Stern v. Stern, 66 N.Y.2d 360 (1985)

Interim agreements regarding valuation methods in corporate dissolution proceedings are enforceable, even if a final agreement is not reached, provided the chosen method reasonably complies with usual valuation practices.

Summary

This case concerns the enforceability of a preliminary agreement outlining a valuation method for shares in a professional corporation during a dissolution. The plaintiff argued the accountant’s cash-basis valuation was incorrect based on precedent for valuing law firms. The Court of Appeals held that the interim agreement, which specified valuation by the accountant, was binding pending a final shareholder agreement. Since no final agreement was reached, the interim agreement controlled. The dissenting judge argued that the plaintiff should have the opportunity to challenge the reasonableness of the accountant’s method, rather than its inherent correctness.

Facts

Two shareholders in a professional corporation, anticipating a potential separation, entered into a preliminary agreement. Paragraph 4(b) stipulated an accountant would evaluate shares, which would be binding pending a final agreement. Paragraph 5 stated the agreement lasted only until a final shareholder agreement was formulated and executed. A final agreement was never executed. The accountant valued shares using a cash-basis method. Plaintiff argued this was incorrect under established law for valuing law firms.

Procedural History

The plaintiff sought summary judgment, arguing that the accountant’s valuation was incorrect as a matter of law. Special Term agreed. The Appellate Division affirmed. The Court of Appeals reversed, holding the interim agreement was binding.

Issue(s)

Whether an interim agreement specifying a valuation method for shares in a professional corporation is enforceable when a final shareholder agreement is never executed?

Holding

Yes, because the parties agreed to the accountant’s evaluation as binding until a final agreement was reached, and no final agreement was ever executed.

Court’s Reasoning

The Court of Appeals reasoned that the parties explicitly agreed to be bound by the accountant’s valuation pending a final agreement. Paragraph 5 clearly stated the interim agreement’s duration. Since a final agreement was never reached, the interim agreement remains in effect. The dissenting judge, Meyer, argued that while the interim agreement was binding, the plaintiff should be able to challenge whether the accountant’s method reasonably complied with usual evaluation methods. He stated, “The only issue open to plaintiff, therefore, should be whether the method used by the accountant reasonably complied with the usual evaluation methods…” The dissent emphasized the need to avoid absurd outcomes and ensure fairness in the valuation process. The majority did not address the reasonableness of the method, only its binding nature due to the interim agreement. The implication is that while the agreement is binding, it is still subject to a test of reasonableness or good faith.