Buy-sell agreements come in all shapes and sizes. Some are straightforward. Others are outrageously complex, especially purchase price formulas. Some have triggers for death. Others disability. Retirement. Expulsion. Termination of officership, directorship, employment.

Some are mandatory. Others discretionary. Where buy-sell agreements are discretionary, a whole set of additional rules – the law of options – comes into play.

Under the law of options, “strict compliance with terms setting forth the time and manner of an option’s exercise” is indispensable (Agostino v Soufer, 12 AD3d 204 [1st Dept 2004]).

“Not only is strict adherence to the terms of an option ordinarily required, but it is a broadly accepted principle that time is of the essence with this type of contractual provision” (Urban Archaeology Ltd. v Dencorp Investments, Inc., 12 AD3d 96 [1st Dept 2004]). Failure to strictly comply with an option’s terms – especially a contractual closing deadline – can be deadly (see id. [“the court was without the power . . . to extend the buyout option beyond the contractually agreed-upon 90-day period”]).

But “a party to an option contract may waive its right to insist upon strict compliance with those terms, either expressly or by its conduct” (Lamberti v Angiolillo, 73 AD3d 463 [1st Dept 2010]). “A valid waiver” of an option exercise deadline “requires no more than the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable” (Gresser v Princi, 128 AD2d 752 [2d Dept 1987]).

These competing rules of law were at play in a recent appeals court decision in a particularly nasty father-son litigation over a donut franchise empire, Burns v C.R.B. Holdings, Inc. (___ AD3d ___, 2024 NY Slip Op 03609 [4th Dept July 3, 2024]).

The Facts

In 1999, Robert Burns (“Robert”) and his then-wife, Cathy Burns (“Cathy”), founded C.R.B. Holdings Inc. (the “Corporation”) as equal 50% shareholders to bring Canada’s beloved coffee and donut chain, Tim Hortons, across the border to the Niagara Falls, New York area, eventually opening seven locations in the region.

Robert and Cathy’s son, Jason Burns (“Jason”), started as an employee of the Corporation. In 2006, Robert and Cathy divorced. In 2007, Jason became a shareholder. Robert owned 85%, and Jason 15%, of the Corporation’s 100 issued and outstanding shares.

As part of Jason’s accession to shareholder, in November 2007, Robert and Jason entered into a Buy-Sell Agreement with mutual, mandatory triggers for resignation, retirement, or death.

In 2009, according to Jason’s Amended Complaint, there was a “physical altercation” between Robert and Jason, which Jason alleged his father “initiated,” resulting in Robert filing criminal charges against Jason.

In 2009, in an alleged scheme to “extort,” Robert made Jason execute an Amendment and Modification to Buy-Sell Agreement (the “Amended Buy-Sell Agreement”) in exchange for agreeing to reduce criminal charges. The Amended Buy-Sell Agreement explicitly recites that the “consideration” Jason received for the Amended Buy-Sell Agreement was Robert “permitting reduction of the criminal charges initiated by him.”

The Amended Buy-Sell Agreement contained some rather harsh provisions, including that if Jason were to ever “assault, strike, harass, menace, intimidate or threaten Robert” his shares would automatically be “cancelled and annulled . . . without payment or remuneration of any kind” and Jason would automatically “release and discharge” his father from any claims of any kind. One wonders whether a forfeiture-for-no-consideration provision would be enforceable.

In 2014, things went from bad to worse for Jason when he and his father entered into a Shareholders Agreement, which, in Section 6.15, expressly superseded the Buy-Sell and Amended Buy-Sell Agreements, but incorporated most of their terms nonetheless, and made them even more lopsided in Robert’s favor.

Sections 3.1, 3.2, and 3.3 restated the Buy-Sell Agreement’s mandatory triggers, but altered them slightly to apply to death, disability, or retirement, and then changed them from mutual to unilateral, applying only to Jason, not Robert.

Section 3.4 added a new “optional” buyout right, providing:

In the event that Jason shall cease to be an employee of the Corporation for any reason, the Corporation shall have the option to purchase from Jason any or all of the Shares which Jason owned at the time of his termination of the Corporation . . . by giving written notice to Jason within thirty (30) days following the effective date of his termination of his employment. In the event the Corporation shall exercise such option, the Corporation shall be required to purchase, and Jason shall be required to sell, such Shares owned by Jason.

The buyout option contained a closing deadline which, as we shall see, became a desperately-needed legal foothold for Jason:

The consummation of any purchase of Jason’s Shares by the Corporation shall take place on a date not more than sixty (60) days following the effective date of the employment of Jason.

According to his Amended Complaint, Jason’s young son had a horrible accident involving a lawnmower, after which Robert allegedly “stole” and never returned the lawnmower. The accident required several surgeries, for which Jason was forced to take paid family leave to care for his son. During this time, there was a falling out and “dissolution of the grandparent relationship” between Robert and Jason’s son, for which Robert allegedly sought to “punish” Jason.

In November 2020, while he was out of work on family medical leave caring for his injured son, Robert sent Jason written notice terminating his employment and exercising the Corporation’s option to purchase Jason’s shares under Section 3.4 of the Shareholders Agreement.

Seven months later, in June 2021, Robert’s counsel sent a letter finally scheduling a closing. According to the letter, the Corporation was worth $1.5 million, with Jason’s 15% stake worth $225,000 (Jason alleged in his Amended Complaint that roughly one year earlier, Robert received a Letter of Intent from a competing Tim Hortons franchise entity to purchase the Corporation’s assets for $5 million, days after which Jason sent Robert his own Letter of Intent offering to purchase his father’s 85% interest at the same valuation, but Robert rejected both).

The Claims

In his Amended Complaint, Jason alleged a mix of direct and derivative causes of action, his first claim seeking a declaratory judgment that the compelled buyout of his shares was “null and void” because Robert failed to comply with the 60-day closing deadline in Section 3.4 of the Shareholders Agreement, his fourth cause of action for breach of contract seeking money damages for breach of Section 3.4.

The Dismissal Decision

Robert moved under CPLR 3211 to dismiss the Amended Complaint. In a lengthy Decision and Order, Niagara County Commercial Division Justice Timothy J. Walker dismissed the Amended Complaint in full.

The Court ruled the first cause of action for declaratory judgment was duplicative of the fourth cause of action for breach of contract. On the fourth cause of action, the Court ruled that Section 3.4 was not a “material provision” of the contract, and in any event, “any delay in the closing date was due to Plaintiff’s previous refusal to consummate the sale,” and therefore, “strict compliance has therefore been waived or excused” (quotations omitted).

Finally, because the Court held that Jason ceased to be an owner of the Corporation upon the compelled buyout of his shares, it dismissed his derivative claims for lack of standing.

The Appellate Decision

With no complaint remaining, Jason predictably appealed (you can read the parties’ appeal briefs here, here, and here).

In a short opinion, the appeals court explained that in the posture of a pre-answer dismissal motion like Robert’s, the motion court is required to “accept the facts as alleged in the complaint as true, accord the plaintiff the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory” (quotations and brackets omitted]). Under this forgiving standard, whether a plaintiff can provide its claims, the Court wrote, is simply “not part of the calculus.”

Applying this familiar, liberal pleading standard, the appeals court held:

Inasmuch as an optionee must exercise the option in accordance with its terms within the time and in the manner specified in the option, and plaintiff alleges facts that, if true, support the conclusion that defendants failed to do so here, we conclude that Supreme Court erred in dismissing plaintiff’s cause of action seeking declaratory relief.

(citation and quotations omitted).

The Court reinstated the first cause of action for declaratory judgment, and based upon the claim’s reinstatement, ruled that the motion court should not have dismissed the derivative claims either, writing:

We further agree with plaintiff that whether the court erred in concluding that he lacks standing to maintain a derivative action depends on whether defendants properly exercised C.R.B.’s option to purchase plaintiff’s shares. If they did not, then plaintiff has the right to maintain derivative causes of action as a shareholder of C.R.B.

As a result, Jason may continue to litigate the validity of his father’s exercise on the Corporation’s behalf of its buyout option, though the appeals court severed his derivative claims and held them “in abeyance pending a determination on the first cause of action” for declaratory judgment.

Comments on Burns

We write about a lot of sad stories on New York Business Divorce. But Burns has to be close to the top of the list. For both father and son, there’s guaranteed to be plenty of regrets. Regrets about bringing a son into a business only to have to expel him from it. Regrets about physical confrontations and the interpersonal destruction they can cause. Regrets about signing contracts with absolutely awful terms. Regrets about letting business issues tear close relatives apart. But yet, we encounter these issues all the time in our business divorce practice.

And finally, there’s the regret over not strictly complying with a buy-sell option closing deadline. The lesson is simple: if one wants to judicially enforce a buy-sell option, one must comply to the letter with the option’s written terms, including any contractual closing deadlines.

In fairness, though, it’s hard not to find some merit to Robert’s position. Where a party contractually compelled to sell his or her business interest refuses to cooperate in a closing, it seems perfectly fair to impose against him or her the doctrine of waiver. The problem is that, as the appeals court held in Burns, waiver usually presents a fact question not resolvable on a pre-answer dismissal motion under CPLR 3211 (nor, often, on a summary judgment motion under CPLR 3212). The question of whether someone “waived compliance” with an “option contract” deadline often “hinges on the resolution of the credibility of the various witnesses,” a quintessential “issue of fact which precludes summary judgment” (Ballston Ave. Dev. v Wolf, 45 AD3d 1032 [3d Dept 2007]).

What are some ways the parties in Burns might have approached the dispute differently?

Where a party like Jason refuses to close, courts may grant specific performance of buy-sell agreements (see Estate of Collins v Tabs Motors of Val. Stream Corp., 73 Misc 3d 1225(A) [Sup Ct, NY County 2021] [“New York courts regularly grant specific performance to enforce buy-sell provisions”]).

And where a party insists upon closing despite the other’s refusal, courts may grant injunctive relief to prohibit enforcement of buy-sell agreements (see Spivak v Bertrand, 147 AD3d 650 [1st Dept 2017] [“Without the preliminary injunction, plaintiff will be irreparably harmed, since his shares . . . will be automatically transferred to the individual defendants, and he will be stripped of his voting power and decision-making rights”]).

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