Rosiny v. Schmidt

Order, Surrogate’s Court, Bronx County (Lee Holzman, S.), entered on or about November 19, 1990, which, after a non-jury trial, inter alia, dismissed the complaint and granted the defendants’ counterclaim for a declaratory judgment to the extent of declaring that the plaintiffs have no right, pursuant to a shareholders’ agreement dated June 30, 1981, to purchase shares held by the defendants’ decedents at the time of their deaths and that said shares may pass pursuant to the terms of the decedents’ wills, modified, on the law and the facts, the complaint is reinstated and judgment is awarded thereon to the plaintiffs directing specific performance of the 1981 agreement, the defendants’ counterclaim for a declaratory judgment is denied, and the order is otherwise affirmed, without costs.

The Surrogate erred in concluding that the post-mortem buyout provision of the 1981 Ched shareholders’ agreement was unenforceable.

The record fails to support the defendants’ initial contention that the agreement was unconscionable. "A determination of unconscionability generally requires a showing that the contract was both procedurally and substantively unconscionable when made—i.e., 'some showing of an "absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party” (Williams v Walker-Thomas Furniture Co., 350 F2d 445, 449).’ (Matter of State of New York v Avco Fin. Serv., [50 NY2d 383,] 389; see also, Jones v Star Credit Corp., 59 Misc 2d 189, 192.)” (Gillman v Chase Manhattan Bank, 73 NY2d 1, 10.)

Central to the defendants’ claim of unconscionability is the fact that at the time the 1981 agreement was entered into, the plaintiffs were young attorneys and the defendants’ decedents, McGuire and Priddy, were elderly and less educated. The record, however, reveals that this was the fourth Ched shareholders’ agreement and the only one to which the plaintiffs were signatories. With the exception of one agreement in 1964 which contained a market value-based post-mortem buyout provision, which was later discarded, the others all provided for a book value formula to determine the value of a decedent’s shares.

Priddy, a former bookkeeper who was later an office manager, was a signatory to a 1971 agreement wherein the shareholders agreed to return to a book value formula after the 1964 agreement, signed by her husband and containing a fair market value approach, was abandoned. McGuire, who ran a *729successful business for many years, executed not only the 1981 agreement but also three others containing book value buyout provisions. He had been a party to the 1964 agreement containing the thereafter rejected market value-based formula and the subsequent 1971 agreement returning to the book value approach. In fact the 1941 shareholders’ agreement of C.L. McGuire & Co., Inc., to which McGuire and Priddy’s first husband, Theodore Schmidt, were parties, contained such a book value buyout provision. Neither of the plaintiffs, nor either of their parents whose interest in Ched they succeeded, were party to that agreement.

The 1981 agreement is simple and straightforward, and provides that shareholders will not, during their lifetime, "sell, assign, transfer, pledge or hypothecate either all or any part” of their stock unless it is first offered to the other shareholders. The parties agreed that "[t]he price at which said stock shall be offered for sale shall be the book value thereof as of the last day of the month immediately preceding the date of the said offer or $200 per share, whichever amount is greater.” With regard to post-mortem transfers, the agreement provided for the surviving shareholders to buy the decedents’ shares at the same price applicable to tránsfers during their lifetime.

Any claim that the Rosinys or the accountant Kwalwasser exerted deceptive or high-pressured tactics to induce the decedents to sign the 1981 agreement is not borne out by the record. Nor were the plaintiffs the draftsmen of the 1981 agreement as the defendants allege. The 1981 agreement contained the identical post-mortem buyout provision as the 1971 agreement, and was only changed to reflect the plaintiffs as the new owners of their mother’s shares, a change to which the decedents consented.

Nor does the record support the implication that because of the disparity in age and educational background, the decedents were deceived by the young attorneys. There is nothing to indicate that the decedents were unaware of the provisions of the 1981 agreement they signed, particularly since they executed an agreement with the identical buyout provision ten years earlier, an agreement to which the plaintiffs were not parties. It may not nor should it be presumed that because one is of a certain advanced age that a contract is void or even voidable (see, Ellis v Keeler, 126 App Div 343).

While the $200 per share buyout provision pertains to shares worth considerably more, "the validity of the restriction on transfer does not rest on any abstract notion of *730intrinsic fairness of price. To be invalid, more than mere disparity between option price and current value of the stock must be shown. (See, Palmer v. Chamberlin, supra, 191 F. 2d 532, 541.)” (Allen v Biltmore Tissue Corp., 2 NY2d 534, 543.)

"[W]hen parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms.” (W.W.W. Assocs. v Giancontieri, 77 NY2d 157, 162.) Moreover, "a mistake, as to the legal effect of an agreement, or as to the legal results of an act, cannot avail to defeat a specific performance” (Pomeroy, Specific Performance of Contracts § 233, at 576 [3d ed 1926]).

Also to be noted is that the 1981 agreement provided for its termination by the sale of the property or by the voluntary or involuntary dissolution of the corporation. Priddy and McGuire owned fifty percent of the shares in Ched and had the option of selling the property or dissolving the corporation. In fact, both options were considered by the decedents. In 1987, a broker had a potential buyer for the property. At a subsequent shareholders’ meeting held at McGuire’s home, where both McGuire and Priddy’s interests were represented by counsel and family members, Priddy’s representatives agreed to have an appraisal made of the property before a sale was seriously considered. However, an appraisal was never obtained. Priddy’s attorney thereafter wrote to McGuire’s attorneys suggesting the dissolution of Ched but the parties never followed through. Despite representation by counsel, neither Priddy nor McGuire opted to sell the property or dissolve the corporation during the seven years following their execution of the 1981 agreement, of which their counsel were aware.

In sum, the record fails to support the absence of meaningful choice on the decedents’ part in executing the 1981 agreement. Accordingly, the agreement was not unconscionable (Gillman v Chase Manhattan Bank, supra).

Nor is there support in the record for the conclusion that there was no meeting of the minds with respect to the term "book value.” The dissent maintains that while the plaintiffs understood the meaning of the term when they signed the 1981 agreement, Priddy and McGuire did not, as demonstrated by "surrounding circumstances.” However, these circumstances demonstrate that Priddy and McGuire had signed a 1971 agreement containing the identical buyout provision after rejecting a fair market value approach contained in an earlier agreement. The return to the use of "book value”, an unambiguous term (see, People ex rel. Knickerbocker Fire Ins. *731Co. v Coleman, 107 NY 541; CBM Equip. Corp. v Markwardt, 77 AD2d 815; Claire v Wigdor, 24 AD2d 992, appeal dismissed 18 NY2d 687), from fair market value, as well as the use of this term in previous agreements, evinces a meeting of the minds as to this term of the agreement.

The defendants further maintain that the plaintiffs, as attorneys and fellow shareholders in a closely held corporation, owed a fiduciary duty to the decedents and that they breached this duty by failing to discuss the efficacy of the buyout provision with them. As the Surrogate found, the proof supports the plaintiffs’ position that they did not act as attorneys for the decedents in any Ched transaction (see, Stout v Smith, 98 NY 25; Colton v Oshrin, 246 App Div 287).

While it is true that in a close corporation, shareholders must deal in good faith in the conduct of the .affairs of the corporation (Matter of Ronan Paint Corp., 98 AD2d 413), we are unaware of any dictate requiring one shareholder to explain a provision of a shareholders’ agreement to another, particularly when the latter signed previous agreements containing the identical provision in question and the former did not. As of 1981, there had been virtually no contact between the plaintiffs and McGuire and they had never met Priddy. More importantly, as the Surrogate noted, the corporation did not engage in the type of business where there was a close working relationship among shareholders. No fiduciary duty is created by a shareholders’ agreement containing a mandatory buyout provision (see, Gallagher v Lambert, 143 AD2d 313, affd 74 NY2d 562; Bevilacque v Ford Motor Co., 125 AD2d 516).

The fact that the plaintiffs are attorneys and the decedents were not, does not of itself lead to the conclusion that any advantage was obtained by undue influence (Stout v Smith, supra). It is not apparent from the positions they held that the plaintiffs possessed the power to induce the decedents to act against their own interest or that any control was exercised by them (supra). Both Priddy and McGuire "were possessed of ordinary intelligence, could read and write, and had an opportunity to examine, or to have examined,” the agreement (supra, at 31).

Both had been represented by counsel. Those counsel were aware of the 1981 agreement and had reviewed it. Those counsel had actively advised their clients. Those counsel explored the possibility of dissolution proceedings for Ched. Those counsel considered a potential sale of the Ched real estate when a substantial offer was made by a broker repre*732senting a prospective purchaser. Those counsel were aware that Allen Rosiny was about to, and then had put up $40,000 of his own money to secure refinancing of a Ched mortgage which had come due, with no contribution by Priddy or McGuire. In these circumstances, the dissent’s observations about fiduciary obligations are simply inapposite.

The dissent further finds that the buyout provision was abrogated by the conduct of the shareholders over the years and cites to the plaintiffs and their mother’s succession to their shares without complying with the buyout provision. Contrary to the conclusion reached by the dissent, there was no violation of previous shareholders’ agreements when the plaintiffs and their mother before them came into possession of their shares. The shareholders’ agreements specifically provided that shareholders could modify the agreements by executing a superseding agreement. Every transfer of Ched stock was effected by formal compliance with the superseding agreement provision of the shareholders’ agreements.

To establish abandonment of a contract by conduct, it must be shown that the conduct is mutual, positive, unequivocal, and inconsistent with the intent to be bound (Benson v RMJ Sec. Corp., 683 F Supp 359). The party who asserts abandonment has the burden of establishing it since the termination of a contract is not presumed (supra). The defendants have failed to establish an intent to abandon the buyout provision of the shareholders’ agreement.

In conclusion, the post-mortem buyout provision of the 1981 agreement is enforceable and the plaintiffs are entitled to specific performance of its terms.

We have considered the parties’ remaining contentions and find them to be without merit. Concur—Sullivan, J. P., Milonas and Rosenberger, JJ.