No-Content Defense Rejected for Digital Spoliation; Unauthorized Share Issuances Are a Nullity Absent Clear Shareholder Override

Comprehensive Commentary on Matter of Loreti v. 1466 E. Gun Hill Rd. Corp. (2025 NY Slip Op 04787)

Introduction

The Appellate Division, Second Department’s decision in Matter of Loreti v. 1466 E. Gun Hill Rd. Corp. addresses three recurring flashpoints in closely held corporate disputes: (1) the validity of shares issued beyond the corporation’s authorized capital; (2) the standards for setting aside an interested-director management agreement under Business Corporation Law (BCL) § 713; and (3) the scope of sanctions for digital spoliation of corporate financial records under CPLR 3126.

The proceeding arose from a petition for judicial dissolution under BCL § 1104-a concerning 1466 E. Gun Hill Rd. Corp. (“Gun Hill”), a closely held corporation whose ownership and internal contracts became contested among members of the Loreti family and related entities. The petitioner, the administrator of the estate of John Loreti, sought declarations on stock ownership, challenged a management agreement channeling a revenue stream to a conflicted insider, and pursued discovery sanctions for the destruction of the corporation’s QuickBooks files.

The key questions were:

Whether shares purportedly issued to an insider in excess of Gun Hill’s authorized 200 shares could be recognized or salvaged by shareholder understanding or agreement;
Whether a 10-year management agreement awarding 8% of gross rents to an insider could stand absent proper shareholder approval or proof of fairness under BCL § 713; and
Whether preclusion sanctions were warranted where an insider orchestrated the deletion and loss of the company’s QuickBooks financial data.

Summary of the Judgment

The Second Department:

Affirmed summary judgment declaring that (a) Gina Loreti Forgione owns 50 shares (25%), and (b) the estate of John Loreti owns 50 shares (25%) in Gun Hill, because Gun Hill’s certificate authorized only 200 shares and any shares issued beyond that limit are a nullity absent a valid amendment or a clear shareholder agreement overriding the certificate.
Reversed the Supreme Court’s denial of summary judgment to set aside the July 2, 2018 management agreement with Costa Realty, LLC, and granted summary judgment to void it. The court held the agreement involved a substantial financial interest for Maria Loreti (8% of gross rents for 10 years), was not approved by informed shareholders under BCL § 713(a), and was not affirmatively shown to be fair and reasonable under § 713(b).
Affirmed a spoliation sanction precluding Maria Loreti and Gun Hill from offering testimony or documents concerning any matter in Gun Hill’s financial history that is, was, or might have been recorded in the destroyed QuickBooks files.
Remitted the matter for entry of judgment reflecting the ownership declarations and awarded one bill of costs to the petitioner and Forgione, payable by Maria Loreti and MSA Realty Group, LLC.

Analysis

Precedents Cited and Their Influence

BCL § 501(a) and § 803(a); Matter of Marino v Island Express Adv., 172 AD2d 525.
These authorities establish that a corporation may only issue the number of shares authorized by its certificate of incorporation, and shares issued beyond that cap are invalid. Changes require board and shareholder approval via § 803. The court relied on Marino to deem excess issuances a nullity and found no compliant amendment under § 803.
Darnet Realty Assoc., LLC v 136 E. 56th St. Owners, Inc., 153 F3d 21 (2d Cir); Ench v Breslin, 241 AD2d 475; Garson v Garson, 105 AD2d 726, affd 66 NY2d 928.
These cases recognize that a later shareholder agreement may, in appropriate circumstances, override conflicting certificate provisions if there is clear and unambiguous evidence of that intent. Shareholder agreements are binding among the parties even if all formalities were not satisfied. The Second Department applied these principles but found no clear evidence here that the shareholders agreed to increase authorized shares or override the certificate.
Business Judgment Rule: Auerbach v Bennett, 47 NY2d 619; Matter of Kenneth Cole Prods., Inc., Shareholder Litig., 27 NY3d 268.
Courts generally avoid interfering in internal corporate affairs and will defer to disinterested directors’ decisions. However, this deference does not insulate self-dealing transactions, which are governed by BCL § 713. The court cited these cases to frame the baseline abstention principle and then applied § 713’s more exacting regime.
BCL § 713(a)–(b); Matter of Hempstead Realty, LLC v Sturrup, 192 AD3d 795; 67–69 St. Nicholas Ave. Hous. Dev. Fund Corp. v Green, 206 AD3d 521; Ench v Breslin, 241 AD2d 475.
For a transaction in which a director has a substantial financial interest: (a) it is not void per se if approved by informed shareholders; (b) absent such approval, the contract is voidable unless the parties prove it was fair and reasonable at the time. The court held there was neither valid shareholder approval (material terms not presented) nor proof of fairness, and thus the management agreement was set aside.
Spoliation and CPLR 3126: 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; Lotardo v Lotardo, 31 AD3d 504; Elaine Farsiso, LLC v Long Is. Compost Corp., 227 AD3d 868; Lieberman v Green, 190 AD3d 713; C.C. v A.R., 192 AD3d 654.
These authorities recognize broad judicial discretion to impose sanctions, including preclusion, where a party negligently or intentionally destroys key evidence. The Second Department affirmed preclusion, emphasizing that the breadth of the sanction was justified because the spoliator’s conduct made it impossible to know what the destroyed QuickBooks contained.
Lanza v Wagner, 11 NY2d 317.
Cited for the procedural step of remitting for entry of a declaratory judgment after granting declaratory relief.

Legal Reasoning

The court’s reasoning proceeds along three tracks: capital structure, conflicted transactions, and discovery sanctions.

1) Capital Structure and Share Ownership

Gun Hill’s certificate authorized only 200 shares. The petitioner’s evidence showed share issuances totaling 200 shares consistent with a 25%/25%/50% distribution: 50 shares to the estate of John Loreti, 50 to Gina Loreti Forgione, and 100 to MSA Realty Group, LLC.
Any shares purportedly issued in excess of 200 to Maria Loreti were void as a matter of law. The court reiterated that excess issuances are a “nullity” under Marino and BCL § 501(a).
To salvage excess shares, respondents had to show either (a) a formal amendment under BCL § 803, or (b) a clear and unambiguous shareholder agreement intended to override the certificate per Darnet/Ench/Garson. They failed on both counts. The record did not support an inference that the shareholders ever agreed to increase authorized shares.
Result: The trial court correctly declared the 25% ownership interests of the estate and Forgione; the Second Department affirmed and remitted for entry of a declaratory judgment.

2) The Costa Management Agreement and Interested-Director Review (BCL § 713)

The July 2, 2018 Costa Realty management agreement diverted 8% of Gun Hill’s gross rents to Maria Loreti for 10 years—a substantial financial interest triggering § 713.
Under § 713(a), an interested contract is not void if approved by a majority of shareholders with full knowledge of all material facts. The shareholders’ meeting minutes (Nov. 20, 2017) did not present the material terms. Thus, there was no valid shareholder approval or ratification.
Without § 713(a) approval, § 713(b) places the burden on the contract’s proponents to prove the agreement was “fair and reasonable to the corporation at the time it was approved.” Respondents’ opposition did not raise triable issues establishing fairness (for example, no evidence of market comparables, independent negotiation, or safeguards).
Business judgment deference did not apply because the transaction was self-interested and lacked approval by disinterested decision-makers. The court therefore granted summary judgment setting aside the agreement.

3) Digital Spoliation and Preclusion Sanctions (CPLR 3126)

The record showed that Maria Loreti received a digital copy of Gun Hill’s QuickBooks files, directed deletion of the originals, and then failed to produce the files despite a court order—first claiming none existed, then claiming she lost the copy.
Given the centrality of QuickBooks to Gun Hill’s financial history, the court held preclusion appropriate: Maria Loreti and Gun Hill were barred from offering testimony or documents concerning any matter that is, was, or might have been recorded in those files.
Importantly, the court rejected the argument that preclusion was unfair because “there is no evidence…to suggest what, exactly, comprised the contents” of the files. The inability to define the scope of the destroyed contents was the direct product of the spoliation. Under Ortega and related authorities, preclusion was a measured and permissible response.

Impact and Prospective Significance

This decision delivers concrete guidance in three important domains of New York corporate practice, particularly for closely held companies:

Capital Integrity and Unauthorized Issuances: Litigants will face a high bar to validate shares issued beyond authorized capital. Absent a formally adopted amendment under BCL § 803 or a clear, unambiguous shareholder agreement intended to override the certificate, excess shares remain a nullity. Practical effect: attempts to re-engineer control through informal or unilateral issuances are unlikely to withstand scrutiny.
Interested-Director Transactions: The decision underscores that minutes and disclosures matter. Ratification requires that shareholders actually be presented with the material terms. Where § 713(a) approval is absent, proponents must come forward with affirmative proof of fairness at the time of approval; silence or conclusory assertions will not stave off summary judgment. Expect heightened documentation practices and independent review for insider deals.
Digital Spoliation Sanctions: The court’s endorsement of broad preclusion—even where the contents of destroyed files are unknown—rebuts the “no-content” defense. Parties who delete or lose core ESI (like QuickBooks) risk being barred from offering any evidence on topics that could have been memorialized in the lost data. This incentivizes immediate litigation holds, forensic preservation, and transparent production.

For dissolution proceedings under BCL § 1104-a, these rulings help stabilize the capital table, unwind conflicted value transfers, and discipline discovery conduct—each critical to evaluating “oppression,” valuation, and remedies in close-corporation breakups.

Complex Concepts Simplified

Authorized vs. Issued Shares: Authorized shares are the maximum the corporation is permitted to issue, as set in the certificate of incorporation. Any purported issuance above that number is legally void unless the authorized number is properly increased.
Shareholder Agreement Overriding the Certificate: In closely held corporations, shareholders can contract around some certificate terms. But courts require clear, unambiguous evidence that the agreement was intended to override the certificate on the specific point at issue (e.g., share numbers).
Business Judgment Rule: Courts usually do not second-guess business decisions made by disinterested directors. However, when directors are self-interested in a transaction, special rules apply (BCL § 713), and courts look for approval by informed shareholders or proof the deal was fair to the corporation.
Interested-Director Transaction (BCL § 713): A deal in which a director has a substantial financial interest. To be insulated, it must be approved by informed shareholders or shown to be fair and reasonable at the time. Without either, the contract can be voided.
Ratification: After-the-fact approval by shareholders. It is only effective if shareholders were presented with the material terms needed to make an informed decision.
Spoliation and Preclusion (CPLR 3126): Destroying or failing to preserve relevant evidence can result in sanctions, including barring the spoliating party from introducing evidence on related subjects. Courts have wide discretion to tailor sanctions to the prejudice caused.
Prima Facie / Triable Issue of Fact: On summary judgment, the moving party must show entitlement to judgment as a matter of law (prima facie). The opponent must then present evidence that creates a genuine factual dispute requiring a trial (a triable issue).

Practice Pointers

Before issuing any new shares, confirm authorized capital and, if needed, formally amend the certificate under BCL § 803. Do not rely on informal understandings.
For insider transactions, present full material terms to shareholders and document the disclosures and approvals in detailed minutes. Consider independent director or third-party review and market benchmarking to establish fairness.
Upon litigation reasonably anticipating, institute a litigation hold. Preserve accounting systems (e.g., QuickBooks) and server backups; avoid deletion or overwriting. When in doubt, consult forensic experts.
In dissolution cases, stabilize the cap table early and challenge conflicted agreements promptly; both can materially affect valuation and remedies.

Conclusion

Matter of Loreti v. 1466 E. Gun Hill Rd. Corp. reinforces three pivotal rules for New York’s closely held corporations:

Shares issued beyond the authorized maximum are a nullity unless the corporation properly amends its certificate or the shareholders clearly and unambiguously agree to override the certificate.
Insider contracts that lack informed shareholder approval are voidable unless their proponents prove the deals were fair and reasonable at the time—a burden that cannot be met with conclusory assertions or silent minutes.
Parties who destroy core digital financial records cannot evade meaningful sanctions by pointing to uncertainty about the records’ contents; broad preclusion is an appropriate remedy when the spoliator created that uncertainty.

By clarifying ownership, policing self-dealing, and endorsing robust spoliation sanctions, the Second Department’s decision will guide governance, transaction structuring, and discovery conduct in future close-corporation disputes. It is a pointed reminder that corporate formalities, transparent disclosures, and meticulous data preservation are not mere technicalities—they define outcomes.

No-Content Defense Rejected for Digital Spoliation; Unauthorized Share Issuances Are a Nullity Absent Clear Shareholder Override — Commentary on Matter of Loreti v. 1466 E. Gun Hill Rd. Corp. (2025 NY Slip Op 04787)