On November 13, 2018, Justice Masley issued a decision following a bench trial in Ganzi v. Ganzi,[1] which concerns a family feud over the Palm Restaurant empire.  Ganzi provides a vivid illustration of the importance of observing corporate formalities, the need to be vigilant for self-dealing when shareholders hold ownership interests in multiple intertwined businesses, and, of course, the pitfalls of mixing family and business.

Factual Background

Ganzi  v. Ganzi concerns two close-held family businesses: Just One More Restaurant Corp. (“JOMR”), which owned the now-shuttered original Palm Restaurant, and Just One More Holding Corp. (“JOMH”), which owned the real property at which the original Palm Restaurant was located.  The businesses are held by various descendants and relatives of Pio Bozzi (“Pio”) and John Ganzi (“John”).[2]

Pio and John opened the original Palm Restaurant in New York City in 1926.  Over the years, it became known as a steakhouse and celebrity hangout spot, famous for posting caricatures of its prominent patrons on the walls.  Eventually, Pio and John transferred ownership of the restaurant to JOMR, with Pio and John splitting the corporation’s shares.  JOMR last held a corporate meeting in 1986, and it has generally not followed corporate formalities since then.[3]

Over time, the ownership and corporate management of JOMR and the Restaurant passed down the family tree to Pio’s and John’s grandchildren: Walter Ganzi (“Wally”), Bruce Bozzi (“Bruce), Gary Ganzi (“Gary”), Claire Breen (“Claire”), and Charles Cook (“Charles”).  By the time of trial, Charles had died, and the shares of JOMR and JOMH were as follows:

Bruce and Wally began working at the Restaurant in the 1960s, but each also branched out and established their own restaurant (Wally’s and Bruce’s Pussycat, respectively), neither of which proved successful.  Bruce and Wally also continued managing the Palm’s business matters, with Wally serving as CEO of JOMR, and Bruce serving as CEO of JOMH.[4]

In 2015, JOMR closed the original Palm Restaurant, and JOMH sold off the real estate on which it was located.[5]  But by that time, the original Palm Restaurant had long ceased being JOMR’s most valuable asset. JOMR now held Palm’s intellectual property rights in a series of trademarks, service marks, and design elements of the Restaurant (such as its menu, food quality choices, and décor) (the “Palm IP”).  Starting in 1972, a large empire of new Palm-branded restaurants, the “New Palms,” opened worldwide—with Bruce and Wally retaining ownership interests in many of these restaurants.  The New Palms are a lucrative business: between 2006 and 2017, they grossed $1.5 billion in revenue.[6]

Bruce and Wally manage their interest in the New Palms through the Palm Management Corporation (“PMC”), of which they are the sole owners.  The New Palms operate pursuant to a license from JOMR, which gives the New Palms the rights to use the Palm IP in exchange for an annual fee of $6,000.  In 1982, Bruce’s and Wally’s trademark attorney warned them that this $6,000 flat fee would likely soon be seen as “modest” because “[m]ost franchise contracts provide for a payment of a percentage of gross sales rather than a flat fee,” and consequently Bruce and Wally should consider using “a royalty provision” instead of the flat fee. They declined to do so.[7]

Despite the Palm business empire’s success, the original Palm Restaurant itself was not a paragon of restaurant management.  In fact, a 1970 report from JOMR’s accountant concluded that the Palm was a “near perfect ‘textbook’ example of how not to manage a restaurant,” and that were it not for the Palm’s large sales volume and below-market rent, the original Palm Restaurant would have gone bankrupt.[8]  The secret of the Palm empire’s success, it seems, was actually the Palm IP—which JOMR had licensed out to Bruce’s and Wally’s empire of New Palms for a nominal fee.

In 2007, PMC and JOMR entered into a Master License Agreement (“MLA”) through which PMC acquired the exclusive worldwide rights to the Palm IP for an annual flat payment of $12,000.  Under the MLA, PMC entered into sublicense agreements for the use of Palm IP with certain third parties for at or near market rate value (as opposed to the $6,000 flat fee paid by the New Palms).  In 2010, JOMR and PMC entered into a service agreement under which JOMR paid PMC a substantial fee per month plus bonuses to Bruce and Wally each year.[9]

Apparently after they discovered what Bruce and Wally had been up to, Gary, Claire, and Charles’ Estate brought a shareholder derivative suit against them, alleging that Bruce and Wally had “engaged in a decades-long pattern of exploiting JOMR’s greatest asset—the Palm IP—to benefit [Bruce’s and Wally’s] own businesses, and by improperly entering the MLA between JOMR and PMC and using the MLA to divert substantial revenue from JOMR to PMC.”  The Plaintiffs also alleged that Bruce and Wally had breached their fiduciary duties to JOMH by leasing the real estate at below-market rates.  After years of litigation, the case went to a bench trial before Justice Andrea Masley, who found for the Plaintiffs on all of their claims.[10]

Court’s Decision

Breach of Fiduciary Duty

Justice Masley began by explaining the “bedrock legal principle” that fiduciaries “cannot exercise the corporate powers for their private or personal advantage or gain.”[11]  Because Bruce and Wally were majority shareholders of JOMR, they were corporate insiders who owed fiduciary duties to JOMR, which owned the valuable Palm IP, which in turn was ultimately what enabled Bruce and Wally to grow rich—as shown by the original Palm Restaurant’s success despite its obvious mismanagement, and as evidenced by the failure of Bruce’s and Wally’s other non-Palm-branded restaurants.

Justice Masley found for the Plaintiffs on each of their breach of fiduciary duty claims.  First, Justice Masley concluded that Bruce and Wally had breached their fiduciary duties to JOMR by (1) causing JOMR to license out the Palm IP to the New Palms for a flat annual fee of $6,000, even though their trademark attorney had warned them decades ago that this was a below-market rate and all of the parties’ experts agreed that a fee based on a percentage of gross sales would be more appropriate; (2) entering into the JOMR-PMC service agreement; and (3) entering into the MLA.[12]   Because “[t]here was no corporate formality, no independent management, and thus, no fair negotiation of these payments,” Justice Masley found that Bruce and Wally “treated JOMR as their own without any regard to other shareholders.”[13]  Indeed, the issuance of licenses “grossly favoring defendants’ New Palms’ interests over those of JOMR, depriving JOMR of fair market value for the valuable Palm IP, is a textbook example of fiduciary misconduct.”[14]

Second, Justice Masley found that Bruce and Wally breached their fiduciary duties to JOMH by causing it to rent out the real estate on which the original Palm Restaurant was located at a below-market rate.[15]

Affirmative Defenses

Justice Masley next addressed and rejected each of Bruce’s and Wally’s affirmative defenses of statute of limitations, laches, acquiescence, implied ratification, and equitable estoppel.[16]

First, Justice Masley rejected the statute of limitations defense. CPLR 213 provides a six-year limitations period for breach of fiduciary duty claims.  Because the trial concerned 54 valid and enforceable license agreements dated in 2007 and 2011, each of them fell within the six-year limitations period; it did not matter that JOMR had originally issued substantially similar licenses to the New Palms many years earlier.  Further, the statute of limitations “on claims against a fiduciary for breach of its duty is tolled until such time as the fiduciary openly repudiates the role.”[17]  Because there was no evidence that Bruce and Wally had repudiated, the statute of limitations on equitable relief was tolled.

Second, Justice Masley rejected Bruce’s and Wally’s laches defense.  A laches defense is not available to a fiduciary unless the fiduciary openly repudiates the relationship.  Because Bruce and Wally had never repudiated their fiduciary relationship, their laches defense could apply only to the Plaintiffs’ cause of action alleging diversion of corporate opportunity.  But the defense did not apply to that cause of action because (1) some of the plaintiffs did not become shareholders until 2010 and could not have acted sooner; (2) because JOMR’s corporate formalities were not followed, the Plaintiffs were denied knowledge and input as to JOMR’s business, and did even not know about the Palm IP prior to the lawsuit; (3) even if one of the shareholders (Charlie) was aware of the licensing agreements, that awareness did not extinguish the rights of other shareholders; and (4) there was no unfair prejudice from a delay in commencing the action.

Third, Justice Masley rejected the affirmative defenses of acquiescence, implied ratification, and equitable estoppel.  Justice Masley explained that acquiescence is not a valid defense to breach of fiduciary duty claims, and the implied ratification and equitable estoppel defenses were inapplicable due to the absence of evidence that all of the Plaintiffs or their predecessors in interest each had sufficient knowledge of or ratified the transactions at issue.

Remedies

Justice Masley concluded by awarding JOMR and JOMH the “amounts by which defendants were enriched at the expense of the corporations.”  She awarded JOMR $68 million plus interest for damages arising from the New Palms royalties and $3.1 million plus interest for damages from the MLA.  She also awarded JOMH $1.742 million plus interest for lost rent.  She declared the 2007 and 2011 licenses between JOMR and the New Palms void.  And she granted Plaintiffs’ request for an injunction prohibiting Bruce and Wally from continuing to harm JOMR with below-market licenses for the use of the Palm IP.  Justice Masley also ruled that Bruce and Wally must credit JOMR and JOMH for the legal fees they had incurred, and granted attorneys’ fees for the Plaintiffs.[18]

Conclusion

Ganzi is a fascinating example of what happens when a collection of family-owned businesses experiences huge success but does not take legal precautions against self-dealing by the family members who dominate the business.  It also provides a vivid illustration of the Commercial Division’s skill in resolving such thorny business disputes.