On appeal from Superior Court of New Jersey, Chancery Division, General Equity, Union County.
J.h. Coleman, Shebell and Conley.*fn1The opinion of the court was delivered by Coleman, J.h., P.J.A.D.
This is an appeal by a minority shareholder in a closely held corporation from a judgment denying her requests to buy out the majority, to have the defendants purchase her minority interest, or in the alternative, for involuntary dissolution of the corporation pursuant to N.J.S.A. 14A:12-7(1)(c) and 7(8). We reverse and remand.
In 1973, plaintiff's father Irving Resnick formed defendant Arbee Associates, Inc., a New Jersey corporation, to operate an
office furniture business. One hundred shares of the corporate stock were distributed: 35 shares to plaintiff Judith R. Brenner, Resnick's daughter, 36 shares to plaintiff's sister Ruth Berkowitz, 19 shares to Ruth's husband Howard Berkowitz (Berkowitz), and 10 shares to Resnick. The minutes of the first shareholders meeting, held on June 1, 1973, reveal that all shareholders were appointed as directors and Berkowitz was named president, and his consent was required for any action taken by the board. Berkowitz was given complete managerial and supervisory responsibility for the company. A quorum consisted of Berkowitz plus any other one member of the board. As might be expected, shareholder dealings were informal. Apparently, no formal meeting of the board or shareholders was held between 1981 and 1984.
Resnick became ill in October 1984 and died on December 10, 1984. Upon his death, his 10 shares were distributed evenly between his two daughters, thereby vesting 60% interest in Howard and Ruth Berkowitz. After the death of Resnick, the relationship between plaintiff's family and the Berkowitz family declined. Plaintiff's son and future daughter-in-law who had been employed in the business, were terminated in September 1987. Soon thereafter, plaintiff instituted the present litigation.
On November 14, 1987, plaintiff filed a verified complaint alleging that defendants Howard and Ruth Berkowitz as directors and officers of Arbee, "have mismanaged Arbee, abused their authority as officers and directors of Arbee and acted illegally, oppressively and unfairly toward plaintiff" as a minority shareholder of Arbee in violation of N.J.S.A. 14A:12-7(1)(c). She sought "appointment of a custodian and the eventual dissolution of Arbee." The specific misconduct alleged in the complaint consists of: (1) the unauthorized $560,000 salary of Berkowitz, (2) the denial of plaintiff's request to have her attorney present at a board of directors meeting scheduled for November 3, 1987, (3) precluding plaintiff from "participating in the decision making process and operation of Arbee," and (4)
the failure of defendants to "provide plaintiff with any other effective notice of the affairs of Arbee."
Plaintiff was permitted on September 15, 1989, to file an amended complaint. In it she repeated the allegations contained in the complaint and the following additional allegations were made: that Berkowitz (1) committed fraud against Arbee and one of its "franchisors," Steelcase, (2) illegally misappropriated proceeds from cash sales to employees, (3) illegally failed to pay sales taxes to the State of New Jersey on cash sales to employees, (4) failed to pay proper taxes on temporary workers, and (5) misrepresented some of Arbee's nonunion employees as union workers. Plaintiff sought appointment of a custodian, an order permitting plaintiff to purchase the stock of Howard Berkowitz and Ruth Berkowitz, an order permitting the corporation or Howard and Ruth Berkowitz to purchase her stock, dissolution of the corporation and payment of plaintiff's attorney's fees and expert fees. Shortly after plaintiff was permitted to file the amended complaint, she was removed from the board in December 1989.
A bench trial was conducted on diverse dates between August 6, 1990 and January 8, 1991. The Judge issued a formal opinion on May 20, 1991, in which he found that plaintiff established there were five instances of mismanagement, oppression, fraud and/or illegality committed by defendants, particularly Howard Berkowitz. The Judge concluded that even though defendants had engaged in fraudulent, illegal and oppressive conduct, plaintiff was not entitled to any relief under N.J.S.A. 14A:12-7(1)(c) because the statute was meant to remedy only "ongoing oppression, fraud or illegality" and all of such acts had ceased before the court issued its opinion. Nevertheless, the court found that plaintiff's removal from the board was oppressive and constituted unfair treatment because both the plaintiff and her father expected her to remain on the board. The Judge ordered her reinstated as a board member. Finally, the Judge enjoined Berkowitz from engaging in further misconduct in violation of his fiduciary duty.
Based on the evidence, the Judge found that the following five instances of misconduct occurred. The first dealt with improper use of pricing discounts. Approximately 70-85% of Arbee's business came from selling Steelcase office products as a franchisee. Steelcase had certain national accounts, among them was Prudential, which were entitled to receive preferential pricing. Such special pricing allows Arbee to remain competitive in the bidding process. Prudential received an 18% discount; by contrast, the United Nations was the beneficiary of no such preferential pricing. Up to 1985, Arbee had not been very successful in obtaining business from the United Nations. Finally, on May 17, 1985, Arbee received a purchase order for $206,000 in equipment from the United Nations. The purchase order requested delivery of the merchandise in three stages. On May 24, 1985, Arbee sent a purchase order to Steelcase for the first part of the order. The misconduct occurred when Arbee identified the customer as Prudential when placing the order with Steelcase and requested the 18% discount. A similar pattern was repeated when processing the second and third stages of the purchase orders of June 28 and August 14, 1985.
Arbee received the preferential pricing, but the United Nation's paid for its order at the un-discounted price. Berkowitz said he detected the mistake by September 1985, but the matter went unrectified until he received a request from plaintiff's attorney after suit was instituted in November 1987 regarding the United Nations' documents. At that point, Berkowitz agreed to return the discount to Steelcase in the form of a debit to Arbee's account.
The second instance of misconduct involved Arbee's failure to pay sales taxes on employee sales and Berkowitz's use of the unreported cash received from those sales. Employees were permitted to buy furniture at wholesale prices free of sales
taxes. Certain non-employees were also afforded the same perk. These transactions were never recorded on Arbee's books as income; instead, they were treated as a cost of sales. While Resnick was alive and active in the business, he received the cash from the employees. In his absence and after he became ill, Berkowitz received the money. Berkowitz would place the money, the amounts of which he never tabulated, in a locked file to which only he and Resnick had keys. After Resnick's death Berkowitz was in full control of the unreported cash. He used the money for what he termed "business expenses." He would pay cash for certain items and then reimburse himself, which was not consistent with the reporting procedures he required of his employees.
In May 1985, five months after Resnick's death, the company controller, Marguerita McCabe, became uncomfortable with the practice because she could not track the sales. (The failure to pay sales taxes or to report the sales as income was proscribed by N.J.S.A. 54:52-8 to N.J.S.A. 54:52-14, and are designated as crimes.) A new account was set up to monitor employee sales. From May 1985 until May 1986, employee sales were recorded in what was called an "E" account. However, no change was made in the practice of giving the cash to Berkowitz to use as he chose, and no sales tax was paid. In the spring of 1986, the "E" account officially ended; employee purchases were theoretically to be placed into the "A" account, with sales tax generally being paid. Although the changeover was made to allow payment of sales taxes, the practice of not charging sales tax on employee purchases persisted until well into 1987.
In January 1990, well after institution of this law suit, Berkowitz sent the State a check for approximately $2,300. This amount was to cover sales tax on employee sales for the period from the second quarter of 1985 through the fourth quarter of 1987. As a result of the litigation, Berkowitz calculated how much money was received by the company during the time the "E" account was active. For that 13 month period, from May 1985 through May 1986, $65,975.15 was
received for employee purchases. After accounting for his personal purchases, for which he ultimately paid, the amount was about $46,000. About $19,000 of this was paid to Arbee by Berkowitz which was apparently reported as income, leaving a cash amount of approximately $27,000 that required a reckoning. Berkowitz reimbursed the company $7,550. He estimated that the balance of $11,450 went for business expenses, his ski house in Vermont and his country club membership which he used for entertainment. Plaintiff contended that Berkowitz stole much more ...