In lower Manhattan, at the bottom of Foley Square, deep within the corridors of 60 Centre Street, there is a Part. It is a general I.A.S. Part. But it appears much like a Commercial Division Part.
Presided over for many years by the Hon. Gerald Lebovits, General I.A.S. Part 7 captures much of Manhattan Supreme Court’s inventory of commercial legal disputes that, for one reason or another, do not find their way into the Commercial Division.
Perhaps a commercial case happens to fall below the Manhattan Commercial Division’s current jurisdictional threshold of $500,000. Perhaps it is a coverage dispute involving an insurance product for which the Commercial Division rules do not provide jurisdiction. A leasing dispute. A lending dispute. A foreclosure case. A construction litigation. A condominium dispute. A professional liability claim arising out of an underlying business deal. Perhaps a legacy case that would fall within the Commercial Division’s jurisdictional rules today but did not at the time of the case’s commencement. Justice Lebovits gets all those kinds of cases. And he likes to write. A lot. Over the years several of his decisions have cropped up on the blog.
This week, we feature a pre-answer dismissal decision from Justice Lebovits in a litigation that automatically would have qualified for Commercial Division assignment because it involves a claim for business entity dissolution, but the lawyers, for whatever reason, forgot or chose not to select Commercial Division assignment. Lucky for us because Justice Lebovits issued a very interesting common-law dissolution opinion in Chang v Sollega Inc. (Decision and Order, Index No. 651274/2025 [Sup Ct, NY County Sept. 28, 2026]). To my surprise, the New York Law Reporter did not select the decision for publication, so we’re pleased to feature it on the blog.
Chang poses the following question:
According to her amended complaint, Joanne Chang (“Joanne”) is the widow of George Shnakenberg (“George”), co-founder of Sollega Inc. (“Sollega”), a solar panel manufacturing firm. George died and his shares passed by intestacy Joanne and their infant daughter. The other shareholder with control over Sollega is Elie Rothschild (“Elie” or “Rothschild”).
According to Joanne, Elie repeatedly misrepresented including in IRS filings the amount of equity she and her daughter owned in the business, and distributed paltry annual profits of ten or twenty thousand dollars to Joanne and her daughter while paying himself in excess of one million dollars.
According to Joanne, in the early 2020s, Elie began allocating income to Joanne and her daughter’s Schedule K-1s for which they did not receive corresponding cash distributions from Sollega (dreaded phantom income).
According to Joanne’s pleading, when questioned about the tax liabilities, “Rothschild emailed in response that all retained earnings were being reinvested, suggesting that no distributions would be made, but ‘we could discuss a buyout if that makes sense.’” In a supplemental affirmation, Joanne characterized these interactions as an attempted “squeeze out,” writing:
When I first began asking questions of Rothschild regarding an unexpected tax liability of roughly $30,000.00, I was told I was facing for 2022 arising from my ownership of Sollega shares, Rothschild emailed me on April 14, 2023: “I propose either Sollega or I buy back some of your stock to help cover your tax liability if you’re not able to. Let me know.” Rothschild followed up on April 18, 2023, emailing: “I appreciate your position and it might make more sense to sell your shares if you’re not able to support the tax liability. I assume you could use the money . . .”
Joanne concluded:
Looking back, it seems clear to me now that Rothschild was trying to squeeze me out by withholding distributions despite knowing that I was facing increasing tax liability due to Sollega profit allocations, then offering to buy my shares because I might be struggling to pay my taxes.
Is that a formula for oppression?
Joanne said yes, pleading a Fourth Cause of Action for “Oppression of Minority Shareholders” framing “failure to make shareholder distributions” to cover phantom income tax as among multiple grounds for the Court to both award “damages” and grant “involuntary dissolution of Sollega” (citation modified). Joanne pleaded her “oppression” claim under common law, not Section 1104-a of the Business Corporation Law, because she and her daughter lacked the 20% share ownership required to sue under the statute.
Elie moved for pre-answer dismissal of Joanne’s Fourth Cause of Action. Relying upon a pre-Sputnik case, Gordon v Elliman (306 NY 456 [1954]), Elie wrote that “Plaintiffs’ claim that they were deprived of shareholder distributions fails” to provide grounds for dissolution because “directors are under no obligation to declare dividends, and the decision to do so lies within their business judgment” (citation modified).
Elie concluded, “The Amended Complaint alleges no facts that rise to the level of oppression recognized by New York law,” so “the claim for oppression of minority shareholders must be dismissed.”
Relying upon Matter of Kemp & Beatley (64 NY2d 63 [1984]), Joanne responded that “where, as here, the majority’s conduct substantially defeats the reasonable expectations of minority shareholders, a claim for oppression can be maintained.”
Joanne wrote: “As a co-founder and chief designer of Sollega through his passing in 2014, George had every expectation of receiving distributions to the extent available. While Plaintiffs, as heirs to George’s shares, do not expect an active role in management, they do have an objectively reasonable expectation to receive at least a minimum tax distribution and proportionate profit distributions during profitable years.”
Generally speaking, “a stockholder may not maintain an action against a corporation to recover a dividend until one has been declared” (Cortes v 3A N. Park Ave Rest Corp., 46 Misc 3d 670 [Sup Ct, Kings County 2014] [citation modified]).
In the absence of an agreement, resolution, by-law, or other enforceable right (see e.g. McCully v Jersey Partners, Inc., 60 AD3d 562 [1st Dept 2009] [modifying dismissal of pre-merger “claim for a tax dividend” arising from a “contractual right to payment of that dividend pursuant to the Stockholders Agreement”]), an equity owner lacks the power to compel a tax distribution except if she can show the controllers “acted in bad faith, fraudulently or dishonestly in establishing the dividend policy of the corporation” (Heller v Lewis, 50 Misc 3d 1203(A) [Sup Ct, Albany County 2015] [citation modified]).
These rules of law leave controllers with immense economic power over noncontrollers. Does dissolution provide a potential remedy for misuse of that power?
Justice Lebovits thought yes, at least for pre-answer dismissal purposes. Under the law of common-law dissolution, he wrote, “dissolution may be available” where “the complaint alleges that those in control looted corporate assets, enriched themselves at the expense of minority shareholders, continued the corporation solely for their own benefit, and sought to freeze out or coerce the minority into selling at a sacrifice.”
Although “more is required for common-law dissolution than would be required to sustain an ordinary derivative claim for waste,” wrote Justice Lebovits, “whether the plaintiff can prove the allegations and whether dissolution or some lesser remedy should ultimately be granted are not questions to be resolved at the pleading stage” (citation modified).
The Court wrote:
Defendants also argue that the oppression claim fails because directors generally have discretion whether to declare dividends. That principle is correct. An undeclared dividend ordinarily does not give rise to an individual right to payment, and courts generally will not interfere with directors’ dividend decisions absent fraud, bad faith, or clear abuse of discretion. But plaintiff’s oppression claim is not based only on the absence of a 2024 distribution. It is based also on an alleged broader pattern of minority prejudice, including disproportionate distributions in earlier years, misleading tax and ownership records, withholding of corporate information, and alleged diversion of corporate assets. Whether the 2024 distribution decision reflects ordinary business judgment or part of that alleged pattern cannot be determined at the pleading stage.
(citation modified).
The Court concluded: “Accepting plaintiff’s allegations as true, the fourth cause of action is sufficiently pleaded under New York’s narrow common-law oppression/dissolution doctrine.”
Chang offers a glimmer of hope to downtrodden minority business owners searching for a remedy when presented with a large phantom income tax bill. On its own, controllers’ refusal to a make a tax distribution most likely will not be enough to state a viable claim for dissolution based upon “oppression.” But in Chang, the refusal to make tax distributions on phantom income was alleged to be part of a “broader pattern of minority prejudice,” particularly, as a tool to “squeeze out” the minority owners with an undesired buyout just to cover their taxes. On those facts, a surprise phantom income tax bill may be a recipe, or at least an ingredient, for a potentially viable claim for oppression-based dissolution.