The opinion of the court was delivered by: Seybert, District Judge
Pending before the Court is an action for declaratory judgment by Plaintiff Frederick Rehberger ("Plaintiff"), seeking enforcement of a Stock Redemption Agreement (the "Agreement") against Defendant MRW Group, Inc. ("Defendant" or "MRW Group"). After holding a bench trial, and considering the parties' submitted findings of fact and conclusions of law, the Court finds Plaintiff's version of the facts more credible and persuasive, and for the reasons stated below, finds in favor of Plaintiff.
The Court presided over a two day bench trial on July 16 and July 17, 2007. All parties presented witnesses and exhibits.
The parties stipulated to a number of facts in their Joint Pre-Trial Order, filed September 7, 2006, and approved by Magistrate Judge Arlene R. Lindsay on September 12, 2006 ("JPTO"). For the basic background facts, the Court refers the parties to the stipulated facts contained in the JPTO. The only issue before the Court was whether Defendant was solvent and had a surplus available to pay Plaintiff the dollar value of his 25.668% share of the corporation.
In January 1987, the Mills-Muller-Wood Corporation and Richtberg & Rehberger, Inc. merged into a new corporation called the MRW Group, Inc. Pl.'s Findings ¶ 1. On June 19, 1987, Plaintiff, as well as the other shareholders, entered into a Stock Redemption Agreement, which set forth the rights, duties, and obligations of the shareholders in the MRW Group. Id. ¶ 2. Plaintiff held 25.668% of the shares of common stock of MRW Group. Id. ¶ 6. Under Article IV of the Stock Redemption Agreement, a stockholder who reaches sixty years of age can require the other stockholders and/or the corporation itself to "buy-out" his/her shares of stock for the value stated in Article VI. Id. ¶ 7. By letter dated November 19, 1999, Plaintiff notified MRW Group that he had reached the age of sixty and wanted to retire and sell his shares in accordance with the last stipulated value of MRW Group, which was $7,000,000.00. Id. ¶ 9.
After Defendant failed to pay for the stock, Plaintiff commenced an action in the Supreme Court of the State of New York, County of Suffolk. Id. ¶¶ 10,11. In the state court action, Plaintiff sought a declaratory judgment establishing the value of all of the outstanding shares of common stock of the MRW Group at $7,000,000. Id. ¶ 12. In May of 2001, Justice Elizabeth H. Emerson granted summary judgment against the MRW Group. Id. ¶ 13. Thereafter, MRW Group moved to renew arguing that it lacked adequate surplus and would be rendered insolvent if required to purchase Plaintiff's shares in accordance with the Agreement. Id.
¶ 15. Justice Emerson found that Defendant failed to prove that it would be rendered insolvent by paying Plaintiff in accordance with the Stock Redemption Agreement, but Defendant did prove that it did not have adequate surplus to pay for the shares. On August 27, 2001, Justice Emerson modified her prior Order to state that any payments to Plaintiff should be limited to years in which a surplus was available since a corporation may only purchase shares out of surplus. Id. ¶ 16; see also Pl.'s Ex. 2.
On November 20, 2001, Justice Emerson entered an Order finding that (1) the stipulated value of 100% of the corporation's common stock was $7,000,000; (2) Plaintiff owned 25.668% of the common stock; (3) Plaintiff made an offer of delivery on his stock on November 24, 1999; (4) the dollar value of Plaintiff's share of the MRW Group was $1,796,760, and; (5) MRW Group was obligated to purchase Plaintiff's shares pursuant to the Shareholders' Agreement, but any payments to Plaintiff were limited to the years in which a surplus was available in accordance with Sections 513 and 514 of the New York Business Corporation Law. Id. ¶ 17; Defendant's Proposed Findings of Fact and Conclusions of Law ("Def.'s Findings") p.2-3; see also Pl.'s Ex. 3. On June 17, 2002, the Appellate Division, Second Department affirmed Justice Emerson's ruling and remitted the matter for entry of the Judgment declaring the value of the outstanding shares of common stock of the MRW Group to be $7,000,000. Pl.'s Findings ¶ 19. Defendant has paid only $15,000 of the State Court's award.
On January 14, 2005, Plaintiff filed a Complaint in this Court seeking judgment that MRW Group was solvent and had a surplus at all times since Plaintiff's election was made, and that MRW Group is required to perform under the buy-out provisions of the Stock Redemption Agreement. Id. ¶¶ 21, 22. The Court presided over a two day bench trial on July 16-17, 2007. Plaintiff presented two witnesses and nineteen exhibits; Defendant presented neither witnesses nor exhibits.
The Court must decide whether Defendant had a "surplus" to pay for the redemption of Plaintiff's shares at any point after Plaintiff elected to retire in November 1999. The Court must also determine whether Defendant is solvent and whether it would be rendered insolvent if ordered to pay for the redemption of Plaintiff's shares. For the reasons set forth below, the Court finds that Defendant had a surplus at least since 2000, and would not be rendered insolvent by paying for Plaintiff's shares.
Section 513(a) of the New York Business Corporation Law ("NY-BCL") states that a corporation may not purchase or redeem shares if it is insolvent or would be made insolvent by the purchase, and a corporation may purchase or redeem shares only out of surplus. N.Y. BUS. CORP. LAW § 513(a) (2003). Section 102(a)(8) of the NY-BCL defines "insolvent" as "being unable to pay debts as they become due in the usual course of the debtor's business" and section 102(a)(13) of the NY-BCL defines "surplus" as the excess of net assets over stated capital.*fn1 N.Y. BUS. CORP. LAW § 102 (2003). The statute defines "net assets" as the amount by which total assets exceed total liabilities, and indicates that stated capital and surplus are not liabilities. N.Y. BUS. CORP. LAW § 102 (2003).
It is well settled that the "burden is on the corporation to establish that, at the time payments were to be made . . . , it lacked the necessary surplus to make the payments or would thereby have been rendered insolvent." La Sorsa v. Algen Press Corp., 105 A.D.2d 771, 773 (N.Y. App. Div. 1984) (internal quotations and citations omitted); see also Nakano v. Nakano McGlone Nightingale Adver., Inc., 377 N.Y.S.2d 996, 1000 (N.Y. Sup. Ct. 1975) ("[I]n an action to enforce a contract of redemption, the burden of proof rests upon defendant to establish that it would be illegal to proceed with the purchase or redemption); see also LaSorsa v. Algen Press Corp., 481 N.Y.S.2d 716, 718 (App. Div. 1984). "Where such proof is lacking, it is incumbent upon the Trial ...