Rafe v. Hindin

• Decision Date: 25 March 1968
• Citation: Rafe v. Hindin, 29 A.D.2d 481, 288 N.Y.S.2d 662 (N.Y. App. Div. 1968)
• Parties: William J. RAFE, Appellant, v. Seymour HINDIN and Bil Cy Realty Corp., Inc., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 662

288 N.Y.S.2d 662

29 A.D.2d 481

William J. RAFE, Appellant, v.Seymour HINDIN and Bil Cy Realty Corp., Inc., Respondents.

Supreme Court, Appellate Division, Second Department.

March 25, 1968.

Albert Boyar, Massapequa (Bernard Meyerson, Brooklyn, of counsel), for appellant.

Irving Waxman, Mineola, for respondents.

Before BELDOCK, P.J., and CHRIST, BRENNAN, RABIN and HOPKINS, JJ.

BELDOCK, Presiding Justice.

On November 1, 1963the plaintiff and the individual defendant organized the corporate defendant for the purpose of purchasing and developing a parcel of real property in Port Jefferson Station, New York.Each owned one certificate for 50% Of the outstanding stock.There was a legend on each certificate, signed by the parties, which made it non-transferable except to the other stockholder; and written permission from the other stockholder was required to transfer the stock to a third party on the books of the corporation.

In April, 1967, being in financial difficulties, the plaintiff found a prospective purchaser for his stock for $44,000.The plaintiff offered to sell his stock to the individual defendant at that price.The latter refused to buy the stock and also refused to consent to the sale thereof to the plaintiff's prospective purchaser.

The plaintiff then instituted this action for a judgment declaring void the legend on the certificate, declaring the stock transferable to a third party without the consent of the individual defendant, and granting other incidental relief.

In addition to a general denial, the answer to the complaint alleges, as an affirmative defense and counterclaim on behalf of the individual defendant, that he and the plaintiff had mutually agreed prior to the issuance of the stock (a) to limit the principals and stockholders of the corporation to themselves, (b) that neither would transfer his stock without the written consent of the other and (c) that neither would unreasonably withhold his consent.The individual defendant further alleges therein that he has reasonable objections to the transfer of the plaintiff's stock to the prospective purchaser.The defendants seek a judgment declaring that the plaintiff's stock is restricted against sale or transfer to a third party without the individual defendant's written consent or, in the alternative, that the corporation be dissolved.

The plaintiff moved for summary judgment.Special Term denied the motion on the grounds that (1) the restriction on the sale of stock is not unreasonable on its face and (2) whether the individual defendant's refusal to consent to the transfer is reasonable is a question of fact.This is an appeal by the plaintiff from the order denying his motion for summary judgment.

The legend on the stock certificate was not contained either in the certificate of incorporation or in the by-laws of the corporation, but was the result of agreement between the parties.That fact is not a sufficient ground for invalidating the restriction.A restriction on the alienation of stock made between all the stockholders of a corporation may be enforced, if reasonable, even though it is not contained in the certificate of incorporation or the by-laws (cf.Reynolds v. Bank of Mt. Vernon, 6 App.Div. 62, 39 N.Y.S. 623, affd.158 N.Y. 740, 53 N.E. 1131).

The legend contained two separate restrictions: (a) each stockholder is required to sell to the other stockholder, but no price is stated at which the offeror is required to sell or the offeree to purchase, and no time limit is set for the offeree to exercise his option to purchase; and (b) each stockholder is required to obtain the consent of the other stockholder to a proposed transfer of the stock to a third party, but there is no provision that the second stockholder may not unreasonably withhold his consent.We are concerned on this appeal solely with the validity of the second restriction.

There is a conflict of authority in other States on the subject of the validity of a restriction on the transfer of stock in a close corporation without the consent of either all or a stated percentage of the other stockholders or the board of directors of the corporation.

In Longyear v. Hardman, 219 Mass. 405, 106 N.E. 1012, it was held that a provision in a certificate of incorporation that none of the shares of stock shall be sold without the consent of the holders of three-quarters the consent of the holders of three-quarters palpably unreasonable or unconscionable because in a small business corporation there is a personal relation analogous to a partnership and there should be retained the right to choose one's associates; harmony of purpose and of business methods and ideals among stockholders may be a significant element in success.(See alsoColbert v. Hennessey, 351 Mass. 131, 217 N.E.2d 914;Mason v. Mallard Tel. Co., 213 Iowa 1076, 240 N.W. 671.)

In Wright v. Iredell Tel. Co., 182 N.C. 308, 108 S.E. 744, it was held that a provision in a certificate of incorporation that shares of stock shall not be transferred unless approved by the directors was valid, where the board of directors had acted in good faith and in the absence of allegation or proof of arbitrary, oppressive, or unreasonable conduct.

In Tracey v. Franklin, 31 Del.Ch. 477, 67 A.2d 56, 11 A.L.R.2d 990, affg.30 Del.Ch. 407, 61 A.2d 780, it was held that a provision whereby two stockholders in a close corporation agreed not to sell their shares, except on the consent of both, was invalid because a restraint on alienation of property is against public policy; and that the fact that two stockholders wish to solidify ownership in themselves in not a legally sufficient purpose to justify the restraint on alienation.To the same effect, see for example, People ex rel. Malcom v. Lake Sand Corp.251 Ill.App. 499;Steele v. Farmers & Merchants Mut. Tel. Assn., 95 Kan. 580, 148 P. 661;Miller v. Farmers Milling & Elevator Co., 78 Neb. 441, 110 N.W. 995;Matter of Klaus, 67 Wis. 401, 29 N.W. 582.

In New York certificates of stock are regarded as personal property and are subject to the rule that there be no unreasonable restraint on alienation (Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 540, 161 N.Y.S.2d 418, 421, 141 N.E.2d 812, 814, 61 A.L.R.2d 1309).In Penthouse Properties v. 1158 Fifth Ave., 256 App.Div. 685, 690--691, 11 N.Y.S.2d 417, (quoted with approval inAllen(supra), 2 N.Y.2d at pp. 541--542, 161 N.Y.S.2d at...