Civil Contempt Granted For Use of Company Funds to Pay Attorney Fees in a Dissolution Proceeding

On February 5, 2015, Justice Kitzes of the Queens County Commercial Division issued a ruling in Nissim Kassab v. Avraham Kassab et al. granting a motion for civil contempt.

Kassab, a hybrid special proceeding and action, concerns an LLC ("Mall") and a corporation ("Corner") which own adjoining properties and are both owned 25% by Nissim and 75% by his brother Avraham. Nissim sought judicial dissolution of both Mall and Corner, as well as other relief related to the two entities.

As is common in judicial dissolution cases, the court had entered a TRO prohibiting Avraham and his agents from "transferring, removing, hypothecating, secreting or in any way disposing of any and all income and property of [Mall and Corner] except in the ordinary course of business." During the course of limited discovery pursuant to the TRO and the Business Corporation Law, it was revealed that Corner had paid $36,185.31 to Avraham's attorneys after the TRO went into effect, and Nissim moved to have Avraham held in contempt. Avraham argued that he had allocated the fees incurred in the action between Corner, Mall, and himself, that he paid $80,799.60 and Corner paid $45,985.31, that he had personally loaned the money to Corner to pay the fees, and that the payments were made in the ordinary course of business. Justice Kitzes rejected these arguments, stating that the mere fact that Corner and Mall were named as parties was not sufficient reason for them to be incurring attorney's fees:

Contrary to respondent's assertions, it is well established that attorney fees incurred by a shareholder in defending a dissolution proceeding are not payable out of corporate funds. Thus, in the usual dissolution proceeding, where the corporation appears as a nominal party and the proceeding amounts to a dispute between the shareholders, corporate funds may not be used in payment of counsel fees for the individual shareholder. Here, Corner is a nominal party, as the claims alleged against Corner are solely for corporate dissolution and the appointment of a receiver.

(Internal citations omitted.)

Accordingly, any attorney fees paid by Corner—even assuming they were paid out of loans made by Avraham for that specific purpose, of which the judge noted no evidence was presented—were not made in the ordinary course of business. As a sanction, Avraham was ordered to pay the statutory fine of $250, Avraham and his attorneys were ordered to pay back all funds belonging to Corner, and Nissim was awarded his own reasonable attorney’s fees and costs in making the motion. In addition, Avraham was directed to produce and to continue to produce “all documents pertaining to the financial transactions of Corner” on a monthly basis until the dissolution proceeding is terminated.

This opinion illustrates the rule that corporate funds may not be used to pay a shareholder's legal fees in dissolution proceedings.

NOTE: Schlam Stone & Dolan LLP represents the petitioner in this action.