Opinion
2012-06-8
In The Matter of Theodore S. LIAROS, Petitioner–Respondent, v. TED'S JUMBO RED HOTS, INC., Spiro T. Liaros, Peter T. Liaros and Thecly Liaros Ortolani, Respondents–Appellants.
Phillips Lytle LLP, Buffalo (Alan J. Bozer of Counsel), for Respondents–Appellants. Hodgson Russ LLP, Buffalo (Jeffrey C. Stravino of Counsel), for Petitioner–Respondent.
Phillips Lytle LLP, Buffalo (Alan J. Bozer of Counsel), for Respondents–Appellants. Hodgson Russ LLP, Buffalo (Jeffrey C. Stravino of Counsel), for Petitioner–Respondent.
PRESENT: SCUDDER, P.J., CENTRA, PERADOTTO, CARNI, AND LINDLEY, JJ.
MEMORANDUM:
Petitioner commenced this CPLR article 78 proceeding to compel respondents to produce certain records for inspection pursuant to Business Corporation Law § 624, CPLR 3102(c), and the common law. Petitioner is a former employee of respondent corporation, Ted's Jumbo Red Hots, Inc., and is the majority equity shareholder of the corporation. In seeking access to the records, petitioner alleged that his purposes were to protect his interests as a shareholder, to ascertain whether the corporation was being mismanaged, and to evaluate his shareholdings. Supreme Court, inter alia, granted the petition. We agree with respondents that the court abused its discretion in granting the petition without first holding a hearing to determine whether petitioner was acting in good faith and sought inspection for a proper purpose and, if so, without holding a hearing to determine the proper scope of inspection. We therefore modify the judgment accordingly, and we remit the matter to Supreme Court to conduct such a hearing.
Initially, we note that this appeal is not moot. The parties entered into a stipulated order after entry of the judgment on appeal. Although the stipulated order states that the parties conferred about the judgment on appeal, the stipulated order does not explicitly or implicitly supersede or modify the judgment and specifically states that the parties otherwise reserved all rights ( cf. Matter of Burkhart v. Webber, 273 A.D.2d 125, 709 N.Y.S.2d 552,lv. denied96 N.Y.2d 702, 722 N.Y.S.2d 794, 745 N.E.2d 1016).
“ ‘It is well settled that a shareholder has both statutory and common-law rights to inspect the books and records of a corporation if inspection is sought in good faith and for a valid purpose’ ” (Matter of Dwyer v. Di Nardo & Metschl, P.C., 41 A.D.3d 1177, 1178, 838 N.Y.S.2d 745;seeBusiness Corporation Law § 624; Matter of Crane Co. v. Anaconda Co., 39 N.Y.2d 14, 18–20, 382 N.Y.S.2d 707, 346 N.E.2d 507). Petitioner sufficiently pleaded and proved under both section 624 and the common law that he had a proper purpose ( see Crane Co., 39 N.Y.2d at 18–20, 382 N.Y.S.2d 707, 346 N.E.2d 507;Matter of Troccoli v. L & B Contr. Indus., 259 A.D.2d 754, 754–755, 687 N.Y.S.2d 400;Matter of Tatko v. Tatko Bros. Slate Co., 173 A.D.2d 917, 917–918, 569 N.Y.S.2d 783). Thus, it was respondents' burden to show bad faith or an improper purpose such that a hearing is required to resolve the issue ( see Matter of Dyer v. Indium Corp. of Am., 2 A.D.3d 1195, 1196, 770 N.Y.S.2d 184;Matter of Marcato, 102 A.D.2d 826, 826, 476 N.Y.S.2d 582), and we conclude that they met their burden.
“Improper purposes are those which are inimical to the corporation, for example, to discover business secrets to aid a competitor of the corporation, [or] to secure prospects for personal business” ( Tatko, 173 A.D.2d at 917–918, 569 N.Y.S.2d 783). Respondents raised an issue of fact whether petitioner was acting for the improper purpose of obtaining personal business or a competitive advantage by stating their belief that petitioner intended to open competing restaurants, the basis for their belief, and the ways in which the documents requested were overbroad for petitioner's stated purposes and would grant petitioner a competitive advantage. Thus, a hearing is required to determine whether petitioner is acting in good faith and with a proper purpose.
If the court determines that petitioner is acting with a proper purpose, then the court must further determine the proper scope of the documents to which petitioner is entitled. Petitioner has admitted on appeal that he does, in fact, operate a business similar to respondents' business. Although his status as a competitor does not in itself render him ineligible to receive access to the information he requested ( see generally People ex rel. Ludwig v. Ludwig & Co., 126 App.Div. 696, 702, 111 N.Y.S. 94), his right of inspection should be limited to those documents, records, and information relevant and necessary to his proper purposes, and a hearing is necessary to define the scope of inspection ( see Dwyer, 41 A.D.3d at 1179, 838 N.Y.S.2d 745;Dyer, 2 A.D.3d at 1197, 770 N.Y.S.2d 184;Tatko, 173 A.D.2d at 919, 569 N.Y.S.2d 783). “Additionally, if inspection is granted, certain information might need to be expunged because of the parties' competitive relationship” ( Marcato, 102 A.D.2d at 826, 476 N.Y.S.2d 582), and “the inspection ... may not unduly disturb the corporation in the conduct of its affairs” (Matter of Bondi v. Business Educ. Forum, 52 A.D.2d 1046, 1047, 384 N.Y.S.2d 291).
Finally, we reject petitioner's alternative ground for affirmance ( see Parochial Bus Sys. v. Board of Educ. of City of N.Y., 60 N.Y.2d 539, 545–546, 470 N.Y.S.2d 564, 458 N.E.2d 1241). Contrary to petitioner's contention, the court did not grant the petition based upon CPLR 3102(c), governing pre-action disclosure. In any event, petitioner was not entitled to pre-action disclosure ( see Matter of Zeigler v. City of New York, 65 A.D.3d 1159, 1159–1160, 885 N.Y.S.2d 206;Matter of Henry [CSX Transp., Inc.], 43 A.D.3d 1445, 1446, 843 N.Y.S.2d 891;Matter of Uddin v. New York City Tr. Auth., 27 A.D.3d 265, 266, 810 N.Y.S.2d 198).
It is hereby ORDERED that the judgment so appealed from is unanimously modified on the law by vacating the first decretal paragraph and as modified the judgment is affirmed without costs, and the matter is remitted to Supreme Court, Erie County, for a hearing.