Epstein Becker Green succeeded in obtaining a judgment of more than $1 million for its client. The dispute concerned shareholders of a close corporation.
In 1985, Epstein Becker Green’s client received from his brother a gift of stock representing a 70 percent interest in a “Subchapter-S” corporation that his brother utilized to own and manage New York City apartment buildings. Our client set aside the certificate for 20 years. In 1986, the NY Secretary of State dissolved the corporation for failure to pay franchise taxes. The brother waited 90 days and incorporated another entity with the same name as the dissolved corporation and continued business as usual, including buying a building in Harlem in 1987 and selling the other properties in 1988. Epstein Becker Green’s client was unaware of these activities. The brother died in 2001, and his wife sold the Harlem building in 2005 for a $1.2 million profit.
In 2006, our client found the stock certificate and asked the wife for his share of the $1.2 million profit. She refused to pay, arguing that our client owned stock only in the first corporation, but the building was bought and sold by the second corporation. Our client sued.
After a bench trial, the New York Supreme Court in Manhattan granted our client 70 percent of the profit from the sale, ruling that the second corporation was a mere continuation of the first. More importantly, the judge agreed with Epstein Becker Green’s position that to allow the wife to prevail would encourage shareholders to avoid paying franchise taxes and, when faced with dissolution, merely reincorporate for a few dollars. Such schemes violate public policy.
This case was challenging because the brother had been dead for eight years, our client had no knowledge of the brother’s business (neither did the wife), corporate records were non-existent, the wife’s son had destroyed all other records of the real estate sale at issue, and most of the corporate activities occurred 20 years ago. Fortunately, Epstein Becker Green found and deposed the lawyer who represented the brother in the 1980s. The lawyer testified that there was no need to transfer title of the first corporation’s property to the second corporation in 1986 since “they were the same corporation” and that it was the brother’s practice not to pay franchise taxes when it was just as easy and cheaper to reincorporate.