Powell v. Bernstein

• Decision Date: 24 June 1999
• Citation: 692 N.Y.S.2d 346
• Parties: David POWELL, etc., Estate of Lily B. Sheflan, Deceased, etc., et al., Plaintiffs-Appellants, v. Madeline BERNSTEIN, et al., Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 346

692 N.Y.S.2d 346

David POWELL, etc., Estate of Lily B. Sheflan, Deceased, etc., et al., Plaintiffs-Appellants, v. Madeline BERNSTEIN, et al., Defendants-Respondents.

Supreme Court, Appellate Division, First Department, New York.

June 24, 1999.

Andrew N. Krinsky, Sidney S. Korzenik, for Plaintiffs-Appellants.

Arthur D. Felsenfeld, for Defendants-Respondents.

ELLERIN, P.J., ROSENBERGER, BUCKLEY and FRIEDMAN, JJ.

MEMORANDUM DECISION.

Judgment, Supreme Court, New York County (Ira Gammerman J.), entered August 21, 1998, dismissing the complaint after a nonjury trial, unanimously affirmed, without costs. Appeal from order, same court and Justice, entered August 11, 1998, unanimously dismissed, without costs, as subsumed in the appeal from the judgment.

Plaintiffs, minority shareholders holding life interests in shares of a subchapter S family corporation, assert that the trial evidence established that the previously ratified policy of distributing less than 100% of net profit as dividends (see, 177 A.D.2d 452, 576 N.Y.S.2d 549, 233 A.D.2d 182, 649 N.Y.S.2d 791) is no longer required by financial conditions, and is being continued by defendant majority shareholders for the sole purpose of creating a tax-free surplus for the benefit of the remainderpersons, who are related to defendants. This refusal to distribute more income, plaintiffs argue, is in contravention of defendants' fiduciary duties to plaintiffs, who must pay taxes on the corporation's net profits whether distributed or not, the intent of the testator who created the life interests, and the corporation's own 1970 purchase of a similarly situated life tenant's stock that included compensation for her proportionate share of the surplus at that time. Plaintiffs also assert that the trial evidence shows that while continuing this dividend policy, defendants paid themselves excessive and concealed sums as compensation, thereby further diverting profits to which plaintiffs are entitled.

We disagree. The trial court, appropriately recognizing plaintiffs' vulnerability as holders of minority life interests in a subchapter S corporation run by directors identified in interest with the remainderpersons (see, Ochs v. Maydole Hammer Co., 138 Misc. 665, 668, 246 N.Y.S. 539), properly placed the burden of proof on defendants, to establish the reasonableness of their dividend and compensation policies and the evidence supports the finding that they did so.

The testimony shows that many considerations affected defendants' policy with respect to dividend payments, the result of which was the corporation's significant growth with payment of reasonable dividends. Plaintiffs offered no expert...