Opinion
Docket No.: CL19-7991
04-16-2020
Re: Ortal Biton v. Vladislav Kreinis and New Tomorrow, Inc.
Jason E. Ohana, Esquire
WILLCOX & SAVAGE, P.C.
440 Monticello Avenue, Suite 2200
Norfolk, Virginia 23510 Nathaniel R. Pierce, Esquire
Julia A. Rust, Esquire
PIERCE MCCOY, PLLC
101 West Main Street, Suite 101
Norfolk, Virginia 23510 Dear Counsel:
Today the Court rules on separate Motions for Determination filed by Plaintiff Ortal Biton and Defendant Vladislav Kreinis asking the Court to determine whether certain leases and related rights are corporate assets for purposes of Kreinis's election to purchase Biton's shares in lieu of dissolution of New Tomorrow, Inc. ("New Tomorrow"), the corporation in which the parties are equal shareholders. Kreinis argues that all leases and operations that the parties intended, based on their written agreement, to become corporate assets indeed are corporate assets. Biton, on the other hand, asserts that because one of the leases—whose operations she primarily controlled—was never re-negotiated to make the corporation a signatory as anticipated by the parties, the lease and any rights thereunder are not corporate assets. The parties also seek direction regarding how the leases should be operated and how to account for those operations prior to Kreinis's purchase of Biton's shares.
The Court finds, based on the parties' agreement and course of dealing, that the assets in question are corporate assets. They therefore are to be included in the valuation of corporate shares for purposes of Kreinis's purchase. Additionally, any order entered by the Court determining the fair value of Biton's shares and directing their purchase shall include provisions requiring, inter alia, (1) New Tomorrow to pay Biton for any unpaid services she provided to, and will continue to provide, the corporation—as well as any unpaid commissions and shareholder distributions—up until the date that Kreinis purchases Biton's shares (the "Share Purchase Date"), (2) Biton to cooperate in transferring the MacArthur Mall lease and any rights thereunder to New Tomorrow, (3) Biton to transfer to or reimburse New Tomorrow for any funds from the MacArthur Mall operations that have not been forwarded to New Tomorrow, including but not limited to those funds that properly should have been forwarded to the corporation since September 2019, and (4) Biton to be liable to New Tomorrow for any harm she may have caused the corporation otherwise since September 2019.
The Court therefore GRANTS Kreinis's Motion for Determination and DENIES Biton's Motion for Determination.
Background
The motions before the Court arise out of an action to dissolve New Tomorrow, a corporation involved in the retail sale of high-end consumer cosmetics. Biton and Kreinis, who are the only directors and shareholders of New Tomorrow, each control separately owned entities related to the corporation. The entity Kreinis controls—Nuriel-Beauty, LLC ("Nuriel")—leases a retail location at Lynnhaven Mall in Virginia Beach, and the entity Biton controls—OB Global, Inc. ("OB Global")—leases a retail location at MacArthur Mall in Norfolk. Both retail locations consist of a store and several kiosks.
On September 15, 2017, Biton and Kreinis entered into an agreement (the "Agreement") to jointly operate the two retail locations and to form a new entity, New Tomorrow, a Virginia corporation with its principal place of business located in Norfolk, Virginia. (See Pl.'s Mot. Determination Ex. A.) The Agreement states that creation of New Tomorrow is "for the purpose of combining the businesses . . . to include [Nuriel] and [Biton's] store which is expected to open by January 2018 at MacArthur Mall . . . and which store is currently under contract to [Biton], or to an entity in which she is the sole party." (Id. Ex. A, at 1.) According to the Agreement, Kreinis shall place Nuriel "into the new entity" and "[Biton] shall place in the new entity all her rights and interest in the new store at MacArthur Mall." (Id. Ex. A, ¶ 2.) The Agreement further provides that "[all] profits, expenses and losses will be divided equally." (Id. Ex. A, ¶ 5.) In addition to handling the revenue and expenses of New Tomorrow, the parties were to use the corporation for most administrative functions related to the two locations, including payroll and accounting. (Id. ¶ 4.) As contemplated by the Agreement, Biton and Kreinis each own fifty percent of the shares of New Tomorrow. (Id. ¶ 1.)
Although the Agreement does not reference New Tomorrow by name, it is undisputed that the "new entity" to which the Agreement refers is New Tomorrow.
OB Global leases the premises for the MacArthur Mall location (the "MacArthur Lease"), and Biton is a personal guarantor on that lease. (Id. ¶ 3 & Ex. B.) Nuriel leased the Lynnhaven Mall location prior to execution of the Agreement. (Id.) The parties testified that, after entering the Agreement, they considered executing new leases for both locations to make New Tomorrow the tenant; they ultimately declined to do so based on additional demands from the landlords. Biton testified that, beginning in January 2019, she became frustrated with Kreinis's ability to manage the logistics and non-sales duties of New Tomorrow—as he was required to do per the Agreement—and expressed a desire to dissolve New Tomorrow. (See id. ¶ 5.)
Although the MacArthur Lease and the associated Guaranty of Lease were executed after the Agreement—on October 26, 2017—Kreinis was fully aware of this arrangement, as demonstrated by the fact that he was the witness on the guaranty. (See Pl.'s Mot. Determination Ex. B.)
On August 2, 2019, Biton filed the instant action to dissolve New Tomorrow. Three days later, on August 5, 2019, Kreinis filed an election to purchase Biton's corporate shares in lieu of dissolution, as was his right under section 13.1-749.1 of the Code of Virginia. Kreinis testified that his election to purchase was premised on receipt of the MacArthur Lease and any rights thereunder. The parties dispute the fair value of Biton's New Tomorrow shares for purposes of Kreinis's purchase. The dispute stems from the uncertainty surrounding whether the MacArthur Lease—and any associated rights—are assets of New Tomorrow that will transfer with Kreinis's purchase of Biton's corporate shares. The parties therefore seek direction from the Court regarding whether the leases and any rights thereunder are assets of New Tomorrow. The parties also seek direction regarding how the MacArthur Mall and Lynnhaven Mall locations should be operated, and how to account for those operations, prior to Kreinis's purchase of Biton's shares.
On March 2, 2020, the Court heard argument from the parties on, inter alia, the parties' Motions for Determination. At the conclusion of the hearing, the Court took both motions under advisement.
Positions of the Parties
Biton's Position
Biton seeks the Court's determination of New Tomorrow's assets in order to properly value her corporate shares for purposes of Kreinis's election to purchase those shares. (Pl.'s Mot. Determination ¶¶ 9(a), 17.) She asserts that the MacArthur Lease and any associated rights are not assets of New Tomorrow and that they should not transfer to Kreinis with his purchase of her shares. (Id. ¶ 10.) Biton argues that any rights to New Tomorrow's current operations at MacArthur Mall are encompassed in the MacArthur Lease, which cannot be altered without consent of the parties to the MacArthur Lease—OB Global and the MacArthur Mall landlord—neither of which is a party to this action. (Id. ¶¶ 8(a)-9(a).) She further points out that "the rights to operate at the premises demised under the MacArthur Lease are governed by that document," which currently "provides neither New Tomorrow nor Kreinis to be on the premises, much less to operate a business there." (Id. ¶ 13.) Biton also seeks "clarity on how to operate the [MacArthur Mall] location and how to account for its operation during the pendency of this matter." (Id. ¶ 9(b).)
Kreinis's Position
Kreinis claims that the New Tomorrow operations at both MacArthur Mall and Lynnhaven Mall are assets of New Tomorrow. (Def.'s Mot. Determination ¶¶ 13, 17). He argues that the Agreement expressly provides that Biton will place any rights and interest she has in the MacArthur Mall location into New Tomorrow and that both locations "would be owned" by New Tomorrow. (Id. ¶¶ 12, 17.)
Kreinis asserts that Biton has operated the MacArthur Mall operations as a personal asset "since at least September 2019." (Id. ¶ 14.) Specifically, he contends that Biton changed New Tomorrow's corporate information, including the Point of Sale ("POS") system that contains New Tomorrow client information and the city business license, in order to "manufacture support for her claim" that the MacArthur Lease and any associated rights are OB Global's personal assets and not New Tomorrow assets. (Id.) Kreinis contends that, by contrast, he has operated the Lynnhaven Mall operation as a New Tomorrow asset and kept an accurate accounting of all transactions as required by the Agreement. (Id. ¶ 15.) Kreinis also seeks "clarity on how to operate the [MacArthur Mall and Lynnhaven Mall] locations and how to account for its operation during the pendency of this matter." (Id. ¶ 20(b).)
Analysis
Legal Standard
The Code of Virginia provides that the Court
may dissolve a corporation: (1) in a proceeding by the shareholder of a corporation that is not a public corporation if it is established that: (a) the directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatened or being suffered, or the business and affairs of the corporation can no longer be conducted to the advantage of the shareholders generally, because of the deadlock.Va. Code § 13.1-747(A) (2007 Repl. Vol.). It also provides that "in a proceeding under . . . section 13.1-747 to dissolve a corporation, . . . one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares" and that such an election "shall be irrevocable unless the court determines that it is equitable to set aside or modify the election." Id. § 13.1-749.1(A).
Further, "[i]f the parties are unable to reach an agreement . . . , the court . . . shall . . . determine the fair value of the petitioner's shares." Id. § 13.1-749.1(D). "Upon determining the fair value of the shares, the court shall enter an order directing the purchase upon such terms and conditions as the court deems appropriate . . . ." Id. § 13.1-749.1(E).
The Agreement provides that the parties will do the following:
Second: That [Nuriel] shall place its existing business at Lynnhaven Mall into the new entity, at an effective date to be determined, and [Biton] shall place in the new entity all her rights and interest in the new store at MacArthur Mall.(Pl.'s Mot. Determination Ex. A.)
. . . .
Fifth: All profits expenses and losses will be divided equally. All major business decisions will be agreed upon jointly.
Discussion
The Court has considered the pleadings, argument from counsel, and applicable authorities. The Court now rules on the Motions for Determination. As discussed below, the Court finds that the MacArthur Mall and Lynnhaven Mall leases, and any rights thereunder, are New Tomorrow assets that need to be accounted for when valuing Biton's corporate shares for purchase by Kreinis.
A. The MacArthur Lease and Associated Rights.
The Agreement clearly anticipates that both parties will place their respective businesses into the new entity. It expressly states that the Agreement's purpose is to "combin[e] the businesses . . . to include [Nuriel] and [Biton's] store which is expected to open by January 2018 at MacArthur Mall . . . and which store is currently under contract to [Biton], or to an entity in which she is the sole party." The Agreement further provides that Biton "shall place in the new entity[, i.e., New Tomorrow,] all her rights and interest in the new store at MacArthur Mall." Kreinis argues that this establishes the MacArthur Lease and any rights thereunder as assets of New Tomorrow and that these assets therefore should be transferred to New Tomorrow as part of his election to purchase Biton's shares. Biton, on the other hand, asserts that the MacArthur Mall location is not a New Tomorrow asset because neither OB Global nor the MacArthur Mall landlord—the signatories on the MacArthur Lease—is before the Court in this action.
It is undisputed that OB Global is the current tenant under the MacArthur Lease and that it has been since the MacArthur Mall operations began. It is also undisputed that the parties intended when they entered into the Agreement to combine the "profits, expenses, and losses" of their previously independent businesses into New Tomorrow. The parties further agree, as evidenced by testimony at the hearing, that they anticipated putting the Lynnhaven Mall and MacArthur Mall leases in the name of New Tomorrow, that they explored doing so after signing the Agreement, and that they later mutually decided—based on additional demands from the landlords—not to renegotiate the leases.
The parties disagree about how their mutual decision to leave OB Global as the leaseholder on the MacArthur Lease after the creation of New Tomorrow affects the Agreement, and specifically whether this apparent change to their original agreement is a proper basis for contract waiver and/or modification.
As an initial matter, the Agreement does not expressly obligate the parties to change or renegotiate the leases to make New Tomorrow a tenant. Instead, it provides that Nuriel—Kreinis's independently owned entity—shall "place its existing business at Lynnhaven Mall into the new entity" and that Biton "shall place in the new entity all her rights and interest in the new store at MacArthur Mall." The Court holds, however, that the "rights and interest" in an operating retail location includes the rights and interest that arise from any leases in which that entity enters. As Biton aptly points out, "the rights to operate at the premises demised under the MacArthur Lease are governed by that document," which currently "provides neither New Tomorrow nor Kreinis to be on the premises, much less to operate a business there."
The question therefore is how noncompliance with the contractual obligation to transfer the leases affects the Agreement. Virginia—like other jurisdictions—has long recognized the doctrine of waiver of contractual provisions.
That covenants and stipulations made by a covenantor for his benefit may be waived by him, either by express terms or by a course of dealing, is a well-established principle in every system of enlightened jurisprudence. That a covenantor may, by his conduct, so lull his convenantee into a sense of security as thereby to estop himself from the exercise of a right for which he had contracted is equally clear. Instances illustrating this principle abound in the law with reference to contracts of insurance, but its operation is not limited to any specific class of contracts and dealings between men.Goldstein v. Old Dominion Peanut Corp., 177 Va. 716, 728-29, 15 S.E.2d 103, 107 (1941); see also Va. Polytechnic Inst. & State Univ. v. Interactive Serv., Inc., 267 Va. 642, 651-52, 595 S.E.2d 1, 6 (2004) (noting that "waiver is an intentional relinquishment of a known right" that requires "knowledge of the facts basic to the exercise of the right and the intent to relinquish that right" (first quoting Stanley's Cafeteria, Inc. v. Abramson, 226 Va. 68, 74, 306 S.E.2d 870, 873 (1983), then quoting Emp'rs Commercial Union Ins. Co. of Am. v. Great Am. Ins. Co., 214 Va. 410, 412-13, 200 S.E.2d 560, 562 (1973))). Biton argued at the hearing that the decision not to renegotiate the MacArthur Lease breached the Agreement and constituted an implied waiver of any obligation she may have had to transfer the MacArthur Lease—and any accompanying rights—to New Tomorrow.
As a threshold matter, the Supreme Court of Virginia has made it clear that waiver and estoppel are distinct legal concepts.
In waiver, both knowledge of the facts basic to the exercise of the right and the intent to relinquish that right are essential elements. In estoppel, intent to relinquish is not an element, and knowledge of the facts basic to the exercise of the right may be presumed when the facts are such as to put a reasonably prudent person upon inquiry and prompt him to pursue the inquiry and acquire knowledge.Emp'rs Commercial Union, 214 Va. at 412-13, 200 S.E.2d at 562. Unless Kreinis intended to relinquish his "right" to have Biton transfer the MacArthur Lease and any associated rights to New Tomorrow—which he clearly disputes—Biton's argument is more precisely understood as an attempt to estop Kreinis from enforcing the second provision of the Agreement. Regardless of the theory, the Court does not find Biton's argument persuasive.
Although the parties' actions regarding the transfer of the MacArthur Lease—as well as the Lynnhaven Mall lease—did not conform to the Agreement, the Court does not find a proper basis for waiver, estoppel, or a contract modification that would preclude the leases and the rights thereunder from being treated as corporate assets. To the contrary, the course of conduct between the parties during the two years before Biton filed the dissolution suit demonstrated that the parties operated both locations as New Tomorrow entities as envisioned by the Agreement, including sharing profits, expenses, and losses. Stanley's Cafeteria, 226 Va. at 73, 306 S.E.2d at 873 (holding that "a course of dealing by contracting parties, considered in light of all the circumstances, may evince mutual intent to modify the terms of their contract"). Hence, to the extent that there was a modification to the Agreement based on a course of conduct, it involved a mutual decision not to renegotiate the leases, but there was no decision—as demonstrated by the parties' course of conduct—to treat the leases and their associated rights as independent entities separate and apart from New Tomorrow.
Biton makes much of the fact that neither Kreinis nor New Tomorrow is a party to the MacArthur Lease. Based on the evidence presented at the hearing, the original decision to name OB Global on the MacArthur Lease, with Biton as personal guarantor, appears to have been intentional. Nuriel, which was established by Kreinis before the parties entered into the Agreement, is the tenant on the Lynnhaven Mall lease. At the time the Agreement was formed, negotiations regarding the MacArthur Lease—including having Biton personally liable—had started. And when that lease and the associated guaranty were signed a month later, Kreinis was fully aware of the situation, as indicated by his signing as a witness to the guaranty. In light of this background, the Court finds that there was an intentional division of liability between the shareholders and the two store locations. The Agreement essentially put the parties on an equal footing, with each of them primarily liable on one of the leases and both of them committed to putting both leases, and the associated rights, into New Tomorrow. Stated differently, the intent to initially establish separate shareholder liabilities does not nullify the clearly expressed future intent to treat the leases and any rights thereunder as assets of New Tomorrow.
Additionally, the Agreement requires Biton to "assume equal responsibility for Nuriel's debt of approximately Sixty Thousand ($60,000) Dollars for the amounts due former members of Nuriel for their interest in Nuriel" (Pl.'s Mot. Determination Ex. A, ¶ 3), and the parties testified that New Tomorrow paid for the build-out associated with the MacArthur Lease. --------
The Court recognizes that neither OB Global nor the MacArthur Mall landlord—the signatories on the MacArthur Lease—is a party to this case and that the Court does not otherwise have jurisdiction over them. The Court does, however, have jurisdiction over New Tomorrow and its assets, as well as Biton and Kreinis as directors and shareholders of New Tomorrow. Hence, although the Court cannot order a renegotiation of the lease, it can order Biton to cooperate in transferring the MacArthur Lease and any rights thereunder to New Tomorrow.
The Court ultimately finds that a determination of the fair value of Biton's New Tomorrow shares for purposes of Kreinis's election to purchase those shares must consider both the MacArthur Mall and Lynnhaven Mall leases, and any associated rights and interest thereunder, to be corporate assets. Pursuant to the express language of the Agreement, the corporate assets of New Tomorrow include the profits, expenses, and losses from both New Tomorrow locations, despite the named leaseholders for each location. Further, upon purchase of Biton's shares, the Court finds that New Tomorrow is entitled to continue operating the MacArthur Mall operations. In support thereof, the order entered by the Court determining the fair value of Biton's shares and directing the purchase will require Biton to cooperate in transferring the MacArthur Mall lease and any rights thereunder to New Tomorrow. Any transfer or renegotiation of the MacArthur Lease shall remove Biton as personal guarantor or otherwise indemnify her. Kreinis, via New Tomorrow, is responsible for any expenses, fees, or penalties related to transferring the MacArthur Lease. To the extent there are any licensing agreements with product distributors involving New Tomorrow or the parties, or entities they own, individually, they are unaffected by the election to purchase shares or lease transfer.
B. Biton's Unreimbursed Corporate Service and Alleged Actions.
Under the circumstances, the Court holds that until the Share Purchase Date, Biton presumptively is entitled to the benefits and must bear the obligations of a fifty-percent director and shareholder of New Tomorrow. She therefore is entitled to be paid by New Tomorrow for any unpaid services she provided to, and will continue to provide, the corporation—as well as any unpaid commissions and shareholder distributions—up until the Share Purchase Date. This can be addressed in the Court's order determining the fair value of Biton's shares and directing the purchase.
To the extent it is established that Biton has operated the MacArthur Mall location as a "personal asset" since September 2019, as Kreinis alleges, New Tomorrow is entitled to be compensated. The order entered by the Court determining the fair value of Biton's shares and directing the purchase will require Biton to transfer to or reimburse New Tomorrow for any funds from the MacArthur Mall operations that have not been forwarded to New Tomorrow, including but not limited to those funds that properly should have been forwarded to the corporation since September 2019. Similarly, to the extent Kreinis failed to forward any funds from the Lynnhaven Mall operations to New Tomorrow before the share valuation date, those funds shall be considered corporate assets for purposes of valuing Biton's corporate shares. New Tomorrow also is required to pay all expenses related to both locations prior to the Share Purchase Date.
Kreinis also alleges that Biton took certain actions "since at least September 2019"—i.e., changing New Tomorrow's corporate information, including the POS system that contains New Tomorrow client information and the city business license—that injured New Tomorrow and him, as a shareholder. To the extent New Tomorrow and/or Kreinis prove such damages, the order entered by the Court determining the fair value of Biton's shares and directing the purchase can hold Biton liable to New Tomorrow for any harm she caused the corporation.
Conclusion
The Court finds that the MacArthur Lease and any rights thereunder—as well as the Lynnhaven Mall lease and any associated rights—are assets of New Tomorrow and therefore are to be included in the valuation of Biton's corporate shares for purposes of Kreinis's election to purchase those shares. Additionally, any order entered by the Court determining the fair value of the shares and directing the purchase of those shares shall include provisions requiring, inter alia, (1) New Tomorrow to pay Biton for any unpaid services she provided to, and will continue to provide, the corporation—as well as any unpaid commissions and shareholder distributions—up until the Share Purchase Date, (2) Biton to cooperate in transferring the MacArthur Mall lease and any rights thereunder to New Tomorrow, (3) Biton to transfer to or reimburse New Tomorrow for any funds from the MacArthur Mall operations that have not been forwarded to New Tomorrow, including but not limited to those funds that properly should have been forwarded to the corporation since September 2019, and (4) Biton to be liable to New Tomorrow for any harm she may have caused the corporation otherwise since September 2019.
The Court therefore GRANTS Kreinis's Motion for Determination and DENIES Biton's Motion for Determination. Attached is an Order incorporating the Court's ruling.
Sincerely,
/s/
David W. Lannetti
Circuit Court Judge DWL/wmp
Enclosure
VIRGINIA: IN THE CIRCUIT COURT FOR THE CITY OF NORFOLK
ORTAL BITON, Plaintiff, v. VLADISLAV KREINIS and NEW TOMMOROW, INC., Defendants. Civil Case No.: CL19-7991 ORDER
Pursuant to the Court's April 16, 2020, letter opinion the Court GRANTS Kreinis's Motion for Determination and DENIES Biton's Motion for Determination.
Endorsements are waived pursuant to Rule 1:13 of the Rules of the Supreme Court of Virginia. Any objections shall be filed within fourteen days. The Clerk shall send a copy of this Order to Jason E. Ohana, Esquire, and Julia A. Rust, Esquire.
Entered: April 16, 2020
/s/_________
David W. Lannetti, Judge