Dimmock v. Reichhold Chemicals, Inc., 41 N.Y.2d 273 (1976)

In corporate appraisal proceedings under Business Corporation Law § 623, a dissenting shareholder’s good faith in refusing a corporate offer should be assessed at the time of refusal, not based on subsequent litigation conduct, to determine eligibility for interest and cost allocation.

Summary

Clarence Dimmock dissented from a merger involving Modiglass Fibers, Inc., and sought appraisal of his shares. After a protracted legal battle, an appraiser valued the shares higher than Reichhold’s initial offer. The court denied Dimmock’s request for interest, apportioned appraiser fees against him, and denied his request for attorney and expert witness fees, citing his alleged bad faith during the proceedings. The New York Court of Appeals modified the Appellate Division’s order, holding that the shareholder’s good faith should be assessed at the time of the refusal of the corporate offer, and remanding for reconsideration of interest and appraiser fees, while leaving open the possibility of revisiting attorney and expert fees if the lower court’s discretion was improperly influenced by later events.

Facts

Reichhold Chemicals, Inc. sought to merge Modiglass Fibers, Inc., a subsidiary, into itself. Dimmock, a minority shareholder of Modiglass, dissented from the merger and demanded the fair value of his shares. Reichhold offered $3.82 per share, which Dimmock rejected. Reichhold initiated an appraisal proceeding, which was dismissed as untimely. Dimmock then commenced his own appraisal proceeding under Business Corporation Law § 623.

Procedural History

Dimmock initiated a special proceeding under Business Corporation Law § 623 to determine the fair value of his shares. The trial court confirmed the appraiser’s report valuing the shares at $4.75 but denied Dimmock’s requests for interest, attorney’s fees, and expert witness fees, and assessed half of the appraiser’s costs against him. The Appellate Division affirmed. Dimmock appealed to the New York Court of Appeals, challenging the denial of interest, the apportionment of costs, and the denial of fees.

Issue(s)

1. Whether the lower courts erred in denying Dimmock’s request for interest on the appraised value of his shares, based on a finding of bad faith stemming from his conduct during the legal proceedings rather than his initial refusal of the corporate offer.
2. Whether the lower courts properly apportioned the costs and expenses of the appraisal proceeding, including the appraiser’s fees, against Dimmock based on a finding of bad faith.
3. Whether the lower courts abused their discretion in denying Dimmock’s application for attorney’s fees and expert witness fees.

Holding

1. No, the denial of interest may have resulted from a consideration of events that occurred after the refusal, which is an incorrect application of the statute. The court should assess good faith at the time of refusal.
2. No, the apportionment of appraiser fees was potentially based on Dimmock’s conduct after the refusal, also misapplying the statute.
3. Possibly. The court’s decision on attorney and expert fees was within its discretion, but the Court of Appeals allowed the lower court to revisit the issue if the original decision was influenced by its incorrect assessment of Dimmock’s good faith.

Court’s Reasoning

The Court of Appeals focused on the statutory language of Business Corporation Law § 623(h)(6) and (7). It emphasized that the assessment of a shareholder’s good faith, for purposes of determining eligibility for interest and cost allocation, must be based on the shareholder’s conduct at the time of refusing the corporate offer, not on their subsequent litigation tactics. The court noted that the lower court appeared to have based its finding of bad faith on Dimmock’s delaying tactics during the legal proceedings, which was an improper basis for denying interest and apportioning costs. The court quoted the statute: “The final order shall include an allowance for interest at such rate as the court finds to be equitable, from the shareholders’ authorization date to the date of payment. If the court finds that the refusal of any shareholder to accept the corporate offer of payment for his shares was arbitrary, vexatious or otherwise not in good faith, no interest shall be allowed to him.”

Regarding attorney’s fees and expert witness fees, the court acknowledged that the decision to award such fees is discretionary. However, it allowed the lower court to reconsider its denial of these fees if it found that its original decision was influenced by its incorrect assessment of Dimmock’s good faith. The court cautioned against using minority shareholder protections as an offensive weapon to cause unwarranted expense or embarrassment to the corporation. The court noted the potential disparity between the amount recovered and the legal fees sought, suggesting a need for careful scrutiny of the reasonableness of the fees.