Rosiny v. Schmidt
185 A.D.2d 727 (1992)
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Rule of Law:
A shareholders' agreement containing a mandatory post-mortem stock buyout provision at a predetermined value (e.g., book value or a fixed price) is enforceable according to its clear terms, even if the price is significantly below market value, unless there is a showing of both procedural and substantive unconscionability, a lack of meeting of the minds on essential terms, mutual abandonment by conduct, or a breach of fiduciary duty where an attorney-client relationship or undue influence is established.
Facts:
- In 1941, Charles L. McGuire and Theodore A. Schmidt became shareholders in C.L. McGuire & Co., Inc. under an agreement that included a book value buyout provision.
- In 1957, Ched Realty was formed, with Edward Rosiny (plaintiffs' father), Charles McGuire, and Theodore Schmidt as initial shareholders, and their agreement provided for post-mortem share purchase at $100 or book value.
- In 1964, Edward Rosiny transferred his shares to his wife, Annabelle Rosiny, and a new agreement with McGuire and Schmidt modified the buyout price to include fair market value for real property.
- After Theodore Schmidt's death, his widow, Jeannette Priddy (then Schmidt), became a shareholder; in 1971, a new agreement with McGuire and Annabelle Rosiny reverted the buyout price to book value.
- In 1981, Annabelle Rosiny transferred her shares to her sons, Allen Rosiny and Frank Rosiny (plaintiffs), and a new shareholders' agreement was executed by Allen Rosiny, Frank Rosiny, Charles McGuire (age 80), and Jeannette Priddy (age 74), which set the post-mortem buyout price at book value or $200 per share, whichever was greater.
- At the time the 1981 agreement was signed, Ched had a negative book value, making the buyout price effectively $200 per share, while the market value of the shares was significantly higher (e.g., $4,225 per share).
- Between 1981 and their deaths, McGuire and Priddy, through their legal counsel, considered selling the property or dissolving the corporation but ultimately did not pursue either option.
- Charles McGuire died on June 19, 1988, and Jeannette Priddy died on July 25, 1988, after which Allen Rosiny and Frank Rosiny sought to purchase their shares for $200 apiece according to the 1981 agreement.
Procedural Posture:
- Plaintiffs Allen Rosiny and Frank Rosiny commenced an action in the Surrogate’s Court, Bronx County (Lee Holzman, S.).
- After a non-jury trial, the Surrogate's Court dismissed the plaintiffs' complaint and granted the defendants' counterclaim for a declaratory judgment, declaring that the plaintiffs had no right to purchase the decedents' shares under the 1981 agreement and that the shares could pass according to the decedents' wills.
- Plaintiffs appealed this order to the Supreme Court of New York, Appellate Division, First Department.
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Issue:
Does a shareholders' agreement's post-mortem buyout provision, setting share value at book value or a fixed price, become unenforceable due to unconscionability, lack of a meeting of the minds regarding "book value," breach of fiduciary duty among shareholders (some being attorneys), or abandonment by prior transfers, when the agreed price is significantly less than market value and some shareholders were elderly and less educated?
Opinions:
Majority - Sullivan, J.P.
Yes, the post-mortem buyout provision of the 1981 shareholders' agreement is enforceable, and the plaintiffs are entitled to specific performance of its terms. The record does not support claims of unconscionability; defendants failed to show both procedural and substantive unconscionability. While McGuire and Priddy were older and less educated, they had signed numerous prior agreements, including the 1971 agreement with an identical book value buyout provision, after having previously abandoned a market-value approach. There was no evidence of deceptive tactics or undue influence by the Rosinys or accountant Kwalwasser, nor were the Rosinys the drafters of the 1981 agreement. The disparity between the option price and the current value of the stock alone is insufficient to invalidate the restriction. Furthermore, the decedents were represented by counsel who were aware of the agreement and considered options like selling the property or dissolving the corporation, indicating an absence of meaningful choice was not present. There was also a meeting of the minds regarding "book value"; the term is unambiguous, and the decedents' history of signing prior agreements with this identical provision, after rejecting a fair market value approach, demonstrates their understanding. As for fiduciary duty, the proof supports that the Rosinys did not act as attorneys for the decedents in any Ched transaction. While shareholders in a close corporation owe good faith, there is no dictate requiring one shareholder to explain provisions to another, especially when the latter signed identical prior provisions and had legal counsel. No fiduciary duty is created simply by a mandatory buyout provision. Finally, the claim of abandonment by conduct is unsubstantiated; previous transfers of shares were done in formal compliance with superseding agreements, and defendants failed to establish mutual, positive, unequivocal conduct inconsistent with the intent to be bound by the buyout provision.
Dissenting - Carro, J.
No, the post-mortem buyout provision is not enforceable. The Surrogate correctly concluded that specific performance of the 1981 agreement would be inequitable, unduly harsh, and unjust. The agreement was grossly one-sided and unconscionable, as the Rosinys, who were approximately 40 years younger and experienced attorneys, were virtually guaranteed to outlive the elderly, less sophisticated McGuire and Priddy, thus enjoying an unconscionable windfall by purchasing shares worth over $40,000 for $200 apiece. In a close corporation, shareholders owe each other fiduciary duties of good faith and loyalty, and transactions between fiduciaries are scrutinized with extreme vigilance. The Rosiny family and their accountant, Kwalwasser (who had a primary allegiance to the Rosinys), acted against the interests of McGuire and Priddy. Kwalwasser, aware of the negative book value, suggested the transfer to the younger Rosinys, effectively guaranteeing the windfall without advising the decedents of the financial significance. The Rosinys' father also led Priddy to believe her children would inherit her shares, creating an estoppel. Moreover, there was no meeting of the minds as to the meaning of "book value"; the term was undefined, and while the Rosinys knew its technical meaning (resulting in a negative value), it defies common sense that the decedents knowingly agreed to sell shares for a negligible amount when they believed "book value" had a reasonable relationship to market value. If a material difference in meaning existed and neither knew or had reason to know the other's meaning, no contract was formed. The buyout provisions were also effectively abrogated by the consistent conduct of the parties over 30 years, who ignored these provisions by allowing transfers (including to the plaintiffs and their mother) without adhering to the right of first refusal, establishing a mutual non-usage that should constitute abandonment.
Analysis:
This case highlights the tension between strict contractual enforcement and equitable principles, particularly within the context of closely held corporations. The majority prioritizes the plain language of the contract and the autonomy of parties, especially when counsel is involved, emphasizing that mere price disparity or age difference does not negate enforceability. Conversely, the dissent underscores the unique fiduciary duties among shareholders in close corporations and the court's equitable power to refuse specific performance when an agreement is unconscionable or based on a lack of mutual understanding, especially with vulnerable parties. This decision has significant implications for drafting shareholders' agreements, stressing the need for explicit and unambiguous valuation mechanisms and careful consideration of potential challenges based on unconscionability or breach of fiduciary duty, particularly when there are disparities in sophistication or attorney-shareholder relationships.
