Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Brenner v. Berkowitz

Decided: December 29, 1993.

JUDITH R. BRENNER, PLAINTIFF-RESPONDENT,
v.
HOWARD BERKOWITZ, RUTH BERKOWITZ, AND ARBEE ASSOCIATES, INC., A NEW JERSEY CORPORATION, DEFENDANTS-APPELLANTS



On certification from the Superior Court, Appellate Division, whose opinion is reported at 261 N.J. Super. 63 (1992).

For Reversal and Reinstatement -- Chief Justice Wilentz, and Justices Clifford, Handler, Pollock, O'Hern, Garibaldi and Stein. Opposed -- None. The opinion of the Court was delivered by Garibaldi, J.

Garibaldi

This appeal concerns the interpretation of two provisions of N.J.S.A. 14A:12-7. Specifically, we address the rights and remedies of a minority shareholder in a close corporation who claims fraud, illegality, mismanagement, and oppression by the majority shareholders in violation of N.J.S.A. 14A:12-7(1)(c), and the requirements for a court-ordered buy-out of a shareholder's interest in a corporation under N.J.S.A. 14A:12-7(8).

I.

In 1973, Irving Resnick invested $144,000 to form Arbee Associates, Inc., (Arbee), a company that sells wholesale furniture to commercial offices. Although Resnick provided the entire startup capital for Arbee, he retained only ten shares of the company for himself. Resnick distributed the remaining ninety shares as follows: thirty-six shares to his daughter defendant Ruth Berkowitz; thirty-five shares to his daughter plaintiff Judith Brenner; and nineteen shares to Ruth's husband, defendant Howard Berkowitz. (Reference hereafter to Berkowitz is to Howard.)

Resnick entrusted Berkowitz, who had worked for the preceding ten years in Resnick's previous furniture company, with ultimate authority to manage Arbee. The shareholders, at their first meeting, unanimously named Berkowitz president and resolved that "the complete management and supervision of the corporation be . . . vested in its president, Howard V. Berkowitz." Further, the shareholders, who had each also been named directors, unanimously resolved that any action taken by the shareholders or directors would require Berkowitz's consent. Berkowitz managed the company between 1981 and 1984 without the benefit of any formal shareholder or board meetings.

Resnick worked with Berkowitz in managing the company until Resnick's death in 1984, whereupon his ten shares were divided equally between his two daughters. Thereafter, the 100 shares of the company were divided as follows: forty shares to plaintiff, Judith Brenner, forty-one shares to defendant Ruth Berkowitz,

and nineteen shares to defendant Howard Berkowitz. That share allocation vested a sixty-percent interest in the Berkowitzes.

After Resnick's death, relations between the Brenner family and the Berkowitz family soured. In September 1987, Brenner's future daughter-in-law, Nancy McGrath left the company, and Brenner's son was fired. Plaintiff believed that these incidents demonstrated Berkowitz's attempt to squeeze her family out of active involvement in the company.

Shortly thereafter, on November 14, 1987, Brenner instituted this action against the corporation and the Berkowitzes. The complaint alleged that Ruth and Howard Berkowitz as directors and officers of Arbee had mismanaged the company, abused their authority, and acted illegally, oppressively, and unfairly toward Brenner, a minority shareholder, in violation of N.J.S.A. 14A:12-7(1)(c) by (a) failing to have the Board approve Berkowitz's annual salary; (b) denying Brenner's request to have her counsel present at the November 3, 1987, Board of Directors meeting; (c) precluding Brenner from "participating in the decision-making process and operation of Arbee"; and (d) failing "to provide Brenner with any other effective notice of the affairs of Arbee."

In August 1989, the Chancery Division permitted Brenner to amend her original complaint. In her amended claim, plaintiff repeated the allegations contained in her original complaint and asserted additional acts of misconduct that had allegedly jeopardized her interest in Arbee: (a) the misapplication of a supplier's discount to acquire an account; (b) the misrepresentation of union identity for some of Arbee's non-union employees; (c) the failure to pay sales tax on cash sales to employees; (d) the failure to file W-2 and 1099 forms for temporary employees who earn more than $600 in one year; and (e) the misappropriation of cash funds by Berkowitz. Plaintiff hired an accounting firm to inspect Arbee's corporate books, records, ledgers, invoices, and income statements that uncovered most of the acts of misconduct alleged in the amended complaint. Brenner alleged also that the termination of her son and daughter-in-law had been unfair.

Plaintiff sought the following relief: appointment of a custodian, an order for the sale of the Berkowitzes' stock to Brenner, an order for the purchase of plaintiff's stock by Arbee or the Berkowitzes, dissolution of Arbee, reimbursement for the fees of Brenner's attorney and expert, and such further relief as the court deemed just.

II.

Evidence adduced at the bench trial established that at the time Arbee was formed, Brenner did not intend to participate in Arbee's management or even to work for Arbee. Brenner's role was solely director and investor.

Brenner received dividends of $17,500 per year from the company until 1985. In that year, Brenner requested an annual salary of $2,000 to $3,000 to establish an Individual Retirement Account. In an arrangement acceptable to Brenner, Arbee began paying Brenner a salary of $26,000 per year in lieu of dividends. Additionally, Brenner received income distributions from real estate holdings connected to Arbee.

Under Berkowitz's management, the company has flourished. Sales have grown from $750,000 in 1973 to $46 million in 1989. A court-appointed expert placed Arbee's value at approximately $4.5 million as of December 31, 1989. In addition, the company has expanded its markets, going beyond New Jersey to open showrooms and warehouses in Washington, D.C. and Maryland. The company has grown from twenty-two employees in 1981 to 155 employees in 1989.

The Chancery Division determined that oppression was required to trigger N.J.S.A. 14A:12-7(1)(c). The court held that to demonstrate oppression, the minority shareholder must show that her reasonable expectations had been frustrated, that the majority shareholders had breached their fiduciary duty to her, or that the majority's misconduct had led to a change in the minority's position within the corporate structure. With regard to each of Brenner's allegations, the Chancery Division determined that

Brenner had failed to demonstrate oppression sufficient to trigger the statute.

Employment

Brenner testified that she believed that the shareholders intended Arbee to be a "family enterprise." Thus, she sought relief for the departure of her future daughter-in-law, Nancy McGrath, and the firing of her son Andrew from Arbee.

In 1986, McGrath was Arbee's second leading salesperson and by 1987 she was the top salesperson. Nonetheless, McGrath testified that Berkowitz had forced her out of the company to make room in the sales force for his daughter, who was less capable than McGrath. McGrath secured a position in another company after Berkowitz reassigned a particularly lucrative account from McGrath to his own daughter.

Berkowitz fired Brenner's son because Andrew had refused to pay $100 in cash to a company employee for helping him do some work at his home. Apparently, the Brenners and the Berkowitzes had used employees free of charge many times in the past. Brenner's son had refused to pay the cash and instead wrote a check payable to Arbee for $225, the estimated value of the labor and the truck. Berkowitz tore up the check and insisted on the cash payment. When Brenner's son continued to refuse, Berkowitz fired him.

Although Brenner testified that it was her understanding that the company had been formed for "any member of the family, for me or for my children, to take part in, if they so desired . . .," the court found Brenner's family had no reasonable expectation of unconditional employment by the corporation. To trigger the statute, Brenner was required to show that the conditions leading to the departure of McGrath from the company and the firing of Andrew had been "targeted" to oppress her. Because plaintiff had not shown a malicious intent, the court found that the business-judgment rule barred it from second-guessing Arbee's management decisions.

Steelcase Dealership

Brenner claimed that a misapplication of the Steelcase Dealership discount jeopardized her investment in Arbee.

Arbee's distribution of Steelcase products constitutes approximately seventy- to eighty-five-percent of its total sales. The Steelcase account is therefore one of Arbee's most valuable assets. Steelcase granted Arbee a discount-pricing arrangement for preferred customers, one of which was Prudential Insurance Company.

In May 1985, defendants applied Prudential's eighteen-percent discount to an order placed with Steelcase on behalf of the United Nations (U.N.), which was not a preferred customer. Arbee had successfully obtained the U.N. order because it included the discount. Berkowitz claimed that the U.N. order was the result of a clerical error. However, not until this suit was instituted did Arbee repay Steelcase the approximately $18,000 discount that had been applied to the U.N. order. Nevertheless, the court determined that Steelcase's subsequent increase in Arbee's franchise to include the territories of Washington, D.C. and Baltimore tended to undermine plaintiff's claim that the improper discount had jeopardized Arbee's relationship with Steelcase.

Employees' Cash Purchases

The Chancery Division also addressed Arbee's practice of permitting its employees to purchase furniture at wholesale prices, for cash, free of sales taxes. Those sales were never recorded on the corporate books. Instead, Resnick and Berkowitz spent the funds at their discretion. After Resnick's death, Berkowitz continued the practice until 1986.

Berkowitz testified that he had used the money for company expenses. Sales records (available only for 1985 and 1986) indicated that $27,000 had been collected in cash sales to employees during those two years. In April 1988, five months after Brenner

had filed suit, Berkowitz accounted for $19,450 of the $27,000 and paid the balance to Arbee.

Additionally, Berkowitz paid the back unpaid sales tax on the employee cash sales. In 1990, Arbee filed an amended sales-tax return together with a check for approximately $2,300 to pay sales tax on employee sales for a portion of the taxable years 1985 to 1987.

Defendants concede that that corporate conduct was improper. The Chancery Division enjoined that practice. However, the court found that the use of unreported cash funds could not have frustrated plaintiff's reasonable expectations because the practice had been started by her father, Resnick. Indeed, denying Brenner's motion for reconsideration, the court noted that for Brenner to challenge a "policy that was established by [her] father" was "disingenuous."

Green Checks

Plaintiff alleged that the failure to pay tax on temporary employees also jeopardized her interest in the company. From 1983 to 1987, Arbee issued "green checks" (i.e. checks from the general disbursement account) for temporary employees. Those checks totaled over $223,000. Berkowitz admitted that Arbee had failed to issue W-2 or 1099 forms to some employees who had earned more than $600 per year during that time period. Berkowitz testified that those employees had been independent contractors and thus that Arbee did not have to file W-2 or 1099 forms. Nonetheless, the practice of failing to withhold income taxes or to report those earnings ceased early in 1987, before Brenner filed suit.

The Chancery Division held that the statute aims to rectify " ongoing oppression, fraud or illegality." Because all employees had been placed on the payroll at the time of suit, Brenner's sole relief was an injunction against future misconduct.

Non-Union Workers

Brenner alleges that her investment was also placed at risk because Arbee was improperly assigning non-union workers to union jobs.

Berkowitz admitted that in 1985 he sent non-union Arbee employees to job-sites, had them assume the names of union members, and had them work under those assumed names. That practice ended in 1986, and Berkowitz contends that the unions suffered no financial losses.

Because the trial court required that the oppression, fraud, or illegality be continuing, the Chancery Division only enjoined Arbee from returning to the previous practice.

Berkowitz's Compensation

Brenner also asserted that Berkowitz was receiving a salary in excess of that authorized by his employment agreement. Berkowitz entered into an employment agreement with Arbee in November of 1976 that set his annual salary at $125,000 unless Arbee's board later determined that he should be paid a different amount. Berkowitz received two board-approved salary increases, with the result that in June 1981 he was earning $350,000 per year. Starting in 1983, however, he began to take salaries in excess of the approved sum. By 1989, Berkowitz reported a salary of $474,206.

Although Berkowitz testified that his compensation was clearly reflected in Arbee's financial statements and that the directors of the corporation knew of his compensation through informal Discussions, plaintiff had received no official notice of the salary increases. Plaintiff produced evidence that tended to show that Berkowitz's compensation was excessive in comparison to Arbee's pre-tax profits.

The trial court rejected Brenner's allegation that payment of Berkowitz's annual salary was oppressive to her or that her expectations had been frustrated by Berkowitz's salary. It found

that Berkowitz's salary was reasonable in light of the company's impressive growth. The court hinted, however, that if Berkowitz's salary continued to grow "at the expense of the corporation and its shareholders," and without corresponding increases of dividends or other benefits to the minority shareholder, Berkowitz's salary might be grounds for "a future claim of oppression."

Brenner's Removal from the Board

Finally, although the removal of plaintiff from the Board of Directors had frustrated her reasonable expectations in the corporation, the court determined that "appointing a receiver or provisional director" as permitted by the statute "would not be feasible given Arbee's consistent growth." Thus, the court ordered that plaintiff be reinstated as a Director. Although the court found that plaintiff had proven the illegal and fraudulent acts of (1) misapplication of discounts, (2) improper assumption of union identity, (3) failure to collect tax on employee sales, and (4) failure to file W-2's and 1099's on behalf of temporary employees, it nonetheless concluded that prior to trial the corporation had taken corrective action to ensure that those acts of misconduct had ceased. Relying on Balvik v. Sylvester, 411 N.W. 2d 383 (N.D.1987), the court determined that for relief to be granted a continuing course of misconduct must be shown. Thus, the court held that "since the above mentioned bases for oppression have ceased, the court [could not] award statutory relief." The court did, however, enjoin Berkowitz from engaging in future misconduct in violation of his fiduciary duties.

More importantly, the court did not believe that considering Arbee's size, the few isolated acts of mismanagement had substantially affected Brenner or put her investment in the corporation at risk. In denying defendants' ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.