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MATTER JULIAN NELKIN ET AL. v. H. J. R. REALTY CORPORATION (12/11/69)

COURT OF APPEALS OF NEW YORK 1969.NY.43944 <http://www.versuslaw.com>; 255 N.E.2d 713; 25 N.Y.2d 543 decided: December 11, 1969. IN THE MATTER OF JULIAN NELKIN ET AL., APPELLANTS,v.H. J. R. REALTY CORPORATION, RESPONDENT Matter of Nelkin v. H. J. R. Realty Corp., 31 A.D.2d 923, affirmed. Counsel Solomon Sidney Goldsmith for appellants. Edward Brodsky, Jay H. Landau and Mel P. Barkan for respondent. Judges Burke, Bergan, Breitel and Gibson concur with Judge Scileppi; Chief Judge Fuld dissents and votes to reverse in a separate opinion in which Judge Jasen concurs. Author: Scileppi


Matter of Nelkin v. H. J. R. Realty Corp., 31 A.D.2d 923, affirmed.

Judges Burke, Bergan, Breitel and Gibson concur with Judge Scileppi; Chief Judge Fuld dissents and votes to reverse in a separate opinion in which Judge Jasen concurs.

Author: Scileppi

 H.J.R. Realty Corporation was organized in 1941 under the laws of the State of New York, by tenants of 128-138 Mott Street in New York City for the sole purpose of owning and managing the property and the building at that address.

The tenants involved in the corporation were Chatham Metal Products, Inc. (hereinafter referred to as Chatham), National Machinery Exchanges, Inc. (hereinafter referred to as National) and Henry Nelkin, Inc. (hereinafter referred to as Nelkin).*fn1

At the time of the incorporation, all of the shareholders entered into an agreement, which, in relevant part, provided: "That all of the parties to this agreement, are not only shareholders in H.J.R. Realty Corporation, but are also tenants or are financially interested in firms which are tenants in the building owned by the said realty corporation. That in furtherance of the aim to make the building show a profit and so that the building may be kept in good repair, the following have been agreed upon:

"That the rental per square foot shall be decided upon and shall be charged equally to each tenant interested in the corporation owning the building. The charge for other tenants shall be decided by the officers of the corporation."

Since 1941 Chatham, National and Nelkin (until 1961) have occupied most of the space in the building at rentals far lower than the property's fair rental value. As a result the corporation has earned little, if any, net profits since its inception.

In 1946 Charles Richter sold his interest in Chatham and in 1961 Nelkin terminated its tenancy in the building. Richter and Nelkin no longer derived any benefit from owning stock in the corporation since neither of them shared in the discounted rentals. In 1968 the Nelkin and Richter interests (who control 4/9 of the issued stock) began a campaign to convince the shareholders of Chatham and National (who control the other 5/9 of the stock) to disregard the shareholders' agreement and pay a fair and reasonable rent, to dissolve the corporation and sell the building, or to buy the minority shares at a reasonable price. In February of 1968 the shareholders of National refused to attend a special meeting called by Nelkin and Richter and, instead, an informal meeting was held. It became clear at the meeting that the differences between the majority shareholders (National and Chatham) and the minority shareholders (petitioners Nelkin and Richter) were irreconcilable. For one thing, the majority shareholders declared that the shareholders' agreement of 1941 authorized the corporation to charge "interested tenants" discounted rentals and that as the controlling majority they intended to manage the buildings in compliance with the agreement. Moreover, in response to Richter and Nelkin's offer to sell their stock, the majority offered only what they had paid in 1941. It was also announced by Chatham that it was intending to move into even more space in the building which was to be vacated by another tenant.

In October of 1968 Nelkin and Richter, as minority shareholders, instituted the instant special proceeding in accordance with section 1104 (subd. [c]) of the Business Corporation Law seeking judicial dissolution of the corporation. The Supreme Court granted the petition and placed the proceeding on the calendar. On appeal, the Appellate Division reversed and dismissed the petition on the ground that it failed to state a cause of action for dissolution.

The sole issue presented on this appeal is whether petitioners, Nelkin and Richter, have made out a cause of action for dissolution of respondent corporation.*fn2 It is our opinion that they have not.

In our opinion petitioners' contention that the majority shareholders are continuing the existence of the corporation solely for their own benefit and that, therefore, the corporation should be dissolved "as a matter of judicial sponsorship" in accordance with Leibert v. Clapp (13 N.Y.2d 313-315) is without merit (Kruger v. Gerth, 16 N.Y.2d 802).

In Leibert v. Clapp (supra) a minority shareholder sued to compel the dissolution of the corporation in which he owned stock. The plaintiff alleged that the majority shareholders of the corporation were maintaining the corporate existence only to enable them to wrongfully divert assets and income to the parent corporation and, furthermore, that the majority shareholders were attempting to coerce the minority into selling their stock at greatly depreciated prices. This court recognized that there was no statutory authority for judicial dissolution in such a case but stated (p. 315) that such relief is available "as a matter of judicial sponsorship" where the majority shareholders or directors: "'have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and dissolution power given to them by the statute'". (13 N.Y.2d, at p. 317.)

In the instant case, however, the alleged behavior of the majority shareholders could in no event be characterized as a wrongful diversion. The recent case of Kruger v. Gerth (16 N.Y.2d 802, supra, affg. 22 A.D.2d 916) is in point. In Kruger a minority shareholder alleged that for several years a majority shareholder had been taking substantial salaries and bonuses, leaving the corporation with only minimal net income. The plaintiff prayed for non-statutory judicial dissolution in accordance with our decision in Leibert on the ground that the majority shareholder was continuing the corporate existence solely to "provide himself with employment, at substantial salaries and bonuses * * * thereby * * * exploiting the corporation to the detriment of the other stockholders". (22 A.D.2d 916).

The Appellate Division, in Kruger, found that the majority shareholder was not looting the corporate assets nor was he maintaining the corporation for his own special benefit and that, therefore, the minority shareholder had not established sufficient facts to warrant non-statutory ...


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