PRESENT: HONORABLE LEONARD B. AUSTIN Justice Motion R/D: Submission Date:

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1 SUPREME COURT - STATE OF NEW YORK IAS TERM PART 23 NASSAU COUNTY INDEX NO PRESENT: HONORABLE LEONARD B. AUSTIN Justice Motion R/D: Submission Date: Motion Sequence No.: O02,003/MOT D X ND SHAPIRO, FLORENCE COUNSEL FOR PLAINTIFFS, RUTH GREENBERG, JOAN Roosevelt, Benowich & Lewis, LLP PETER, THOMAS W. HAYES, ROBERT 1025 Westchester Avenue HUBER and BETTY ANN MARSHALL, White Plains, New York Shareholders in ROCKVILLE RY CLUB, INC. Suing in the ROCKVILLE COUNTRY CLUB, COUNSEL FOR DEFENDANTS (for all Defendants except Gerry Plaintiffs, Marcoux and Rockville Links Corp.) Cullen & Dykman, LLP 100 Quentin Roosevelt Boulevard - against - Garden City, New York II ILLE COUNTRY CLUB, INC., LE LINKS CORPORATION, JOSIAH, ROBERT, ANTHONY MAURO, GOMIELA, JACK (for Rockville Links Corp.) Matthews & Matthews, Esqs. 191 New York Avenue Huntington, New York 11743, STEVEN SMITH, EDWARD OSTRO, NICHOLAS NIEL LENNON, PATRICK, EDWARD ROGER, GERRY UX and PETER DORAN, Defendants.

2 SHAWRO, et al., v. ROCKVILLE COUNTRY CLUB, INC., et al., ORDER The following papers were read on Defendant Rockville Country Club s motion to compel Plaintiff s to post a bond and Plaintiff s cross-motion to stay the action and to compel production of a shareholder list for Rockville Country Club, Inc. Notice of Motion dated November 14, 2002; Affidavit of Walter Josiah sworn to on November 14, 2002; Defendant s Memorandum of Law; Notice of Cross-motion dated December 6, 2002; Affidavit of Joan Peter in Opposition to the Motion sworn to on December 6, 2002; Affirmation of Leonard Benowich, Esq. dated December 6, 2002; Plaintiff Memorandum of Law; Affidavit of Peter J. Mastaslio sworn to on December 31, 2002; Defenant;s Reply Memorandum of Law; Affirmation of Leonard Benowich, Esq. dated January 6, 2003; Stipulation dated March 11 I Co-defendant Rockville County Club, Inc., moves for an order pursuant to Business Corporation Law $j 627 directing the Plaintiffs to post security for the reasonable expenses, including counsel fees, which may be incurred by the movant in defending this action. The Plaintiffs cross-move for an order pursuant to Business Corporation Law 3 624, hteralia,directing Defendant Rockville Country Club, Inc., to deliver to the Plaintiffs counsel, a current, up-to date list of the names and addresses of its shareholders. BACKGROUND Defendant Rockville County Club, Inc ( Rockville CC ) owns approximately 106 acres of land located in both the Town of Hempstead and the Incorporated Village of Rockville Centre. The property is improved with an 18 hole golf course and 2

3 SHAPIRO, ef al., v. ROCKVILLE COUNTRY CLUB, INC., ef a/., clubhouse.(josiah Aff.,r[ 2; Benowich Aff., lj 2; Cmplt.,flq 32-35). Rockville CC leases the property on a year-to-year basis to co-defendant Rockville Links Corporation ( Links ), a not-for-profit corporation, which operates the golf club and related facilities at the premises (Benowich Aff., 7 5; W. Josiah Aff.,q IO [dated Oct. 22, Defs Mot. Exh., C ). In 1999, Rockville CC and Links obtained a $2.6 million line of credit from JP Morgan Chase, repayment of which was secured by a mortgage on the premises (2nd Amended Cmplt.,ly 52-3; Benowich Aff., jj 6). An appraisal conducted prior to the issuance of the line of credit valued the property at approximately $40 million (Benowich Aff., 7, Exh., I ). Defendants relied upon that appraisal to obtain the loan. Since its inception, Rockville has issued 500 shares of stock, of which, at least, 108 shares are owned by Links. Some 272 Rockville CC shares are owned by members of Links and approximately 120 shares are owned by individuals who are not members of Links (W. Josiah Aff.,f[ 14 [dated Oct. 22, Defs Mot. Exh., C ). The Plaintiffs, Raymond Shapiro, Florence Siegel, Ruth Greenberg, Joan Peter, Thomas Huber, and Betty Ann Marshall, who are not members of Links, collectively own seven shares in Rockville (2nd Amended Cmplt.,jTl l-6). In January, 2002, the Plaintiffs commenced the within shareholders derivative action, in which they also seek corporate dissolution of Rockville CC. In their amended pleadings, the Plaintiffs contend that the Defendant directors of Rockville CC breached fiduciary duties, committed corporate waste and engaged in self-dealing by, infer alia, 3

4 SHAPIRO, et al., v. lndex No ROCKVILLE COUNTRY CLUB, INC., ef al., mismanaging Rockville CC s principal asset - its real property - and by interfering with the efforts of Rockville s shareholders to sell their Rockville shares * * * (Cmplt.,Ty 30, 35, 63-91). With respect to the latter contention, the Plaintiffs allege that the Rockville CC directors embarked upon a coordinated plan and program (Cmplt.,T 64), to place outstanding Rockville CC shares in the hands of Links or Links-friendly individuals (Cmplt.,T 64-67, 70). The Plaintiffs contend that in furtherance of this objective, the Defendants encouraged Rockville CC shareholders interested in selling their stock to sell only to Links - or existing Links members - at artificially low prices suggested and/or determined by Links or the Defendants themselves (Cmplt.,r[T 64-67, 85-86). According to the Plaintiffs, there is no public market for Rockville CC s stock since only Links members, prospective Links members or Links itself would have any interest in purchasing the stock (Benowich Aff.,l jl 18-20). Upon the instant notice, Rockville moves for an order compelling the Plaintiffshareholders to post security for its reasonable expenses in the action pursuant to Business Corporation Law In support of its application, Rockville has submitted, inter a//a, the affidavit of its former president, Walter Josiah, who has averred that in the three years preceding the execution of his affidavit some 60 transactions involving the transfer of Rockville CC shares have taken place, of which he possesses personal knowledge of approximately five to ten (Josiah Aff.,q 5). According to Josiah, in none of these five to ten transactions 4

5 SHAPIRO, et al., v. ROCKVILLE COUNTRY CLUB, INC., et al,, did the price [paid] exceed $3, per share (Josiah Aff.,q 5). The Plaintiffs oppose the motion, and conditionally cross-move for an order directing Rockville CC to produce a current list of the names and addresses of its shareholders in the event this Court determines that Plaintiffs shares do not have a fair value of $50,000 or more (L. Benowich Aff., 7 30). The parties motions should be denied. DISCUSSION Business Corporation Law ( BCL ) 627, which was enacted to discourage unfounded derivative actions (Roach v. Franchises International, Inc., 32 A.D. 2d 247, 250 [2nd Dept ; 3 White, New York Corporations, ),provides, in sum, that unless the Plaintiffs in a derivative action hold more than five percent of any class, or unless the shares held possess a fair value of $50, or more, the corporation in whose right the action is commenced may require the Plaintiffs to post security for the expenses which may be expended in defending against the action. Although BCL 627 offers no definition of fair value (cf, In re Dissolution of Penenent Corp., Inc., 96 N.Y. 2d 186, 193 [2001]), in analogous contexts, the Court of Appeals has adopted an expansive view of the term, observing that fair value, being a question of fact, will depend upon the circumstances of each case; there is no single formula for mechanical application. Matter of Seaqroatt Floral Co., Inc., 78 N.Y. 2d 439, 445 (1991). See also, % Fletcher, Cyclopedia of Private Corporations 5

6 SHAPIRO, et al., v. ROCKVILLE COUNTRY CLUB, INC., et al,, Similarly, the Court has considered the concept of fair value in analyzing the appraisal rights of dissenting shareholders pursuant to BCL (h), which utilizes the same definitional phrase. See, BCL 623 (h) (4). See also, Friedman v. Beway Realtv Corp., 87 N.Y. 2d 161 (1995). In attributing meaning to the term fair value, the Court of Appeals in Friedman defined the term as a composite of three significant valuation criteria, including net asset value, investment value and market value. Id. at 167. See also, Miller Bros. Industries, Inc. v. Lazy River Inv. Co., 272 A.D. 2d 166, 167 (lst Dept. 2000); and Matter of Endicott Johnson Corp. v. Bade, 37 N.Y. 2d 585, (1975). Bn sum, the overall objective in calculating fair value is to determine what a willing purchaser in an arm s length transaction would offer for petitioners interest in the company as an operating business. In re Dissolution of Penepent Corp., Inc., supra at 193, quoting from, Matter of Seaqroatt Floral Co., supra at 445. See also, Matter of Pace Photoaraphers, Ltd., 71 N.Y. 2d 737, 748 (1988). Cognizant of the foregoing principles, and considering the statutory purpose for which the section at issue was enacted, the Court. concludes that the movants submissions fall short of demonstrating that the value of the shares possessed by the Plaintiffs is less than the $50,000 threshold. More particularly, while the Plaintiffs hold in the aggregate, only seven of the 500 issued and outstanding Rockville shares, the movants market value evidence with respect to the alleged $3, price, has been credibly rebutted by the Plaintiffs opposing submissions which suggest, infer alia, that: (1) Rockville CC s shares have 6

7 SHAPIRO, et al., v. ROCKVILLE COUNTRY CLUB, INC., et a/., been sold on several occasions for substantially more than the $3, amount; and (2) that certain actions may allegedly have been undertaken by the Defendants impacting upon the price and marketability of the stock, thereby potentially skewing and/or depressing the amounts paid in the limited number of sales transactions relied upon. Moreover, the record is also supportive of the contention that there is, at best, a limited open market for Rockville s stock which undermines the movant s reliance upon the market value methodology as the sole and definitive means of assessing the worth of the shares at issue. It is settled in this respect that [mlarket value * * * is of little weight where the stock is sold over the counter on a narrow spasmodic market or a market subject to abnormal influences one way or another (14A NY Jur.2d Business Rel~tkmships $j 876; 15 Fletcher, Cyclopedia of the Law of Private Corporations ). Under these circumstances, the Court finds that the movants have failed to demonstrate that the Plaintiffs stock possesses a value of less than $50, within the meaning of BCL 627. This is especially true when it is remembered that in 1999 the appraised value of Rockville CC s real property was established at $40,000, Thus, on a dissolution value, each share is arguably worth $80,000. Lastly, the Plaintiffs cross-motion, which conditionally seeks an up-to-date list of Rockville s shareholders, [i]n the event that the Court finds that Plaintiffs shares do not have a fair value of $50,000 or more (Benowich Aff.,fl30)(BCL 624[a], [b]) should 7

8 SHAPIRO, et al., v. ROCKVILLE COUNTRY CLUB, INC., et a/., be denied, in light of the Court s denial of the corporate-movant s application. Accordingly, it is, QRDERED, that Defendants motion to compel the posting of security in defending this action is denied; and it is further, ORDERED, that Plaintiffs cross-motion for discovery of the up-to-date shareholder list is denied as moot. This constitutes the decision and Order of the Court. Dated: Mineola, NY April 29, 2003 Hon. LEONARD B. AUSTIN, J.S.C. 8