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Castriota v. Castriota

Decided: December 1, 1993.

LINA CASTRIOTA, PLAINTIFF-APPELLANT,
v.
LUIGI CASTRIOTA, DEFENDANT-RESPONDENT



On appeal from Superior Court of New Jersey, Chancery Division - Family Part, Morris County.

Petrella, Baime and Conley. The opinion of the court was delivered by Baime, J.A.D.

Baime

This is an appeal from an order denying plaintiff's motion to compel defendant to turn over certain stock certificates for the purpose of an execution sale. At issue is whether a judgment creditor may execute upon the judgment debtor's shares of stock in a closely held corporation where such securities are subject to an absolute prohibition against their alienation. We hold that the unqualified restraint on the transfer of the securities is unreasonable and contravenes public policy. To protect the rights of the surviving shareholder, we afford the corporation a reasonable opportunity to acquire the restricted securities at fair market value. Whether or not this option is exercised, the proceeds of any sale are subject to whatever priorities exist among the creditors of the judgment debtor.

I.

The salient facts are not in dispute. Plaintiff and defendant were divorced in 1988. The judgment incorporated a property settlement agreement which required defendant to pay $200,000 in scheduled installments for the purpose of equitable distribution. Defendant retained exclusive ownership of his shares of stock in the Italian Chalet, Inc. and the Il Villagio, Inc., two closely held corporations in the business of operating two restaurants.

In 1976, defendant and his business partner, Frank Reda, pledged the shares of the Italian Chalet, Inc. as collateral in an unrelated business transaction involving the purchase of a restaurant. Under the agreement, the pledged stock could not be sold, hypothecated or otherwise transferred without the consent of the seller. The record does not disclose whether the purchase price was ultimately paid and whether the securities remain encumbered by the terms of the 1976 agreement. For reasons which will be described later in our opinion, we need not presently concern ourselves with the impact of this agreement and the alienation restriction on the securities. Suffice it to say at this point that defendant does not rely upon the escrow agreement in this appeal and, in any event, whatever Disposition is to be made of the securities must protect the rights of prior creditors.

Instead, our attention is focused upon a shareholders agreement entered into between defendant and Reda in 1989. The articulated objective of this agreement was to insure "continuity of management" in the event of the death or disability of one of the shareholders and to preserve and protect the "intimate[ ]" working relationship they had forged over the years. The agreement provided for an insurance funded "buyout" in the event of the death of either of the shareholders. In addition, the agreement purported to prohibit all lifetime transfers of the stock in the Italian Chalet, Inc. and the Il Villagio, Inc. Because of the importance of this paragraph to the issue presented, we quote it verbatim:

The parties acknowledge and agree that each are intimately involved in the conduct of the business and affairs of the entities described in paragraph 1 of this Agreement. Specifically they acknowledge that they do not want to upset the workings of the entities described in paragraph 1 and therefore prohibit the issuance of stock to their children, spouses, of [sic] any other third party. Therefore, in the event of a divorce, levy, bankruptcy or insolvency, their interest in the entities described in paragraph 1 shall be evaluated by Harvey Shoner of Baker & Shoner, Boonton, New Jersey. The valuation of the stock of the insolvent partner shall be binding on him and his creditors. The valuation shall be reduced to a Note given by the corporation to the creditor of the insolvent partner. The note shall be subordinated to all secured obligations of the entities described in paragraph 1, trade payables and shareholders loans. The Note shall be without

interest and shall be due and payable if, as and when the remaining partner shall sell his interest in the entities described in paragraph 1.

Sometime thereafter, defendant defaulted in making payments under the equitable distribution provisions of the property settlement agreement. On August 28, 1989, plaintiff obtained a judgment against defendant in the amount of $184,800. When plaintiff commenced proceedings to collect on the judgment, a settlement between the parties was reached. In return for a payment of $40,000, plaintiff agreed to refrain from taking further steps against defendant for a period of six months.

Following the six month period, plaintiff resumed her efforts to obtain payment of the balance due. After receiving no response from the defendant, plaintiff obtained a writ of execution commanding the Morris County Sheriff to levy upon his personal property. When the sheriff levied upon defendant's interest in his stock in the Italian Chalet, Inc. and the Il Villagio, Inc., plaintiff filed a motion to compel a "turnover" of the named stock certificates. In his opposing papers, defendant argued that it would be inequitable to require him to divest himself of the principal asset that had been distributed to him pursuant to the property settlement agreement. He also asserted that his shares were encumbered by the 1976 escrow agreement and the subsequent restrictions on alienation of the stock imposed under the 1989 shareholders agreement. Although the matter was extensively argued, the Family Part Judge reserved decision and subsequently entered an order denying plaintiff's motion without any articulation of his reasons, contrary to the requirements ...


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