Strict Charter Caps on Shares, No Ratification Without Disclosure, and Robust E‑Discovery Sanctions: The Second Department’s Guideposts in Matter of Loreti v. JJL Realty Corp. of N.Y.
Court: Appellate Division, Second Department, New York
Date: August 27, 2025
Citation: Matter of Loreti v. JJL Realty Corp. of N.Y., 2025 NY Slip Op 04788
Introduction
This decision provides a detailed, practical synthesis of three recurring issues in closely held corporate disputes: (1) the legal effect of issuing shares in excess of a corporation’s chartered authorization; (2) the enforceability of a conflicted, self-benefiting management agreement under Business Corporation Law (BCL) §713 where material terms were not disclosed to, or approved by, disinterested shareholders; and (3) meaningful sanctions for spoliation of electronic accounting data under CPLR 3126, even when the exact contents of the destroyed data cannot be reconstructed.
The petitioner, acting as administrator of the estate of John Loreti, sought dissolution of JJL Realty Corp. under BCL §1104-a and declaratory relief to settle ownership disputes. Central controversies included whether allegedly “extra” shares issued to Maria Loreti were valid despite the certificate of incorporation’s 200-share cap, and whether a July 2, 2018 management agreement that paid Maria 8% of JJL Realty’s gross rents for 10 years could stand absent disclosure and approval by disinterested owners. A separate discovery dispute involved deleted QuickBooks files.
On appeal, the Second Department affirmed ownership declarations invalidating shares issued beyond the 200-share cap, reversed the denial of summary judgment to set aside the self-dealing management agreement, and affirmed a broad spoliation sanction precluding the use of testimonial and documentary evidence tied to the deleted accounting records.
Summary of the Judgment
- Share Ownership Declared: The court affirmed summary judgment declaring that (i) Gina Loreti Forgione owns 50 shares (25%), and (ii) the estate of John Loreti owns 50 shares (25%), in JJL Realty Corp. The matter was remitted for entry of a judgment to that effect.
- Self-Dealing Management Agreement Set Aside: The court reversed the Supreme Court and granted summary judgment setting aside the July 2, 2018 “Costa agreement” (paying Maria 8% of gross rents for 10 years), holding it was not approved under BCL §713(a) and not shown to be fair and reasonable under §713(b).
- Spoliation Sanctions Upheld: The court affirmed a CPLR 3126 preclusion sanction barring Maria Loreti and JJL Realty from offering testimonial or documentary evidence concerning any matter in the corporation’s financial history that is, was, or might have been recorded in certain QuickBooks files she failed to preserve and produce.
- Costs: One bill of costs was awarded to the petitioner and Gina, payable by Maria and MSA Realty Group, LLC.
Factual and Procedural Background
The petitioner initiated a BCL §1104-a proceeding in 2019, alleging oppressive conduct and seeking, among other relief, dissolution of JJL Realty, a closely held family corporation. Ownership was asserted as: (i) Estate of John Loreti — 50 shares (25%); (ii) Gina Loreti Forgione — 50 shares (25%); and (iii) MSA Realty Group, LLC — 100 shares (50%). The petitioner contended that Maria orchestrated the issuance of additional, unauthorized shares beyond the 200 shares permitted by JJL Realty’s certificate of incorporation, and that she engaged in unauthorized disbursements. Gina moved for a declaration of her 25% interest; the petitioner cross-moved for declarations of ownership and to set aside the Costa management agreement.
Separately, during discovery, Maria obtained a digital copy of QuickBooks accounting files from JJL Realty’s prior accountant, directed deletion of the originals, and failed to produce those files despite a court order—first denying possession and later claiming the digital copy had been lost. The Supreme Court imposed a preclusion sanction under CPLR 3126. Appeals and a cross-appeal followed.
Analysis
Precedents Cited and Their Influence
- Matter of Marino v Island Express Adv., 172 AD2d 525 (2d Dept 1991): Shares issued beyond the number authorized by the certificate of incorporation are invalid. This bedrock rule supplied the doctrinal basis to declare “excess” shares a nullity.
- BCL §§501(a), 803(a): Corporations may issue only the number of shares authorized in the certificate of incorporation; amendments to the certificate require board approval and majority shareholder vote. The court applied these provisions to measure the validity of purported issuances.
- Darnet Realty Assoc., LLC v 136 E. 56th St. Owners, Inc., 153 F3d 21 (2d Cir): A later shareholder agreement can override the certificate only with clear and unambiguous evidence of intent to do so. The court relied on Darnet to reject claims that informal or ambiguous materials superseded the charter’s share cap.
- Ench v Breslin, 241 AD2d 475 (2d Dept 1997); Garson v Garson, 105 AD2d 726 (2d Dept 1984), affd, 66 NY2d 928: Shareholder agreements may bind the parties even if statutory formalities are not perfectly observed—but this does not permit ignoring the charter absent clear, unambiguous override.
- Matter of Kenneth Cole Prods., Inc., Shareholder Litig., 27 NY3d 268; Auerbach v Bennett, 47 NY2d 619: Courts avoid interference in corporate management decisions under the business judgment rule, but may examine the independence of decision-makers. The court framed its deference but proceeded under the specific statutory regime of BCL §713 for conflicted transactions.
- BCL §713(a), (b): Conflicted transactions are not void solely due to the conflict if approved by the board/shareholders after full disclosure; otherwise, they are voidable unless proven fair and reasonable at the time of approval. This statutory framework controlled the outcome on the Costa agreement.
- Matter of Hempstead Realty, LLC v Sturrup, 192 AD3d 795: No shareholder ratification exists where material terms were not presented to shareholders. This foreclosed the argument that the Costa agreement was ratified.
- 67–69 St. Nicholas Ave. Hous. Dev. Fund Corp. v Green, 206 AD3d 521: Reinforces the “fair and reasonable” requirement under §713(b). Maria and MSA failed to raise triable issues showing fairness.
- Ortega v City of New York, 9 NY3d 69; Holland v W.M. Realty Mgt., Inc., 64 AD3d 627; Utica Mut. Ins. Co. v Berkoski Oil Co., 58 AD3d 717; C.C. v A.R., 192 AD3d 654: Common-law spoliation sanctions under CPLR 3126, including preclusion, are within the trial court’s broad discretion and will be upheld absent improvidence—especially when the spoliator’s conduct frustrates discovery and proof.
- Lanza v Wagner, 11 NY2d 317: In declaratory actions, courts must enter a declaration of rights; hence the remittal for entry of judgment declaring ownership interests.
Legal Reasoning
1) Share issuances beyond the charter’s cap are a nullity
The certificate of incorporation authorized only 200 shares. Any purported issuances beyond that number lacked corporate power under BCL §501(a) and were invalid under Marino. Gina and the petitioner made a prima facie showing by proving the 200-share cap and the “excess” issuances to Maria. The burden then shifted, and Maria/MSA did not raise a triable issue that the certificate had been amended under BCL §803(a) or clearly overridden by a shareholder agreement under Darnet. The court thus affirmed declarations that Gina and the estate each own 50 shares (25%).
Key point: While shareholder agreements can, in principle, override corporate instruments between their parties, New York requires clear and unambiguous intent to displace the certificate of incorporation. Vague corporate paperwork or informal understandings cannot silently expand authorized capital.
2) The Costa management agreement failed BCL §713 and was voidable on summary judgment
The agreement funneled 8% of gross rents for 10 years to Maria, concededly a party with a substantial financial interest. Under §713(a), the agreement needed approval by disinterested directors or by shareholders with full disclosure of material facts. The petitioner’s proof—shareholder meeting minutes—showed no such presentation of material terms. Therefore, unless Maria/MSA raised a triable question of fact that the agreement was “fair and reasonable” at the time of approval (BCL §713[b]), it was voidable.
They did not. Nor did they demonstrate shareholder ratification; Hempstead Realty makes clear that ratification requires presentation of material terms. Accordingly, the Second Department granted summary judgment setting aside the agreement. Notably, the court acknowledged the business judgment rule’s non-interference doctrine (Auerbach, Kenneth Cole) but made plain that §713 supplies a distinct statutory test for conflicted transactions that is not insulated by generalized deference.
3) Spoliation preclusion for destroyed QuickBooks files was within the court’s discretion
Maria directed deletion of the original QuickBooks files and failed to produce a digital copy she had received during discovery, flouting a court order. The Second Department upheld a preclusion sanction barring her and JJL Realty “from offering testimonial or documentary evidence concerning any matter in JJL Realty’s financial history that is, was, or might have been recorded” in those files.
Two features are noteworthy: First, the sanction’s breadth tracked the likely scope of the destroyed data (the company’s financial history). Second, the sanction remained appropriate even though “there is no evidence in the record to suggest what, exactly, comprised the contents” of the destroyed files. Ortega and its progeny recognize preclusion as a proportional response when a party’s conduct deprives opponents and the court of the evidentiary record. The court explicitly rejected the argument that the sanction was “too harsh” given that the uncertainty about contents was a risk created by the spoliation itself.
Likely Impact on New York Corporate and Litigation Practice
- Capital Structure Discipline: The decision underscores that New York courts will treat share issuances beyond charter authorization as void ab initio, absent a properly adopted amendment or a clear, unambiguous shareholder agreement overriding the certificate among the relevant parties. Practitioners should ensure that any change to authorized capitalization follows BCL §803’s formalities or that any shareholder agreement purporting to override the charter is drafted with unmistakable clarity and executed by all necessary parties.
- Conflicted Transactions Scrutiny: Family-run and closely held corporations frequently rely on informal approvals. Loreti warns that conflicted arrangements—especially fee streams tied to gross revenues over long horizons—will be set aside on summary judgment if material terms were not actually disclosed to disinterested decision-makers and if the interested party cannot substantiate fairness at the time of approval. Contemporaneous valuations, independent advice, and meticulous minutes are crucial.
- Ratification Requires Real Disclosure: Post hoc reliance on “ratification” will fail when material terms were never presented. Minutes and correspondence must document the actual disclosure of key terms to owners to support any ratification defense.
- E‑Discovery and Accounting Data: The decision validates robust spoliation sanctions—including sweeping preclusion—when electronic accounting systems (like QuickBooks) are destroyed or lost. Courts will not require the non-spoliating party to prove the destroyed contents with specificity—the spoliator bears the risk of that uncertainty.
- Dissolution/Valuation Proceedings: In the dissolution context, the ownership declaration and the preclusion sanction will have outsized effects on any buyout election under BCL §1118, valuation analyses, and derivative accounting claims. The removal of a conflicted management fee may materially alter cash flows and valuation models.
Complex Concepts Simplified
- Authorized Shares vs. Issued Shares: The certificate of incorporation sets a ceiling (authorized shares). The company may issue up to that number. Issuing more than the authorized number is beyond the corporation’s power and invalid.
- Shareholder Agreement vs. Certificate of Incorporation: A shareholder agreement can, among the parties, change governance or economic arrangements. But to override the certificate’s terms, New York demands clear and unambiguous evidence that the later agreement was intended to supersede the certificate. Ambiguity is fatal.
- Business Judgment Rule: Courts generally defer to business decisions made by disinterested directors acting in good faith. That deference does not shield conflicted transactions; those are governed by BCL §713.
- BCL §713 (Interested Director Transactions): A contract where a director has a significant financial interest is not automatically void. It can be protected if disclosed and approved by disinterested directors or shareholders. Without such approval, it is voidable unless the interested parties prove the deal was fair and reasonable when approved.
- Ratification: Even if approval was flawed, shareholders can “ratify” a deal after the fact—but only if they are told the material facts. No disclosure, no ratification.
- Summary Judgment: A mechanism to resolve claims without trial when there are no genuine disputes of material fact and the movant is entitled to judgment as a matter of law.
- Spoliation and CPLR 3126: Destroying or losing key evidence can trigger sanctions, including preclusion from offering evidence, adverse inferences, or even striking pleadings. Courts have broad discretion and will not require the innocent party to reconstruct what the spoliator erased.
Practice Pointers and Compliance Checklist
- Changing Authorized Capital:
- Obtain board approval and a majority vote of all outstanding shares (BCL §803[a]).
- File the certificate of amendment with the Department of State.
- Update the stock ledger and issue shares within the new limit.
- Using Shareholder Agreements:
- If the agreement is intended to override the certificate, say so expressly and unambiguously.
- Ensure execution by all necessary parties; keep meticulous copies.
- Approving Conflicted Deals (BCL §713):
- Circulate all material terms in writing to disinterested directors or all shareholders.
- Obtain disinterested approval; record detailed minutes reflecting disclosure and deliberation.
- Document fairness at the time of approval (e.g., independent benchmarking, valuations).
- Avoid contingent profit extractions (like gross revenue skim) without robust justification.
- E‑Discovery and Financial Systems:
- Upon anticipation of litigation, issue a litigation hold; preserve original accounting files.
- Do not delete or overwrite source data; keep verifiable backups.
- Work with IT and accountants to maintain chain of custody and audit trails for QuickBooks or other platforms.
Conclusion
Loreti v. JJL Realty Corp. sharpens three doctrinal edges relevant to New York’s closely held corporations. First, the authorized-share cap in the certificate of incorporation is a hard ceiling: shares issued beyond it are void unless the certificate is properly amended or a later shareholder agreement clearly and unambiguously overrides the certificate among the parties. Second, conflicted transactions that are not disclosed and approved under BCL §713(a) are vulnerable to summary invalidation unless the interested party can substantiate fairness at the time of approval; “ratification” is unavailable without full disclosure of material terms. Third, courts will impose robust spoliation remedies—including sweeping preclusion—when parties destroy core electronic accounting evidence and thereby create uncertainty about its contents.
Substantively, the decision anchors ownership percentages, removes a self-dealing fee stream, and ratifies substantial discovery consequences—developments that will shape any dissolution, buyout, or valuation proceedings downstream. Procedurally, it offers a clear roadmap for corporate governance and litigation conduct: follow formalities, document disclosures, and preserve the data.
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