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FEIWUS v. GENPAR

March 30, 1999

JACK FEIWUS, PLAINTIFF,
v.
GENPAR, INC., JEROME JOSEFSON, JOSEPH MARGOLIS, RENEE OPERMAN AND JACOB HIRSCH, INDIVIDUALLY AND AS DIRECTORS OF GENPAR, INC., AND ABINGDON MANAGEMENT, A LIMITED PARTNERSHIP, DEFENDANTS.



The opinion of the court was delivered by: Block, District Judge.

MEMORANDUM AND ORDER

Plaintiff Jack Feiwus ("Feiwus"), represented by counsel, moved for the dissolution of Genpar, Inc. ("Genpar") and Abingdon Management, and the appointment of a receiver, or alternatively, for the Court to compel defendants Jerome Josefson, Joseph Margolis, Renee Operman and Jacob Hirsch (collectively, the "individual defendants") to buy Feiwus's minority interest in Genpar. The Court referred the motion to Magistrate Judge Robert M. Levy, who on February 17, 1999 issued a Report and Recommendation recommending that: (1) Feiwus's motion for an order dissolving Genpar and appointing a receiver to administer the dissolution, or alternatively, compelling the individual defendants to buy-out Feiwus's interest in Genpar, be denied because the Court should abstain from exercising jurisdiction; (2) his motion for an order dissolving Abingdon Management be denied without prejudice; and (3) his discretionary claims be dismissed and his damage claims be stayed, pending resolution of the discretionary claims in New York State court. In light of Feiwus's March 15, 1999 objections to the Report and Recommendation, the Court undertakes a de novo review of the Magistrate Judge's Report and Recommendation. See 28 U.S.C. § 636 (b)(1)(C); United States v. Tortora, 30 F.3d 334, 337-38 (2d Cir. 1994).

BACKGROUND

Feiwus asserted six causes of action against the defendants: (1) corporate oppression and waste; (2) breach of fiduciary duty; (3) failure to account for wrongful official corporate conduct; (4) breach of contract; (5) official corporate conduct engaged in pursuant to an unlawfully noticed meeting; and (6) fraud. He asked the court to dissolve defendant Genpar, a New York corporation in which he owns a thirty percent interest, under the Supervision of a court-appointed receiver. He alternately proposed that the individual defendants be required to buy out his interest. He asked the Court to require the defendants to account for their alleged breaches of fiduciary duty and contract, and for their fraud. He requested that the Court declare null and void the actions taken at the shareholders' September 29, 1997 meeting, and that he be awarded damages of not less that $750,000.

DISCUSSION

The Report and Recommendation recommends that under Burford v. Sun Oil, 319 U.S. 315, 332-34, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), the Court abstain from exercising subject matter jurisdiction over Feiwus's claims for the dissolution of Genpar, because a federal court may abstain from exercising jurisdiction over a case such as this one where federal review would disrupt a state's ability to administer local affairs which are of great interest to the state. The exercise of federal review over the dissolution of a New York corporation would disrupt New York's attempt to develop a unified policy concerning the equitable dissolution of its corporations, a matter of great importance to the state. As New York can offer an appropriate forum for resolving questions of corporate dissolution, federal abstention is appropriate. See Friedman v. Revenue Management, Inc., 38 F.3d 668, 671 (2d Cir. 1994) (affirming abstention on claims for dissolution of New York corporation); c.f. Sriram v. Preferred Income Fund III Ltd. Partnership, 22 F.3d 498, 501-02 (2d Cir. 1994) (affirming federal court's dissolution of Delaware partnership when dissolution did not involve exercise of discretion). However, while a federal court may abstain from exercising jurisdiction over discretionary claims for equitable relief such as a demand for corporate dissolution or buy-out, the Court may not relinquish jurisdiction over common law claims for damages. See Quackenbush v. Allstate Ins. Co., 517 U.S. 706, 730, 116 S.Ct. 1712, 135 L.Ed.2d 1 (1996). It may, however, enter a stay order pending resolution of related equitable claims by a state court, as the Magistrate Judge recommended. Id. at 719-20, 116 S.Ct. 1712.

Feiwus objects that the Magistrate Judge misconstrued the factual record and misread Feiwus's request for relief. A careful comparison of the Report and Recommendation shows that it accurately draws upon the record before the Magistrate Judge. He also objects that abstention will delay the action, but the proper focus of an abstention analysis is the effect of federal interference on New York's local affairs, not on Feiwus's schedule.

Feiwus also objects that the Magistrate Judge should have recommended that a buy-out order be issued, rather than that the Court abstain from exercising jurisdiction over dissolution, because Feiwus in fact had expressed a preference for such a course of action. See Exhibit 10 to Plaintiffs Affidavit in Support of Objections ("Pl.Aff."), at 2-3 (proposing that if the Court planned to abstain from exercising jurisdiction over the corporate dissolution, the Court first entertain the request for a buy-out). Under New York law, both a buy-out and a corporate dissolution involve an exercise of a court's discretion in an area in which New York has "strong interest in the uniform development and interpretation of the statutory scheme regarding its corporations." Report and Recommendation, at 298 (citing Friedman, 38 F.3d at 671). Thus, even if the Magistrate Judge accepted Feiwus's request for a buy-out as his preferred course of action, abstention would be appropriate.

Lastly, Feiwus objects to the staying of his legal claims while his equitable claims are before the state court because this schedule requires him to proceed with his liquidation claim before his legal claims, contrary to his expressed preference. The record clearly shows that Feiwus only provisionally suggested that he would prefer to hold his dissolution claim in abeyance if the Court would appoint a receiver and proceed to trial on the legal claims; he did not withdraw his other claims for equitable relief, such as a buy-out, which implicate abstention. See Exhibit 9 to Pl. Aff. at 19, Exhibit 10 to Pl. Aff., at 2-3. The Magistrate Judge's recommendation for abstention appropriately balanced Feiwus s equitable claims and legal claims, which depend upon similar facts, by recommending a stay of the legal claims so that the federal court does not determine factual issues which may be bound up in the state court's corporate dissolution determination.

CONCLUSION

The Court fully concurs with, and adopts, the Magistrate Judge's well-reasoned Report and Recommendation in its entirety.

SO ORDERED.

REPORT AND RECOMMENDATION

By order dated June 3, 1998, the Honorable Frederic Block, United States District Judge, referred this matter to me for a report and recommendation on the motion by plaintiff Jack Feiwus ("Plaintiff" or "Feiwus") for an order: (1) dissolving defendants Genpar, Inc. ("Genpar") and Abingdon Management and appointing a receiver to administer the dissolution; or, in the alternative, (2) compelling defendants Genpar, Jerome Josefson ("Josefson"), Joseph Margolis ("Margolis"), Renee Operman ("Operman"), and Jacob Hirsch ("Hirsch"), individually and as directors of Genpar, and Abingdon Management (collectively, "Defendants") to buy out Plaintiffs minority interests in Genpar and Abingdon Management. For the reasons stated below, I respectfully recommend that Plaintiffs motion be denied. In addition, I respectfully recommend that Plaintiffs discretionary claims be dismissed without prejudice and that his claims for damages be stayed, pending resolution of the discretionary claims in New York Supreme Court.

BACKGROUND

Feiwus, the sole plaintiff in this diversity action, claims that this case presents an "unfortunately typical situation" of the majority of a closely held corporation (Genpar) harming the minority (Feiwus). (Affidavit of Jack Feiwus, sworn to on May 29, 1998 ("Feiwus Aff.") ¶ 3.) Plaintiff is a thirty percent shareholder of defendant Genpar, a New York corporation formed on or about June 1, 1994 with New York as its principal place of business. (Am. Compl. ¶¶ 1, 2; Answer ¶¶ 2, 3.) Plaintiff has been a real estate developer and builder on Staten Island since 1968. (Feiwus Aff. ¶ 6.) He is also a licensed real estate broker and property manager. (Id.) In 1984, Feiwus and defendants Josefson and Margolis became aware that thirty-two town houses in Richmond County, New York ("the property") were for sale and decided to structure a deal to purchase the property. (Id. ¶ 7.) They formed a limited partnership, Abingdon Management, to acquire title to the property, and formed Genpar as the sole general partner of Abingdon Management. (Id. ¶ 10.)


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