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O'DONNEL v. MARINE REPAIR SERVS.

January 21, 1982

William O'DONNEL, Plaintiff-Counterdefendant,
v.
MARINE REPAIR SERVICES, INC., Defendant-Counterplaintiff, and Vincent Marino, Anthony Juliano and Samuel N. Greenspoon, Defendants



The opinion of the court was delivered by: LASKER

William O'Donnel, the owner of 35% of the shares of stock and a former director and officer of Marine Repair Services, Inc. ("MRS"), sues for dissolution of the corporation under New York Business Corporation Law ยง 1104(a) on the grounds that those in control of MRS are guilty of illegal, fraudulent or oppressive acts towards O'Donnel and that the assets of the corporation are being looted or wasted. O'Donnel also sues on the corporation's behalf to recover allegedly wasted or looted assets. Defendants counterclaim that O'Donnel breached his fiduciary duties to the corporation by competing with MRS during and after his employment as an officer and that O'Donnel failed to return company cars after the termination of his employment. The case has been tried to the court.

According to O'Donnel's evidence, he and Marino agreed that they would share an equal voice and equal benefits in MRS, but Marino began refusing O'Donnel a say in the corporate management in April, 1980, and eventually brought about his termination as a director and officer in May and June, 1980. O'Donnel testified that he first met Marino about January, 1971, when Marino was hired and began working at Marine Trailers, a container repair concern and a subsidiary of Seamount, where O'Donnel had been employed for approximately two years as President. Sometime in 1972, American Export Lines, Marine Trailers' largest customer, expressed its intention not to continue doing business with Marine Trailers because it was unhappy with its principals. Marino suggested to O'Donnel that they acquire Marine Trailers together and attempt to convince American Export to keep its business there with Marino and O'Donnel owning and managing the company. They agreed that O'Donnel would bring Marino up to his own level of pay and that they would share equally in the venture. American Export, however, wanted nothing to do with anyone but O'Donnel and Marino at Marine Trailers, and subsequently cancelled its contract with Marine Trailers. (Tr. 18-21). American Export, however, indicated to Marino that if he could form a company which was properly licensed it would send its business to him. Marino next suggested that he attempt to purchase a small, licensed container repair business from his cousin, Philip Lacqua. According to O'Donnel, he and Marino negotiated with Lacqua and it was agreed that Lacqua would sell Marino 85 of the shares and retain 15, and that Marino would then sell O'Donnel 30 of his 85 shares. O'Donnel testified that it was agreed that the two would have equal ownership but that Marino would hold an extra 25 shares for the benefit of certain persons in Brooklyn. It was also agreed that their salaries and benefits would be equal and that they would each have an equal voice in the management of the new corporation. (Tr. at 21-28). It was not until 1974 that Marino and O'Donnel received formal certificates of stock ownership and that O'Donnel formally became a director and officer. (Tr. at 111, 112).

From 1974 to 1980, the salaries and perquisites of Marino and O'Donnel were equal. During this period, the company prospered. While they began with an initial investment of only $ 12,000. or so, by 1980 Marino and O'Donnel were each earning approximately $ 150,000. per year, not including significant fringe benefits such as use of company cars, discretionary use of expense accounts, and various company paid insurance benefits. According to O'Donnel, he had primary responsibility for the financial affairs of the company, including setting and keeping up the books and records and the like, and Marino was primarily responsible for the day-to-day operations in the New York port. Important decisions were arrived at by consensus. (Tr. at 28-29). In 1974, the company expanded its operations to southern ports, over which O'Donnel had primary responsibility for day-to-day operations. Eventually, the corporation owned container repair facilities in Baltimore, Maryland; Norfolk, Virginia; Charleston, South Carolina; Houston, Texas; Savannah, Georgia; and Pireus, Greece. Subsidiaries were set up to own all the non-New York facilities except those at Norfolk. By the last months of his employment at MRS, O'Donnel was spending about 90% of his time outside of New York, overseeing the business of the southern subsidiaries. In 1977, the corporation acquired Lacqua's shares, leaving Marino with 55 shares and O'Donnel with 30. (Tr. at 26-30).

 Sometime in 1977, the FBI interviewed O'Donnel and Marino in connection with its investigation into East Coast waterfront activities and subpoenaed them and their corporate records before a grand jury. O'Donnel and Marino, for themselves and on behalf of MRS, consulted Samuel Greenspoon, Esq., who began to represent them as attorney in connection with the investigation. Eventually, Greenspoon became general counsel for the corporation (Tr. at 30-33).

 In January, 1979, Marino was indicted for an alleged kickback scheme. It was charged that he had agreed to pay money to two executives of a steamship company and a union official for each chassis repaired by MRS. O'Donnel testified that in the winter or spring of 1979, he became increasingly concerned that the criminal investigation was taking up the bulk of his time and energy and subjecting him to great stress. He decided that he wanted to separate himself from the New York operation and proposed to Marino that Marino buy out his interest in MRS in exchange for O'Donnel taking some of the southern subsidiaries. Marino told O'Donnel that he would consider the proposal. Approximately one month later, O'Donnel refined his proposal, offering Marino full ownership of the New York and Norfolk operations and to repay the $ 600,000. intercorporate debt owed by the subsidiaries to the parent in exchange for ownership of the other southern operations. Again Marino stated that he would consider the proposal. In the summer of 1979, O'Donnel made a third proposal that would have left Marino with the New York, Norfolk and the highly profitable Baltimore operation, and would have involved adjustment of the intercorporate debt in relation to their respective stock holdings. A few days later, Marino told O'Donnel that he would not accept the proposals because he felt that the subsidiaries and the parent were interdependent and could not effectively be split. Marino offered to buy O'Donnel out and asked O'Donnel to name a price for his interest. O'Donnel agreed to consider Marino's proposal. In subsequent conversations with Greenspoon, O'Donnel stated that he could not accept Marino's proposal because a cash buy-out would present tax problems, would not leave him with enough money to live on, and because Marino would insist on a covenant not to compete, just as he had demanded of Lacqua when Lacqua's interest was bought. Greenspoon indicated that he would try to help in the negotiations between Marino and O'Donnel and asked O'Donnel what he would do if Marino were convicted. O'Donnel told him that without question he would remain in New York and manage the company until Marino's legal problems were concluded. (Tr. at 35-42). Up to this point, the negotiations had apparently not adversely affected the relationship between Marino and O'Donnel which continued on a close and harmonious basis. (Tr. at 35-42; 238-39; 1038-39).

 Negotiations continued through the fall of 1979 and into the spring of 1980. Several times during the discussions, O'Donnel conceded, he told Greenspoon and Marino that Marino's proposal was unacceptable and that he would prefer to take nothing from MRS and begin his own business in the localities with which he was familiar rather than sign a covenant not to compete. According to O'Donnel, neither Greenspoon nor Marino appeared to take these statements seriously. Indeed, according to O'Donnel, Greenspoon assured him that they would not let him walk away with nothing. (Tr. at 40-42; 271). O'Donnel testified that, despite these statements, he took no action to start his own business until after his employment with MRS was terminated. (Tr. at 80-84).

 During the negotiation period, both were indicted in December, 1979, for conspiracy and for aiding the embezzlement of funds of a common carrier. This indictment replaced the earlier charge against Marino and not surprisingly increased O'Donnel's fears about his relationship with Marino and the New York waterfront business. (Tr. at 32). Their trial began on March 10, 1980, and concluded on April 2, 1980. On Greenspoon's advice, O'Donnel distanced himself from Marino while in the courthouse. Marino was convicted and the jury was unable to reach a decision as to O'Donnel. O'Donnel's indictment was eventually nolle prossed.

 O'Donnel testified that after the trial he noticed a cooling of the relationship between himself and Marino. For example, when he offered to run the company while Marino dealt with his legal problems, Marino told him that he no longer trusted O'Donnel. (Tr. at 62). In addition, according to O'Donnel, Marino began to leave O'Donnel out of the major decision making facing the company. After the trial, O'Donnel noticed one Larry Bonaguidi on the premises of the company and learned that Marino had proposed a sale of the New York operation to Bonaguidi's group without consulting O'Donnel. (Tr. at 52-55). In addition, O'Donnel stated that conversations between himself and Marino became infrequent; he was excluded from day-to-day decisions relating to the company; equipment was sold without his knowledge; he was no longer consulted as to the employment of office personnel; employees were directed by Marino not to speak to him about the business; and at Marino's instruction, he no longer received the vital sales information from the managers of the subsidiaries. (Tr. at 61-64).

 About May 3rd, Greenspoon called O'Donnel and told him to be sure to be in New York on May 20th. The same day, Greenspoon prepared and sent a handwritten notice of a shareholders' meeting to be held May 20th. At the shareholders' meeting, Marino voted O'Donnel out as a director and Greenspoon, Marino and Anthony Juliano were elected directors. (Tr. at 64-68). At the meeting, O'Donnel voiced his objection to his termination and to the proposed sale of the New York operations. He stated that he had already been closed out of the company for several weeks. A meeting of the new board followed the shareholders' meeting, at which a resolution was adopted requiring all officers to obtain Marino's written approval for any travel. This action impacted most heavily on O'Donnel, who at the time spent approximately 50% of his time traveling. (Tr. at 68).

 On May 22, 1980, Marino was sentenced to a prison term of a year and a day. On May 23, 1980, O'Donnel began a two week vacation and, as had been his and Marino's practice, wrote himself a check for two weeks pay in advance. He noted in the ledger that the pay was for the period ending June 1, 1980. On May 27th, O'Donnel wrote to the Waterfront Commission to give legally required notice of the changes in MRS management. He also noted that a minority shareholder had objected.

 After O'Donnel was removed as a director but before he was terminated as an officer, he spoke with Edward Yager, the manager of Container Maintenance ("CM"), the Charleston subsidiary, who called O'Donnel to express concern about the future of the company. (Tr. at 80-82). In his deposition testimony, Yager stated that he had noticed after the criminal trial that relations were not good between O'Donnel and Marino (Yager Dep. at 31-34) and that Marino, who rarely called CM and had only visited it once, suddenly began expressing concern for Yager. (Id. at 40-41). When O'Donnel told Yager that O'Donnel had been removed as a director and was trying to negotiate a separation with Marino, Yager said that he "blew up" and wondered what he was supposed to do because "my kingdom is falling down around me." (Id. at 38). O'Donnel told him to stay calm: that everything would be worked out. (Id.) O'Donnel made no mention of the possibility of Yager and himself going into business together. (Id. at 44). Yager told O'Donnel that if O'Donnel and Marino did separate, Yager would not work for Marino. Yager testified that following this conversation, he remained concerned about his own future in light of the rift between Marino and O'Donnel, and rented space in Charleston for the month of June so that, if Marino and O'Donnel split up, "I would have a place to start a company of my own." (Id. at 60-61). Yager asked the broker to keep the rental confidential.

 On June 2, 1981, the board met and voted to terminate O'Donnel's position as secretary-treasurer of MRS. Greenspoon notified O'Donnel in writing of the Board's action and that his termination was effective June 8, 1980. (Tr. at 78-79; Ex. C).

 Some time after June 6, 1980, O'Donnel called Yager and told him he (O'Donnel) had been fired and would like to talk about starting a business together. (Tr. at 83).

 On June 11, 1980, O'Donnel orally applied for a $ 55,000. loan to go into business in competition with MRS. (Tr. at 85; Merendino Dep. at 34, 37, 46). *fn1" On June 12th or 13th, O'Donnel met in Charleston with Yager. They agreed to join forces to commence a container repair business of their own in Charleston. (Tr. at 87-90). O'Donnel told Yager that his lawyers had warned against soliciting business or employees while Yager was still employed at CM. (Tr. at 88). On June 13, 1980, Yager submitted two weeks notice of his resignation to Marino. While Yager finished his work at CM, O'Donnel began preparing for the opening of his and Yager's new company, General Container Services ("GCS"), at the location which Yager had rented. During this period Yager worked some evenings with O'Donnel, planning the company's future. On June 27th, Yager ceased his employment at the MRS subsidiary and the next day began working full time at GCS. Between June 30th and July 3rd, three more employees gave notice that they were quitting CM, and a fourth gave notice on July 9th. These four eventually joined GCS. Each testified at deposition that he or she was not solicited at any time before June 27th by Yager or O'Donnel. (Deposition of Robert Knies at 5-6; Lawrence Potter at 10; Mary Morris at 15; Benjamin Parker at 6). In addition, in early July a major customer of CM arranged for ...


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