Rosiny v. Schmidt

• Decision Date: 06 August 1992
• Citation: 185 A.D.2d 727,587 N.Y.S.2d 929
• Parties: Allen P. ROSINY, et al., Plaintiffs-Appellants, v. Theodore N. SCHMIDT, et al., Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 929

587 N.Y.S.2d 929

185 A.D.2d 727

Allen P. ROSINY, et al., Plaintiffs-Appellants, v. Theodore N. SCHMIDT, et al Defendants-Respondents.

Supreme Court, Appellate Division First Department.

Aug. 6, 1992.

Before SULLIVAN, J.P., and CARRO, MILONAS and ROSENBERGER, JJ.

MEMORANDUM DECISION.

Order, Surrogate's Court, Bronx County (Lee Holzman, S.), entered on or about November 19, 1990, which, after a non-jury trial, inter alia, dismissed the complaint and granted the defendants' counterclaim for a declaratory judgment to the extent of declaring that the plaintiffs have no right, pursuant to a shareholders' agreement dated June 30, 1981, to purchase shares held by the defendants' decedents at the time of their deaths and that said shares may pass pursuant to the terms of the decedents' wills, modified, on the law and the facts the complaint is reinstated and judgment is awarded thereon to the plaintiffs directing specific performance of the 1981 agreement, the defendants' counterclaim for a declaratory judgment is denied, and the order is otherwise affirmed, without costs.

The Surrogate erred in concluding that the post-mortem buyout provision of the 1981 Ched shareholders' agreement was unenforceable.

The record fails to support the defendants' initial contention that the agreement was unconscionable. "A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made--i.e., 'some showing of an "absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party" (Williams v. Walker-Thomas Furniture Co., 350 F.2d 445, 449).' (Matter of State of New York v. Avco Fin. Serv., supra [50 N.Y.2d 383], at 389 [429 N.Y.S.2d 181, 406 N.E.2d 1075]; see also, Jones v. Star Credit Corp., 59 Misc.2d 189, 192 .)" (Gillman v. Chase Manhattan Bank, 73 N.Y.2d 1, 10, 537 N.Y.S.2d 787, 534 N.E.2d 824).

Central to the defendants' claim of unconscionability is the fact that at the time the 1981 agreement was entered into, the plaintiffs were young attorneys and the defendants' decedents, McGuire and Priddy, were elderly and less educated. The record, however, reveals that this was the fourth Ched shareholders' agreement and the only one to which the plaintiffs were signatories. With the exception of one agreement in 1964 which contained a market value-based post-mortem buyout provision, which was later discarded, the others all provided for a book value formula to determine the value of a decedent's shares.

Priddy, a former bookkeeper who was later an office manager, was a signatory to a 1971 agreement wherein the shareholders agreed to return to a book value formula after the 1964 agreement, signed by her husband and containing a fair market value approach, was abandoned. McGuire, who ran a successful business for many years, executed not only the 1981 agreement but also three others containing book value buyout provisions. He had been a party to the 1964 agreement containing the thereafter rejected market value-based formula and the subsequent 1971 agreement returning to the book value approach. In fact the 1941 shareholders' agreement of C.L. McGuire & Co., Inc., to which McGuire and Priddy's first husband, Theodore Schmidt, were parties, contained such a book value buyout provision. Neither of the plaintiffs, nor either of their parents whose interest in Ched they succeeded, were party to that agreement.

The 1981 agreement is simple and straightforward, and provides that shareholders will not, during their lifetime, "sell, assign, transfer, pledge or hypothecate either all or any part" of their stock unless it is first offered to the other shareholders. The parties agreed that "(t)he price at which said stock shall be offered for sale shall be the book value thereof as of the last day of the month immediately preceding the date of the said offer or $200 per share, whichever amount is greater." With regard to post-mortem transfers, the agreement provided for the surviving shareholders to buy the decedents' shares at the same price applicable to transfers during their lifetime.

Any claim that the Rosinys or the accountant Kwalwasser exerted deceptive or high-pressured tactics to induce the decedents to sign the 1981 agreement is not borne out by the record. Nor were the plaintiffs the draftsmen of the 1981 agreement as the defendants allege. The 1981 agreement contained the identical post-mortem buyout provision as the 1971 agreement, and was only changed to reflect the plaintiffs as the new owners of their mother's shares, a change to which the decedents consented.

Nor does the record support the implication that because of the disparity in age and educational background, the decedents were deceived by the young attorneys. There is nothing to indicate that the decedents were unaware of the provisions of the 1981 agreement they signed, particularly since they executed an agreement with the identical buyout provision ten years earlier, an agreement to which the plaintiffs were not parties. It may not nor should it be presumed that because one is of a certain advanced age that a contract is void or even voidable (see, Ellis v. Keeler, 126 App.Div. 343, 110 N.Y.S. 543).

While the $200 per share buyout provision pertains to shares worth considerably more, "the validity of the restriction on transfer does not rest on any abstract notion of intrinsic fairness of price. To be invalid, more than mere disparity between option price and current value of the stock must be shown. (See Palmer v. Chamberlin, supra, 191 F.2d 532, 541.)" (Allen v. Biltmore Tissue Corp., 2 N.Y.2d 534, 543, 161 N.Y.S.2d 418, 141 N.E.2d 812).

"[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms." (W.W.W. Assocs. v. Giancontieri, 77 N.Y.2d 157, 162, 565 N.Y.S.2d 440, 566 N.E.2d 639). Moreover, "a mistake, as to the legal effect of an agreement, or as to the legal results of an act, cannot avail to defeat specific performance" (Pomeroy, Specific Performance of Contracts, § 233 [3d ed. 1926].

Also to be noted is that the 1981 agreement provided for its termination by the sale of the property or by the voluntary or involuntary dissolution of the corporation. Priddy and McGuire owned fifty percent of the shares in Ched and had the option of selling the property or dissolving the corporation. In fact, both options were considered by the decedents. In 1987, a broker had a potential buyer for the property. At a subsequent shareholders' meeting held at McGuire's home, where both McGuire and Priddy's interests were represented by counsel and family members, Priddy's representatives agreed to have an appraisal made of the property before a sale was seriously considered. However, an appraisal was never obtained. Priddy's attorney thereafter wrote to McGuire's attorneys suggesting the dissolution of Ched but the parties never followed through. Despite representation by counsel, neither Priddy nor McGuire opted to sell the property or dissolve the corporation during the seven years following their execution of the 1981 agreement, of which their counsel were aware.

In sum, the record fails to support the absence of meaningful choice on the decedents' part in executing the 1981 agreement. Accordingly, the agreement was not unconscionable (Gillman v. Chase Manhattan Bank, supra).

Nor is there support in the record for the conclusion that there was no meeting of the minds with respect to the term "book value." The dissent maintains that while the plaintiffs understood the meaning of the term when they signed the 1981 agreement, Priddy and McGuire did not, as demonstrated by "surrounding circumstances." However, these circumstances demonstrate that Priddy and McGuire had signed a 1971 agreement containing the identical buyout provision after rejecting a fair market value approach contained in an earlier agreement. The return to the use of "book value", an unambiguous term (see, People ex rel. Knickerbocker Fire Ins. Co. v. Coleman, 107 N.Y. 541, 14 N.E. 431; CBM Equip. Corp. v. Markwardt, 77 A.D.2d 815, 430 N.Y.S.2d 769; Claire v. Wigdor, 24 A.D.2d 992, 266 N.Y.S.2d 6, appeal dismissed,18 N.Y.2d 687, 273 N.Y.S.2d 437, 219 N.E.2d 883), from fair market value, as well as the use of this term in previous agreements, evinces a meeting of the minds as to this term of the agreement.

The defendants further maintain that the plaintiffs, as attorneys and fellow shareholders in a closely held corporation, owed a fiduciary duty to the decedents and that they breached this duty by failing to discuss the efficacy of the buyout provision with them. As the Surrogate found, the proof supports the plaintiffs' position that they did not act as attorneys for the decedents in any Ched transaction (see, Stout v. Smith, 98 N.Y. 25; Colton v. Oshrin, 246 A.D. 287, 285 N.Y.S. 433).

While it is true that in a close corporation, shareholders must deal in good faith in the conduct of the affairs of the corporation (Matter of T.J. Ronan Paint Corp., 98 A.D.2d 413, 469 N.Y.S.2d 931), we are unaware of any dictate requiring one shareholder to explain a provision of a shareholders' agreement to another, particularly when the latter signed previous agreements containing the identical provision in question and the former did not. As of 1981, there had been virtually no contact between the plaintiffs and McGuire and they had never met Priddy. More importantly, as the Surrogate noted, the corporation did not engage in the type of business where there was a close working relationship among shareholders. No fiduciary duty is created by a shareholders' agreement containing a mandatory buyout provision (see, Gallagher v. Lambert, 143 A.D.2d 313, 532 N.Y.S.2d 255, aff'd, 74 N.Y.2d 562, 549 N.Y.S.2d 945, 549 N.E.2d 136; Bevilacque v. Ford Motor Co.,...