Harras Bloom & Archer LLP Blog

Friday, January 31, 2014

Is bad faith a defense in deadlock dissolution proceedings?

In a corporation where shareholders maintain a 50/50 ownership structure, differences in opinion among shareholders on important business matters could lead to the involuntary dissolution of the company. Deadlocks occur when disagreements evenly divide shareholders, rendering them unable to reach the majority vote that is customarily required in business. As a result, the company's ability to conduct business becomes severely compromised. But, what if one shareholder uses the "bad faith" defense? Does the petitioner’s so-called bad faith have a bearing in a deadlock dissolution case when the 50/50 owners suffer a communication breakdown and reach an impasse? Justice Vito DeStefano recently dealt with this situation in the Supreme Court's Nassau County Commercial Division in the case of Feinberg v. Silverberg, equal-share co-owners of L&E International Ltd., a Long Island company.

Plaintiff Feinberg sought injunctive relief against defendant Errol Silverberg based on the latter's bad faith, more specifically, his alleged attempt at "freezing" Feinberg out of the company.  

The judge originally assigned to the case, who is now retired, did grant injunctive relief to Feinberg due to evidence of Silverberg's scheme to phase Feinberg out of the company. Evidence presented in court included an audio recording in which Silverberg and his devoted comrades discussed shuttering L&E and reassigning its business to another company under their ownership, without Feinberg. This type of conduct is a clear example of bad faith.

While in proceedings for that ruling, Silverberg filed a deadlock dissolution petition under BCL § 1104 claiming that it was impossible for L&E to conduct business due to the clashing of opinions and eventual dissension between himself and Feinberg. Feinberg's and Silverberg's cases were consolidated by Justice DeStefano in May 2013. 

Feinberg challenged the deadlock dissolution claim, maintaining that Silverberg's actions set the stage for dissension, and therefore his bad faith disqualified his petition. Silverberg argued that a bad faith defense is not relevant to a dissolution proceeding. Based on previous cases cited by the former co-owners and other evidence, Justice DeStefano ruled that evidence of bad faith does have a bearing on deadlock dissolution proceedings. This answers our earlier question: Does the petitioner’s so-called bad faith have a bearing in a deadlock dissolution case? 

The ruling of Feinberg v. Silverberg is the first of its kind in New York, determining that the actions which led to a deadlock make a difference in dissolution proceedings. 




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