Litigation between co-owners of closely-held businesses frequently devolves into a "he-said-she-said" contest in which each side testifies about oral statements made by the other--which the alleged speaker invariably denies--that either evidence or refute intent to impair shareholder rights and other misdeeds. Such testimony, if credited by the court, can shed important light on actions that superficially may accord with proper business activities and motives but, in reality, are designed to gain improper advantage in a battle for control and financial gain. Naturally the recorded word has far greater reliability and evidentiary power than the unrecorded one, but rare is the case in which clients have the forethought and opportunity to capture their business partner's inculpatory words on tape. Feinberg v. Silverberg, 2011 NY Slip Op 32299(U) (Sup Ct Nassau County Aug. 18, 2011), decided last month by Nassau County Commercial Division Justice Ira B. Warshawsky, is the rare exception in which a business owner's words captured on tape played a decisive role in undermining his credibility and in supporting his opponent's request for judicial relief. Feinberg involves a successful Long Island-based company founded in 1993 called L&E International Ltd. co-owned 50/50 by plaintiff Samuel Feinberg and defendant Errol Silverberg. According to its website, L&E is "a leading global supplier of hardline & softline print packaging and packaging related materials to the footwear, athletic and retail consumer product industries." Justice Warshawsky's decision notes that L&E's gross annual revenues have exceeded $100 million.
In March 2011, Feinberg filed a lawsuit against his co-owner, Silverberg, accusing him of scheming with several other L&E executives to oust Feinberg and gain complete control of L&E. Silverberg claimed that the scheme included secret meetings; excluding Feinberg from his role as head of the sales department and undermining his business relationships with suppliers; opening a secret overseas bank account to siphon funds from L&E; cutting off his monthly compensation and unilaterally announcing that no dividends or distributions would be paid despite the requirement that such decisions be made by the unanimous Board of Directors; and assisting L&E's general counsel to form a shell corporation which is being paid by L&E.
Simultaneously with filing his lawsuit Feinberg sought and obtained a temporary restraining order (TRO) enjoining Silverberg, among other things, from interfering with Feinberg's duties and rights as shareholder and President, Treasurer and Director of L&E and from depriving Feinberg of his regular compensation.
Silverberg subsequently opposed Feinberg's request for a preliminary injunction, submitting an affidavit in which he asserted business justification for the withholding of dividends and distributions and, as described in the court's decision, expressing "incredibility and surprise toward Feinberg's claims."
But it appears that Feinberg had a different kind of surprise in store for Silverberg. Somehow--the decision gives no details--Feinberg secretly taped conversations among Silverberg and other executives sometime after the court issued the TRO. Feinberg then sprang the taped conversations on Silverberg in Feinberg's reply affidavit. What he caught on tape was devastating to Silverberg's position.
As Justice Warshawsky puts it, "particularly damning to Silverberg's credibility" is a conversation in which Silverberg spoke about "his plan to oust [Feinberg] by forcing a breach on L&E's contracts and then offering L&E's clients identical contracts by a new company formed by Silverberg and his associates." The decision quotes the following snippet from the taped conversation, in which Silverberg says:
So if we shut the lights on this sucker, at the same time we march into Adidas and say, hey, this is what's happening here . . . Forget about the name of the company . . .
Justice Warshawsky also cites another blatant passage from the same conversation, in which L&E's Chief Financial Officer states:
You know, two-man board, two owners, who needs all that crap?
Based on the taped conversations, and on the shareholders' agreement and by-laws confirming Feinberg's management role and right of access to company information, Justice Warshawsky grants Feinberg's motion for preliminary injunction finding that he is likely to succeed on the merits of his claim and that injunctive relief is necessary to preserve Feinberg's management rights pending the litigation. On the latter point, Justice Warshawsky cites case precedent holding that "money damages for violations of a shareholders' agreement or corporate by-laws are insufficient and the element of irreparable injury is established." When the violation includes withholding of compensation to a shareholder, he further explains, although the withheld amounts are compensable damages it also causes "non-compensable injury to the plaintiff's rights under the Shareholders' Agreement or Corporate By-laws, because the plaintiff has a right to participate in decisions regarding compensation and any distributions." Justice Warshawsky then concludes:
In this case, it is patently clear that the withholding of salary or dividend payments to Feinberg is part of Silverberg's plan to force [Feinberg] out of the company and usurp the balance of power that is reflected in the Shareholders' Agreement. Indeed, the telephone conversation which was transcribed reveals an apparent effort to deprive [Feinberg] even of services provided by his company to employees, such as use of company cars, in order to further Silverberg's efforts to oust Feinberg.
A word of caution before you run out and buy miniature recording devices to plant in the office. State laws vary on the legality of non-consensual audio recordings, especially telephone conversations, so be sure to check local law first. Also, extreme caution must be taken to avoid the surreptitious recording of confidential conversations between one's business partner and his or her lawyer.
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