Bergstein v. Emerson Convalescent Ctr., Inc.

CHAIM MOSHE BERGSTEIN, et al., Plaintiffs, v. EMERSON CONVALESCENT CENTER, INC., Defendant.

Civil Action No. 16-8009-JMV-AME

United States District Court, D. New Jersey

November 22, 2021

Not for Publication

OPINION

JOHN MICHAEL VAZQUEZ, United States District Judge

The present matter comes before the Court on Defendant Emerson Convalescent Center, Inc.'s (“Defendant” or “Emerson”) motion for summary judgment. D.E. 83. Plaintiffs oppose the motion. D.E. 87. The motion was decided without oral argument pursuant to Federal Rule of Civil Procedure 78 and Local Civil Rule 78.1. The Court has considered the parties' submissions^[1]and denies Defendant's motion. However, as discussed below, certain aspects of Plaintiffs' case are limited going forward.

I. BACKGROUND^[2]

Plaintiffs minority shareholders in Emerson, contend that Defendant has breached its fiduciary duties to them and caused them harm in several ways. Plaintiffs first claim that Defendant diluted their ownership interest in the corporation. See Am Compl. ¶¶ 14-26. Plaintiffs next say that Defendant has caused the corporation's shareholder distributions to “not reflect” Plaintiffs' “actual share of Emerson's income and/or profits.” Id. ¶¶ 27-32. According to Plaintiffs, Defendant has also “failed to observe corporate formalities[ ]” and failed to abide by the corporation's bylaws. Id. ¶¶ 33-50. Plaintiffs add that they have not been able to participate in certain ancillary services offered by Emerson. Id. ¶¶ 51-57. They further argue that Defendant has denied them information to which they are entitled as shareholders, id. ¶¶ 58-69, and that Defendant has engaged in nepotism. Id. ¶¶ 70-82. Finally, Plaintiffs claim that “the company had allowed the transfer of shares of stock to persons or entities unqualified to maintain its status as a sub-chapter S corporation[, ]” which will harm Emerson and Plaintiffs “in that they will owe substantial sums in taxes which would affect the profitability and cash flow of the company.” Id. ¶¶ 83-87.

Defendant denies the bulk of the allegations, but admits “that Emerson has not observed certain corporate formalities set forth in the By-Laws[.]” Answ. ¶ 42. Yet, Defendant notes that no shareholder has raised any objection for over twenty years. Id. Defendant further admits each of the four board members received regular compensation. Id. ¶ 44. Defendant also agrees that minutes of meetings are not kept, id. ¶ 48, and that it employs certain family members of the majority holders, id. ¶¶ 71, 73, 75, 78.

Defendant is a New Jersey corporation “that operates a nursing home in Emerson, New Jersey[.]” SOMF ¶ 1. “Emerson was started in 1975 by Holocaust survivors, many of whom had extended familial relationships across each of Emerson's founding shareholders' immediate families.” Id. ¶ 2. Among the “founding shareholders were husband and wife Jacob and Dwoira Bergstein[;]” Jacob's brother Leo Rosenson; Rosenson's brother-in-law, Ernest Hollander; Nat Friedman; and Morris Schnitzer. Id. ¶¶ 4-5, 9, 12, 14-15, 31; Hollander Dep. at 12, 15. Named Plaintiffs and the majority holders-who include Barry Hollander, Estie Hollander^[3] and Dorothy Prager-are all related by blood or marriage to those founding shareholders. Brothers Jacob Bergsten and Leo Rosenson did not always enjoy good relations, and their respective families have previously litigated over real estate and their common ownership of another senior facility in Brooklyn. SOMF ¶¶ 6-7; Chaim Dep. at 16.

Jacob and Dwoira Bergstein had four children: Chaim Moshe Bergstein, Toby Woolf, Sara Lefkowitz, and Judy Bergstein Handler. Id. at 37-38. Judy predeceased her mother Dwoira and was survived by four children of her own: Matanya Handler, Chovav Handler, Hila Greenbaum, and Amiitai Handler. Id. at 37. Ernest Hollander had a son, Barry, who is married to Estie Hollander. Hollander Dep. at 8, 49. Leo Rosenson had a daughter, Dorothy Prager, who is Barry's first cousin and who is related to the Bergsteins. Prager Dep. at 8; Chaim Dep. at 14. Jonathan Mechaly is Dorothy Prager's son-in-law. Prager Dep. at 27.

At the time of Emerson's formation, Jacob Bergstein owned 15 shares, or 10.135% of the corporation. D.E. 83-7 at 1; CSOMF ¶ 1. The Amended Complaint reflects that Jacob Bergstein owned “16 or 17 of the then total outstanding beds of 148.” Am. Compl. ¶ 14. As of the early 2010s, Emerson increased its capacity “from 148 to 155[]” beds. Hollander Dep. at 104. Barry Hollander testified, however, the “[t]he share ownership” of the respective owners does “not vary based upon there being additional or less beds[.]” Id. at 63.^[4] At some point, “one [of Emerson's] shareholder[s] was bought out, ” Hollander Dep. at 64, which apparently was Friedman, SOMF ¶ 31. According to Barry Hollander, “everybody [i.e., the other shareholders] purchased his interest pro rata based on the remaining shareholders in the group[, ]” meaning that the percentage of the company owned by each of the remaining shareholders remained the same. Hollander Dep. at 64. In other words, no owner's shares were diluted, and no additional shares were ever issued by Emerson. Id. at 65. Chaim states that he was never provided any information on the issue. Chaim Dep. at 47.

Emerson provides physical therapy, occupational therapy, speech therapy, pain management therapy, hospice, and Alzheimer's support. Hollander Dep. at 190-92. The services are provided by “medical directors that are independent contractors[.]” Id. at 192. Barry further testified that those services are offered by Emerson itself, and not through ancillary or additional businesses. Id. at 191. He stated that names such as “Reflections” and “Emerson Cares, ” are “marketing name[s] that I think show[] up on the website.” Id.

At the time of its formation, Emerson adopted bylaws by which it was to be governed and operated. See id. at 35-39. The parties do not appear to have made the bylaws part of the summary judgment record, but frequently refer to the bylaws and contest their meaning and requirements. See, e.g., Am. Compl. ¶¶ 34-35; Hollander Dep. at 35-39. Since June or July 2017 through, at the earliest, May 31, 2018, Emerson had three members on the board of directors: Barry Hollander, Dorothy Prager, and Morris Schnitzer. Hollander Dep. at 43. Emerson's bylaws, however, require four directors and, until recently, Emerson had five directors. See Id. at 43-45.

According to the parties, paragraph eleven of the bylaws provides in relevant part that “[n]o compensation shall be paid to directors as such for their services, but by resolution of the board a fixed sum and expenses for actual attendance at each regular or special meeting of the board may be authorized[.]” Id. at 51. As of May of 2018, directors were each being paid $500 per month, and no board resolution authorized the payments. Id. at 52. See also Am. Compl. ¶¶ 43-45; Answ. ¶¶ 43-45. Defendant further admits that when Rosenson was serving on the board, Emerson paid the directors $24, 000 per year. Answ. ¶¶ 43-45.

The bylaws further require that Emerson hold annual shareholder and board of director meetings, and that minutes be kept of those meetings, but Emerson rarely, if ever, had shareholder or board meetings. E.g., Trauring Dep. at 15-16. But see Hollander Dep. at 46, 51 (testifying that there are “regular board of directors' meetings[.]” “Usually three or four [per year take place”.). As noted, Emerson admits that it did not keep regular minutes of its board meetings. Answ. ¶ 48. Barry Hollander and Prager do not recall passing any board resolutions during their tenure.

Hollander Dep. at 52; Prager Dep. at 34-35. Prager testified that by May of 2018, she was “sure” that the bylaws were not “being complied with.” Prager Dep. at 42.

The bylaws further provide that Emerson is empowered to issue distributions to its shareholders. Hollander Dep. at 51. From January 2013 at the latest until June 2017, Emerson paid monthly distributions to its shareholders. See D.E. 87-10; D.E. 83-13; see also Am. Compl. ¶ 31. These monthly distributions remained essentially constant in amount and frequency for several years, with occasional additional, secondary distributions. See, e.g., D.E. 87-10; D.E. 87-13. When the corporation was issuing distributions, they were “based on a combination of profit” and cash flow. Hollander Dep. at 53. The decision as to whether to issue a distribution was “made on a monthly basis[]” by three Emerson employees: Dorothy Prager, Estie Hollander, and Marianne Oddo. See Id. at 53-54. Barry Hollander explained that each month, an informal “cash flow report [was] prepared.” Id. at 53. The bookkeeper, Oddo, with an eye to the following month's “anticipated expenses[, ]” then “[made] a determination as to the distribution.” Id. at 53, 55. Once Oddo “determine[d] whether there's cash available[, ]” she “communicate[d ] to Dororthy or Estie, and the decision [was] then made to distribute how much and where.” Id. at 54. The board of directors was not involved in the distribution decisions. Id. at 55. On June 7, 2017, Barry Hollander sent a letter to all of Emerson's shareholders, explaining that “[a]fter much reflection and a review of the current cash flow situation, we have decided that it is in the best interest of Emerson to skip this month's distribution.” D.E. 83-13 at 1. Barry blamed the instant litigation for causing that “cash flow situation.” Id. It does not appear that Emerson has made any distributions since then.

Ernest Hollander passed away in 1987, and his son, Barry took his board seat. Hollander Dep. at 8. Barry indicated that he was given the position at “a shareholders meeting[]” in a New York City restaurant. Hollander Dep. at 9. Barry also serves as...