Opinion
25191-13
05-02-2018
Star WITTY, individually and on behalf of herself as a Shareholder of 1650 Fifth Avenue Corp., Inc., and on behalf of all other Shareholders of said corporation similarly situated, Plaintiff, v. Martin R. WALLACE, Judith Wallace, and 1650 Fifth Avenue Corp., Inc., Defendants.
LAW OFFICES OF DANIEL A. ZAHN, P.C., Attorneys for Plaintiff, 1597 Grundy Avenue, Holbrook, New York 11741 GLYNN MERCEP and PURCELL, LLP, Attorneys for Defendants, P.O. Box 712, Stony Brook, New York 11790
LAW OFFICES OF DANIEL A. ZAHN, P.C., Attorneys for Plaintiff, 1597 Grundy Avenue, Holbrook, New York 11741
GLYNN MERCEP and PURCELL, LLP, Attorneys for Defendants, P.O. Box 712, Stony Brook, New York 11790
Elizabeth H. Emerson, J.
Upon the following papers numbered 1-46 read on this motion for summary judgment ; Notice of Motion and supporting papers 1-19 ; Notice of Cross Motion and supporting papers; Answering Affidavits and supporting papers 20-44 ; Replying Affidavits and supporting papers 45-46 ; it is,
ORDERED that this motion by the defendants for summary judgment dismissing the complaint is granted.
The defendant 1650 Fifth Avenue Corp. Inc. (the "Corporation"), is a closely held corporation that owns a single parcel of commercial real property in Bay Shore, New York. The property is improved with a bank building that has been leased to J.P. Morgan Chase Bank ("J.P. Morgan Chase") and its predecessors in interest (the "Tenant") since 1986. The property was acquired in 1986 by the corporation's founders, the defendant Martin Wallace and his long-time law partner Emanuel Witty (the plaintiff's husband, who died in 2012). In 1993, they transferred title to the property to the Corporation. In 1995, they transferred ownership of the Corporation to their respective wives, the defendant Judith Wallace and the plaintiff, as 50/50 shareholders. The shareholders' agreement identified the officers of the Corporation as Judith Wallace (president and treasurer) and the plaintiff (vice-president and secretary). At some point, the officers were changed to Martin Wallace (president) and Emanuel Witty (vice-president). The plaintiff and Judith Wallace continued to be 50/50 shareholders, but not officers, of the Corporation. After Emanuel Witty died, Martin Wallace became the only officer.
The original term of the lease in 1986 was for 10 years with two five-year options to renew. The Tenant exercised both options to renew. The second lease extension gave the Tenant a third option to renew. On February 24, 2006, the Corporation and the Tenant entered into a third lease extension for a term of five years from October 1, 2006, to September 30, 2011. The third extension provided for annual rent increases and gave the Tenant a fourth option to renew for an additional five years, also with annual rent increases. Pursuant to the terms of the third lease extension, if the Tenant exercised the fourth option, the rent would increase from $138,996 in the first year to $156,441 in the fifth and final year. The third lease extension was signed by the plaintiff as vice-president of the Corporation.
The Corporation entered into a fourth lease extension with J.P. Morgan Chase on August 31, 2010, amid the financial crisis that threatened the whole economy. Fearful of having a vacant building and having to pay the taxes and maintenance costs thereon, the Corporation agreed to terms that were less favorable to it than the previously agreed-upon terms. The fourth lease extension was for a term of 10 years at substantially lower rents. The rent was initially $100,000, and it ran for five years from October 1, 2011, to September 30, 2016. The rent increased only once to $112,00 on October 1, 2016, and runs until the end of the term on September 30, 2021. The fourth lease extension was signed by the plaintiff as vice-president of the Corporation on August 31, 2010, and ratified by Emanuel Witty and Martin Wallace on September 23, 2010. J.P. Morgan Chase opened bank accounts for both shareholders of the Corporation, the plaintiff and the defendant Judith Wallace. Each month's rent is divided equally between the two accounts after deducting therefrom any nominal corporate fees.
Messrs. Wallace and Witty, believing that the officers of the Corporation had been changed to them at that point, ratified the plaintiff's execution of the fourth lease extension in a letter dated September 23, 2010.
On or about September 13, 2013, the plaintiff commenced this shareholder derivative action on behalf of the Corporation against Martin and Judith Wallace. She seeks damages for corporate waste on the theory that the fourth lease extension, which she alleges was negotiated by Martin Wallace, reduced the rent on the Corporation's only asset by more than 30% for a period of 10 years. She also seeks the production of corporate books and records and the removal of Martin Wallace as an officer and director of the Corporation. After several years of discovery, the defendants now move for summary judgment on the grounds that the fourth extension to the lease was negotiated by Emanuel Witty and executed by the plaintiff and that Martin Wallace's actions, if any, are protected by the business judgment rule. The plaintiff contends in opposition that it was Martin Wallace, and not her husband, who negotiated the fourth lease extension. She also contends that Wallace misrepresented that J.P. Morgan Chase would abandon the premises, and that the building would remain vacant, unless they agreed to the proposed rent reductions and longer term.
While the caption indicates that the plaintiff is suing individually as well as derivatively, the complaint does not contain any causes of action that are individual in nature.
The party moving for summary judgment must make a prima facie showing of entitlement to judgment as a matter of law by tendering sufficient evidence to demonstrate the absence of a triable issue of fact ( CPLR 3212[b] ; Alvarez v. Prospect Hosp. , 68 NY2d 320, 324 ). Once this showing has been made, the burden shifts to the party opposing the motion (Id. ), who must assemble and lay bare its affirmative proof to demonstrate the existence of genuine, triable issues ( Corcoran Group v. Morris , 107 AD2d 622, 624, affd 64 NY2d 1034 ). Reliance upon mere conclusions, expressions of hope, or unsubstantiated allegations is insufficient for the purpose (Id. ). Moreover, the burden upon the party opposing the motion is not met merely by a repetition or incorporation by reference of the allegations contained in pleadings or bills of particulars, verified or unverified ( Indig v. Finkelstein , 23 NY2d 728, 729 ).
The defendants have established, prima facie, that the fourth lease extension was negotiated by the plaintiff's husband, Emanuel Witty, before it was executed by the plaintiff. The plaintiff admitts that she signed the fourth extension to the lease "at the direction of her deceased attorney husband. " Moreover, Martin Wallace testified that, although he negotiated previous lease extensions, the fourth extension was negotiated by Mr. Witty because Mr. Wallace's wife, the defendant Judith Wallace, was being treated for cancer and he was busy taking care of her. The plaintiff has failed to proffer any evidence that contradicts Mr. Wallace's testimony. She does not submit any of her own deposition testimony or even an affidavit by her or someone else with knowledge of the facts. Instead, she relies on her verified petition in a related, but now discontinued, special proceeding to dissolve the Corporation. The petition simply reiterates the unsubstantiated allegations that the plaintiff makes in this action. Accordingly, the court finds that the plaintiff has failed to raise a triable issue of fact as to who negotiated the fourth lease extension.
In 2014, the plaintiff commenced a special proceeding to dissolve the Corporation. It was discontinued in 2016.
Even assuming that the fourth lease extension was negotiated by Mr. Wallace, his actions are protected by the business judgment rule, which bars judicial inquiry into the actions of corporate directors taken in good faith, in the exercise of honest judgment, and in the lawful and legitimate furtherance of corporate purposes ( Auerbach v. Bennett , 47 NY2d 619, 629 ). The business judgment rule is necessary to avoid judicial second-guessing of corporate decisions and provides protection to directors when a decision is made in good faith and after reasonable investigation ( Shapiro v. Rockville Country Club , 2 Misc 3d 1002[A], at *9, citing Auerbach v. Bennett , supra ). Absent a showing of breach of fiduciary duty to the corporation, judicial inquiry into the actions of corporate directors is prohibited, even though the results show that what the directors did was unwise or inexpedient (see , Jones v. Surrey Coop. Apts. , 263 AD2d 33, 36 ). Inquiry into claims of fraud and self-dealing are permitted only when a factual basis exists to support such claims ( Id. at 36 ). It is the plaintiff who bears the burden of making the requisite showing that the directors breached their fiduciary duties ( Id. at 36-37 ).
The plaintiff contends that Martin Wallace had a conflict of interest because the Wallaces had a right of first refusal to purchase her shares. The plaintiff contends that Mr. Wallace offered J.P. Morgan Chase a lease extension with a significant rent reduction and an unreasonably long term in order to diminish the value of the property so that the Wallaces could purchase her shares in the Corporation at a significantly discounted price after her husband, who was terminally ill at the time, died. In support thereof, the plaintiff submits her verified petition in the now-discontinued corporate dissolution proceeding and an appraisal of the property showing that, as encumbered by the J.P. Morgan Chase lease extension, the property is worth $1.8 million instead of $2.275 million. The plaintiff also relies on deposition testimony by Martin Wallace that he wanted his children to inherit shares in the Corporation.
The plaintiff has failed to submit any affirmative proof that Martin Wallace had a conflict of interest. Again, the plaintiff does not submit any of her own deposition testimony or an affidavit by her or someone else with knowledge of the facts and relies, instead, on the unsubstantiated allegations in her petition for judicial dissolution of the Corporation. Moreover, the testimony from Mr. Wallace's deposition upon which she relies is taken out of context. While Mr. Wallace testified that he wanted his children to inherit "the shares," he did not testify that he wanted to purchase the plaintiff's shares for any reason, including to give them to his children, nor does the record reflect that he made any offers to purchase the plaintiff's shares before this action was commenced. Mr. Wallace explained that, since he and Mr. Witty were retired, they did not want a vacant building for which they would have to pay taxes and other expenses. They also wanted the plaintiff and Judith Wallace to have an income stream if they died. He, therefore, agreed with Mr. Witty to extend the lease for 10 years, instead of five, and accepted a reduced rent in order to keep the tenant since the economy had "collapsed." The appraisal report submitted by the plaintiff confirms Mr. Wallace's testimony about the economy at the time. It states, in pertinent part, "Due to the recession which started in late 2007, the commercial real estate market had seen a decline of 15 to 30%." The court finds that, under these circumstances, the plaintiff has failed to demonstrate that Martin Wallace breached his fiduciary duty to the Corporation.
Finally, Mr. Wallace testified at his deposition, and repeats in his affidavit in support of summary judgment, that he has provided the plaintiff and her attorneys with all of the corporate documents that he has in his possession. While the plaintiff disputes that she has received all of the documents requested during discovery, it appears that she is in possession of all of the documents that are material and necessary to the prosecution of this action ( CPLR 3101 [a] ). Absent an affidavit from the plaintiff demonstrating that facts necessary to oppose the defendants' motion exist but cannot be stated without obtaining further discovery from the defendants, the court declines to deny their motion for summary judgment ( CPLR 3212 [f]; Hess v. Schwartz , 7 Misc 3d 1011[A] at *2 ). Accordingly, the motion is granted.