The conventional path to a fair value appraisal proceeding under Section 623 of the Business Corporation Law (the “BCL”) involves deliberate invocation of the statute by the business entity, the dissenting owner, or both.
For corporation mergers and asset sales, the process ordinarily involves the entity’s transmission of written notice to shareholders of their right to dissent from the transaction and pursue an appraisal remedy (BCL § 605 [a]; BCL § 623 [l]), the shareholder’s written exercise of the right to dissent (BCL § 623 [a], [c]), the entity’s offer to purchase the dissenting shareholder’s interest for fair value (BCL § 623 [g]), a statutory negotiating period (BCL § 623 [h]), and, if the entity and shareholder cannot reach agreement on price, commencement by one side, or the other, of an appraisal proceeding (BCL § 623 [h], [1], [2]).
If, after all of that activity, neither side files an appraisal proceeding within the statutory timeframe, then “all dissenter’s rights shall be lost unless the supreme court, for good cause shown, shall otherwise direct” (BCL § 623 [h] [2]).
Under BCL § 623 (k), the “exclusive remedy” provision of the fair value appraisal statute, “[t]he enforcement by a shareholder of his right to receive payment for his shares in the manner provided herein shall exclude the enforcement by such shareholder of any other right to which he might otherwise be entitled by virtue of share ownership,” except an action for “equitable relief” to enjoin, set aside, or rescind “unlawful or fraudulent corporate conduct” (Breed v Barton, 54 NY2d 82 [1981]).
Can a shareholder lose all rights as shareholder under BCL § 623 (k) where neither the corporation, nor shareholders, did anything to invoke the fair value appraisal statute, and where all parties consent to the transaction?
Can that loss of rights include a shareholder’s ability to challenge a co-shareholder’s post-closing withholding of the proceeds from the very transaction that gave rise to potential dissenters’ rights?
Those were the consequential questions posed by a brand new appeals court decision, Klein v Wiley (___ AD3d ___, 2025 NY Slip Op 04715 [2d Dept Aug. 20, 2025]). The answer to both questions is a rather surprising “yes.”
Klein is one part wakeup call, one part trap for corporate transactional lawyers and business divorce practitioners: where a corporate transaction potentially triggers dissenting shareholder appraisal rights, a shareholder’s failure to exercise those rights can lead to severe consequences, even for unknown, future events post-dating the closing, like misappropriation of the cash consideration from the very transaction itself creating dissenters’ rights.
The Dental Practice and the Asset Sale
In 2008, two dentists, Edwin Wiley “(Wiley”), as 85% shareholder, and Gregory Klein (“Klein”), as 15% shareholder, entered into a Shareholders Agreement for Galloway Dental, P.C. (“Galloway”).
In 2018, Wiley and Klein executed an Asset Purchase Agreement, selling all of Galloway’s assets to another dental practice for a gross purchase price of $800,000.
The Lawsuit Alleging Pre- and Post-Closing Defalcation
In 2019, Klein sued Wiley in Orange County Supreme Court, alleging misconduct by Wiley both pre- and post-dating the closing of Galloway’s asset sale.
Pre-closing, Klein alleged an array of financial misfeasance by Wiley, including that Wiley “regularly paid personal expenses with Galloway funds,” “paid excess compensation to family members,” “paid compensation in the form of wages to family members that were not actually working for Galloway,” “paid excess rental payments to Warwick Gardens, LLC, a company wholly owned by Wiley,” “incurred excessive personal debt in the name of the corporation,” “mismanaged corporate affairs thereby plunging Galloway into substantial debt,” “filed fraudulent tax returns,” and “authorized employees to pay personal expenses with corporate funds.”
Post-closing, Klein alleged that Wiley “failed to account for the sale proceeds” of Galloway, withheld Klein’s share of the proceeds, and distributed to Klein only “a small portion of the proceeds due to him in the amount of $30,000” from the total gross sale price of $800,000. As 15% equity holder, Klein would have been entitled to a gross distribution of $120,000, less transaction costs and expenses.
Klein alleged seven causes of action derivatively on behalf of Galloway: (i) Accounting, (ii) Breach of Fiduciary Duty, (iii) Aiding and Abetting Breach of Fiduciary Duty, (iv) Fraud, (v) Unjust Enrichment, (vi) Constructive Trust, and (vii) “Common Law Embezzlement and Misappropriation of Funds.”
The Summary Judgment Motion
In 2021, Wiley moved for summary judgment, arguing in his brief that all of Klein’s claims, including those based upon Wiley’s alleged post-closing withholding of the asset sale consideration, were “barred by New York’s statutory ‘exclusivity’ rule applicable to post-asset sale disputes, and which provides the exclusive remedy to consenting minority shareholders.”
The Scant Case Law Emerging from Dicta and a Footnote from a Dissent
Wiley relied upon two Second Department cases, Walter J. Schloss Assoc. v Arkwin Indus., Inc. (90 AD2d 149 [2d Dept 1982, Mangano, J., dissenting], revd 61 NY2d 700 [1984]), and Kingston v Breslin (56 AD3d 430 [2d Dept 2008]).
In Walter J. Schloss, a single Justice, in a single footnote, arguably overstating dicta from another case, Breen v Barton, wrote: “It should be emphasized that the exclusivity rule as interpreted by the Court of Appeals in Breed v Barton . . . did not limit its applicability to cases such as Breed where the right of appraisal had been exercised. It extended it to cases, such as the one at bar, where the right was apparently not exercised but clearly available.”
This comment was arguably overstatement because in Breed, the Court wrote in passing that an equitable claim for “fraudulent or illegal action” may survive a merger “notwithstanding” the “availability or exercise of the right of appraisal” (54 NY2d at 87).
And Breed’s comment was certainly dicta, because in that very case, the fair value appraisal remedy was not just “available” – the shareholders formally exercised dissenters’ rights (Breed v Barton, 54 NY2d at 85 [“When appellants exercised the right under sections 910 and 623 of the Business Corporation Law to have their stock appraised in a judicial proceeding, they abandoned their alternative rights as shareholders”]).
But dicta has a way of becoming law.
In Kingston, the Second Department, relying exclusively upon the dissent from Walter J. Schloss, in turn relying exclusively upon dicta from Breed, ruled: “While the exclusivity provision of Business Corporation Law § 623 (k) permits an individual shareholder who foregoes the statutory appraisal proceeding pursuant to Business Corporation Law § 623 to bring an action for equitable relief on the ground that the corporate action was fraudulent as to that shareholder . . ., the exclusivity provision is not applicable to derivative causes of action, such as those at bar, which were asserted on behalf of the [corporation] and not on behalf of the plaintiff in his individual capacity.”
An immediate distinction between Walter J. Schloss and Kingston, was that in the former, but not the latter, the corporation actually invoked BCL § 623 by notifying shareholders of appraisal rights, which the shareholder declined to pursue (Walter J. Schloss Assoc. v Arkwin Indus., Inc., 90 AD2d at 151 [a “proxy statement set forth the rights of shareholders who objected to the agreement and proposed merger. Notice was given that they, as dissenting shareholders, could avail themselves of the judicial appraisal procedure for determining the fair value of their shares by complying with the requirements of section 623 of the Business Corporation Law”]). There was no notice of appraisal rights in Kingston. Or Klein.
And in neither Walter J. Schloss, nor Kingston, did either shareholder – as in Klein – sue to challenge a co-owner’s post-closing misappropriation of proceeds from the very transaction giving rise to dissenters’ rights.
The Seemingly Conflicting Case Law
These nuances somewhat obscured in the papers, Klein opposed summary judgment, arguing that the “exclusivity provision set forth in § 623 (k) is triggered when a dissenting shareholder who objects to the merger or sale of a corporation brings an appraisal proceeding . . . .Here, Plaintiff did not object to the sale of Galloway’s assets and does not seek to bring an appraisal proceeding in connection with said sale of assets. Plaintiff is aware of the value of his shares, and the amount he is due from the sale of Galloway’s assets, which Defendants continue to withhold and squander.”
To his credit, Klein cited a seemingly conflicting Second Department case, Collins v Telcoa Intl. Corp. (283 AD2d 128 [2d Dept 2001]), also involving an asset sale, where the Court indicated that some degree of purposeful availment of the dissenting shareholder appraisal statute is required to lose dissenters rights: “Had the plaintiff commenced the instant action as a valuation proceeding pursuant to Business Corporation Law § 623, his causes of action for money damages would have been dismissed. Since he did not, however, nothing prevents him from maintaining a cause of action for money damages against [his co-shareholders] based on their alleged breaches of fiduciary duty.”
Collins held that a “corporate shareholder may sue for money damages where the corporation sells all or substantially all of its assets, the sale is not made in the usual or regular course of business, the corporation fails to give the shareholder proper notice of that action as required by Business Corporation Law § 909 (a), and the shareholder does not bring a proceeding to value his shares pursuant to Business Corporation Law § 623” (id. at 129). Klein would seem to potentially fall within that description.
The Summary Judgment Decision
In a Decision and Order, Orange County Supreme Court Justice Craig Stephen Brown dismissed Klein’s complaint. Relying upon Kingston and the dissent in Walter J. Schloss, the Court ruled that the exclusivity provision of BCL § 623 (k) extinguished Klein’s right to bring damages claims based upon his share ownership, including even those for misappropriation of the asset sale’s proceeds.
The Appeal
Klein appealed, arguing that “even if the preclusive effect of BCL § 623 (k) were found to be permanent, it can only be held to proscribe claims relating to misconduct prior to the corporate action . . . . Otherwise, a minority shareholder would be forever denied relief, simply because he consented to one corporate action. The claims in the Complaint . . . at the least should not have been dismissed with respect to the subsequent wrongs.”
You can read the three appeal briefs here, here, and here.
The Second Department – sadly, with no analysis at all – held:
Contrary to the plaintiff’s contention, the Supreme Court properly granted the defendants’ motion for summary judgment dismissing the complaint. Business Corporation Law § 623 (k) states: ‘The enforcement by a shareholder of his [or her] right to receive payment for his [or her] shares in the manner provided herein shall exclude the enforcement by such shareholder of any other right to which he [or she] might otherwise be entitled by virtue of share ownership, . . . .’ Here, because the plaintiff is asserting only derivative claims and Business Corporation Law § 623 (k) precludes such claims from being asserted, the court properly granted the defendants’ motion for summary judgment dismissing the complaint (see Kingston v Breslin, 56 AD3d 430, 432).
Does that Seem Right?
It does not sit well with me at all that failure of a shareholder to dissent from an asset sale to which all shareholders agreed at the time precludes the shareholder from suing a co-shareholder for making off with the proceeds of the sale.
First, a fair value appraisal proceeding fixes value as of the “valuation date” – with asset sales, the day before the shareholders authorized the transaction (BCL § 623 [h] [4]). In an appraisal proceeding, courts ordinarily, but not always, may not consider post-valuation date events, which would potentially preclude the court’s consideration, possibly even discovery by Klein, of the very act of misappropriation Klein alleged against Wiley.
Second, Galloway is now almost certainly assetless. For meaningful recovery, Klein would have needed a judgment against Wiley, the alleged tortfeasor, not Galloway, the entity. But in fair value appraisal proceedings, unless there is a buyout election, which there was not in Klein, all Klein would have been able to recover was a worthless judgment against Galloway (BCL § 623 [h] [5] [“The final order in the proceeding shall be entered against the corporation . . . .”]).
Third, the parties already knew what their shares were worth – they agreed to the value of their shares in a negotiated, arms-length transaction with a third-party purchaser, the very best evidence of value.
Fourth, the decision in Klein leaves a damaged shareholder with no legal remedy at all: it is now years too late to commence an appraisal proceeding (BCL § 623 [h] [2]).
Was there a way to plead post-closing misconduct, like misappropriation of the sale proceeds, the claim as direct, not derivative, to potentially circumvent the exclusivity provision of BCL § 623 (k)?
There is some authority that a claim for diversion by a shareholder of the proceeds of an asset sale alleges an individual harm and states a viable direct claim for conversion (see e.g. Collins v Telcoa Intern. Corp., 283 AD2d at 134 [“plaintiff claims that after the improper sale was completed, Dolin absconded with the plaintiff’s share of the proceeds of the sale. This adequately states a cause of action sounding in conversion”]).
But this case law is little solace to Klein. The three-year statute of limitations for conversion would have accrued and run years ago. Klein is another one of the many cases we write about here on New York Business Divorce where it’s hard not to feel sorry for the loser.
Klein is a lesson to practitioners: for asset sales and mergers, failure of a shareholder to exercise the fair value appraisal remedy of BCL § 623 – even if the shareholder consents to the transaction – may extinguish any legal remedy by virtue of share ownership, even for post-closing events.
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