voting shares to Nathan Celauro individually; (2) these voting shares are purchased by respondent, its directors and or its majority shareholders; and (3) such causes of action are not otherwise rendered moot by any determination made in the Nassau County declaratory judgment action ( Celauro v. Celauro, Nassau County Index No. 426/13). The motion for leave to file an amended petition is granted with respect to the proposed declaratory judgment claim in which petitioner seeks a declaration that the January 11, 2013 notice addressing the transfer of voting shares formerly controlled by Gaetana Celauro is a nullity. The special proceeding is converted to a declaratory judgment action, but any further proceedings in the action are stayed pending the determination of the Nassau County declaratory judgment action ( Celauro v. Celauro, Nassau County Index No. 426/13).

In the dismissed petition, petitioners contended that, pursuant to Business Corporation Law §§ 623 and 806, they were entitled to a determination of the value of their shares in respondent and a judgment providing that respondent was required to pay petitioners fair value for their shares.¹ Petitioners are a minority group of shareholders of respondent, a closely held family corporation. The minority and majority groups of shareholders have had a contentious relationship for years. In 2007, the majority group passed an amendment to the shareholders agreement that gave the majority shareholders the right to approve or reject any transfer of shares (Fourth Amendment § 4.3[a] ) and that allows respondent to buy the shares for which transfer approval has not been granted (Fourth Amendment § 4.3[b] ). This amendment to the transfer provisions was declared legal and enforceable in a previous declaratory judgment action ( see Celauro v. 4C Foods Corp., 30 Misc.3d 1204[A], 2010 N.Y. Slip Op 52264[U] [Sup Ct Nassau County 2010], affd88 A.D.3d 846, 931 N.Y.S.2d 250 [2d Dept 2011], lv denied19 N.Y.3d 803 [2012] ).

At issue in the instant proceeding was a December 2, 2011, resolution that amended the certificate of incorporation and the shareholder's agreement to provide for a four for one split of the non-voting shares for each shareholder. Although the amendment did not alter the percentage of shares held by the majority and majority shareholders, the split reduced the per share value of each share.² Petitioners contended that this amendment would thus allow the majority shareholders to take advantage of the limitation on transfer provisions (Fourth Amendment § 4.3) to pick off petitioners' voting shares at a reduced price. This issue was not merely hypothetical, in that Gaetana Celauro, who controlled a portion of the minority shares, was on her deathbed at the time the majority shareholders decided to amend the certificate of incorporation in order to change the number of shares. Further, upon her death in December 2011, and the subsequent probate of her will, the transfer of her shares or those held for her benefit from her estate to the beneficiary, petitioner Nathan Celauro, another minority shareholder, is a transfer that will be governed by section 4.3 of the fourth amendment.

Upon, respondent's declining to recognize the applicability of Business Corporation Law § 623, petitioners commenced the proceeding alleging entitlement to appraisal rights under section 623 and respondent moved to dismiss the petition. In support of the petition, and in opposition to respondent's motion to dismiss, petitioners had asserted that they were entitled to an appraisal pursuant to section 623 because the amendment adversely altered their redemption and voting rights under Business Corporation Law § 806(b)(6)(B) and (D). In the December 5, 2012 order deciding respondent's motion to dismiss, the court stated that:

“Upon considering the language of the statute as interpreted by the extent court decisions, this court finds that the amendment here does not alter any of petitioners' rights under section 806(b)(6). In this regard, the splitting of the stock does not affect any right to a preference for purposes of section 806(b)(6)(A) since, prior to the amendment, all of respondents stock was common stock and none of its stock carried with it any preferential rights ( see generallyBusiness Corporation Law § 501 [generally describes the differences between common stock and preferential stock] ). With respect to section 806(b)(6)(B), respondent's limited right to repurchase shares under section 4.3 of the fourth amendment to the shareholders agreement upon a decision by a majority of the shareholders to reject all or part of a transfer is not a redemption right for purposes of the statute ( see Glens Falls Ins. Co. v. National Bd. of Fire Underwriters Bldg. Corp., 63 Misc.2d 989, 991–994, 314 N.Y.S.2d 80 [Sup Ct, New York County 1970], affd36 A.D.2d 793, 318 N.Y.S.2d 915 [1st Dept 1971], lv denied29 N.Y.2d 482 [1971] ). Likewise, the splitting of shares also does not directly affect any preemptive rights or voting rights (Business Corporation Law § 806[b][6][C], [D] ).”

Because the court found that the amendment at issue here was not an adverse alteration of the certificate of incorporation for purposes of Business Corporation Law § 806(b)(6), it also found that petitioners do not have a right to appraisal under Business Corporation Law § 623. This court noted, however, that:

“[R]espondent has not presented a business justification for increasing the number of shares, and, as such, petitioners' concern that the majority shareholders may intend to take advantage of the reduced per share value of the corporation in order to pick off their voting shares may not be unreasonable. Nevertheless, the amendment at issue here is simply not one of the enumerated changes that would allow an appraisal action. It would appear that petitioners' claim would be better addressed if and when the majority shareholders use section 4.3 of the fourth amendment to force a selective purchase by respondent of a portion of the shares to be transferred from Gaetana Celauro's estate to Nathan Celauro in order to reduce the minority shareholders' voting stake in respondent. At that time, petitioner may have an argument that any such limitation on the transfer by the majority shareholders would violate the fiduciary duty majority shareholders of a closely held corporation owe the minority shareholders ( see Lirosi v. Elkins, 89 A.D.2d 903, 906–907, 453 N.Y.S.2d 718 [2d Dept 1982]; see also Schwartz v. Marien, 37 N.Y.2d 487, 491–493 [1975];Giaimo v. EGA Assoc. Inc., 68 AD3d 523, 524 [1st Dept 2009]; Lichtenberger v. Long Is. Mach. Sales Corp., 71 A.D.2d 941, 947–948, 420 N.Y.S.2d 507 [2d Dept 1979] ).”

In moving to renew the motion to dismiss and to amend the petition, petitioners allege that the majority shareholders have now taken the action that the petitioners feared would be made possible by the amendments to the certificate of incorporation and shareholders agreement discussed above. Namely, Nathan Celauro, as executor of Gaetana Celauro's estate, gave notice, pursuant to the stock transfer provisions (Fourth Amendment § 4.3), of his intent to transfer the shares held by the estate to the beneficiary, Nathan Celauro. While, in their response, dated January 11, 2013, the majority shareholders allowed the transfer of the non-voting shares, they declined to allow the transfer all of the voting shares to Nathan Celauro unless the court, in a declaratory judgment action respondent has commenced in Nassau County, found that it was improper to disallow such a transfer. Petitioners contend that they are entitled to...