Overissued Shares Are a Nullity Absent a Clear Shareholder Override; Unapproved Interested-Director Contracts Are Voidable Unless Proven Fair; Broad Preclusion Permitted for Destroyed ESI

Introduction

The Appellate Division, Second Department’s decision in Matter of Loreti v. Lorcress Enterprises, Inc., 2025 NY Slip Op 04789 (Aug. 27, 2025) sits at the intersection of close-corporation governance, statutory constraints on capital structure, and discovery sanctions in the age of electronic financial records. Arising from a judicial dissolution proceeding under Business Corporation Law (BCL) § 1104-a, the case resolves three pivotal disputes:

• Who owns the shares of Lorcress Enterprises, Inc., and whether shares issued beyond the corporation’s authorized capital can ever be valid without a formal amendment.
• Whether a management agreement channeling 8% of gross rents for a decade to a sitting director (Maria Loreti) is enforceable absent informed shareholder approval or demonstrable fairness under BCL § 713.
• What sanctions are appropriate when a party destroys or “loses” core electronic accounting files (QuickBooks) during discovery.

The parties included the petitioner (administrator of the estate of John Loreti), Gina Loreti Forgione, and Maria Loreti. The Supreme Court (Westchester County) had granted summary judgment fixing share ownership consistent with 2010 shareholder minutes, denied summary judgment to set aside a 2018 management agreement, and imposed preclusion sanctions for spoliation of QuickBooks files. On appeal, the Second Department affirmed the ownership ruling, reversed and granted summary judgment setting aside the management agreement, and affirmed the spoliation preclusion.

Summary of the Judgment

• Authorized Shares and Ownership: The court affirmed summary judgment declaring ownership exactly as reflected in the May 25, 2010 shareholder minutes—Gina Loreti Forgione: 40 shares (20%); Estate of John Loreti: 80 shares (40%); Maria Loreti: 80 shares (40%). Shares purportedly issued beyond the 200 shares authorized by the certificate of incorporation were a nullity.
• Interested-Director Transaction (BCL § 713): The court reversed the Supreme Court and granted summary judgment setting aside the July 2, 2018 “Costa agreement” (management agreement) paying Maria Loreti 8% of Lorcress’s gross rents for 10 years. The agreement was not properly approved by informed shareholders and Maria failed to show it was fair and reasonable to Lorcress at the time of approval.
• Spoliation/Preclusion Sanction: The court affirmed preclusion sanctions under CPLR 3126, barring Maria and the corporation from offering testimonial or documentary evidence concerning any matter that is, was, or might have been recorded in the destroyed QuickBooks files. The sanction was not overbroad despite uncertainty about the files’ precise contents, because that uncertainty resulted from Maria’s own conduct.
• Remittal and Costs: The matter was remitted to enter a declaratory judgment fixing ownership; one bill of costs was awarded to the petitioner and Gina Loreti Forgione against Maria Loreti.

Analysis

Precedents Cited and Their Role

• Business Corporation Law §§ 501(a) and 803(a): Section 501(a) confines a corporation to issuing no more shares than authorized in its certificate of incorporation. Section 803(a) prescribes the process (board and majority shareholder vote) to amend the certificate. These statutory anchors drove the outcome on ownership: absent a valid amendment, overissued shares are void.
• Matter of Marino v Island Express Adv., 172 AD2d 525 (2d Dept 1991): Cited for the proposition that shares issued in excess of authorized capital are invalid. This authority undergirded the court’s ruling that purported excess shares to Maria were a nullity.
• Darnet Realty Assoc., LLC v 136 E. 56th St. Owners, Inc., 153 F.3d 21 (2d Cir): Quoted for the nuanced point that shareholder agreements can, in some circumstances, override the certificate where there is “clear and unambiguous” evidence the later agreement was meant to do so. The court acknowledged the doctrine but found no qualifying agreement in this record.
• Ench v Breslin, 241 AD2d 475 (2d Dept 1997); Garson v Garson, 105 AD2d 726 (2d Dept 1984), aff’d sub nom. Garson v Rapping, 66 NY2d 928 (1985): These cases establish that shareholder agreements are binding among the parties even if not all statutory formalities are observed. They provided a potential pathway for Maria—but she failed to show any such clear, overriding agreement.
• Matter of Kenneth Cole Prods., Inc., Shareholder Litig., 27 NY3d 268 (2016); Auerbach v Bennett, 47 NY2d 619 (1979): These bedrock authorities articulate the business judgment rule and courts’ reluctance to intrude upon internal management decisions. The court invoked them to frame, but ultimately distinguish, the interested-director analysis governed by BCL § 713.
• BCL § 713 and related authorities:
  • BCL § 713(a)-(b): An interested-director contract is not automatically void, but it must be approved by informed disinterested directors or shareholders; absent such approval, the contract is voidable unless the interested party proves it was fair and reasonable at the time.
  • Matter of Hempstead Realty, LLC v Sturrup, 192 AD3d 795 (2d Dept 2021): Used to reject Maria’s ratification argument because the material terms were never presented to shareholders.
  • 67-69 St. Nicholas Ave. HDFC v Green, 206 AD3d 521 (1st Dept 2022): Cited for the burden on the interested party to show fairness and reasonableness.
• Spoliation and sanctions cases:
  • Ortega v City of New York, 9 NY3d 69 (2007): Authorizes preclusion of favorable proof as a sanction for spoliation.
  • Holland v W.M. Realty Mgt., Inc., 64 AD3d 627 (2d Dept 2009); Barnaman v Bishop Hucles Episcopal Nursing Home, 213 AD3d 896 (2d Dept 2023): State the spoliation doctrine under CPLR 3126.
  • Utica Mut. Ins. Co. v Berkoski Oil Co., 58 AD3d 717 (2d Dept 2009); De Los Santos v Polanco, 21 AD3d 397 (2d Dept 2005); Perez v Tedesco, 214 AD3d 1010 (2d Dept 2023): Emphasize the trial court’s broad discretion in tailoring sanctions.
  • Lotardo v Lotardo, 31 AD3d 504 (2d Dept 2006); Elaine Farsiso, LLC v Long Is. Compost Corp., 227 AD3d 868 (2d Dept 2024); Lieberman v Green, 190 AD3d 713 (2d Dept 2021): Appellate deference to sanctions absent improvident exercise of discretion.
  • C.C. v A.R., 192 AD3d 654 (2d Dept 2021): Supports broad preclusion where spoliation undermines the adversary’s ability to test evidence.
• Lanza v Wagner, 11 NY2d 317, 334 (1962): Cited as procedural authority to remit for entry of a declaratory judgment after granting summary judgment.

Legal Reasoning

1) Ownership and Overissued Shares

The court began with the statutory cap: a corporation “shall have power to create and issue the number of shares stated in its certificate” (BCL § 501[a]). Lorcress’s certificate authorized 200 shares. Any issuance beyond that ceiling is void ab initio (Marino). Because the 2010 shareholder minutes accounted for all 200 authorized shares (40/80/80), any later issuance to Maria beyond that total could not validly expand the company’s equity unless there was either:

• a proper certificate amendment under BCL § 803(a), or
• a clear and unambiguous shareholder agreement intended to override the certificate (Darnet; Ench; Garson).

Maria failed to raise a triable issue on either route. She offered no formal amendment evidence and no clear shareholder agreement superseding the certificate. Accordingly, the court fixed ownership according to the 2010 minutes.

2) Interested-Director Contract and the BCL § 713 Framework

The Costa management agreement directed 8% of Lorcress’s gross rents to Maria for a decade—a substantial financial interest. Under BCL § 713(a), such a contract is not per se void if approved by disinterested directors or a majority of informed shareholders. If not, the contract is voidable unless the interested party proves it was fair and reasonable when approved (BCL § 713[b]).

The petitioner established (i) Maria’s financial interest; and (ii) a lack of informed shareholder approval because the material terms were never presented to shareholders (supported by 2017 minutes). Without informed approval, the burden shifted to Maria to demonstrate fairness. Her opposition failed to raise a triable issue on ratification or fairness:

• No ratification: Ratification requires knowledge of material terms (Hempstead Realty). The shareholders lacked that knowledge.
• No fairness showing: She offered no substantiation that the agreement was fair and reasonable to Lorcress at the time (67-69 St. Nicholas Ave.; Ench).

The court therefore granted summary judgment voiding the Costa agreement. The business judgment rule did not insulate the transaction because BCL § 713 imposes specific approval and fairness requirements, and judicial scrutiny is appropriate where disinterested independence is lacking (Auerbach; Kenneth Cole).

3) Spoliation: Broad Preclusion When ESI Contents Are Unknown Due to the Spoliator

The trial court found, and the appellate court credited, that Maria: (a) received the QuickBooks files from the former accountant; (b) directed deletion of the originals; and (c) defied a court order to produce them—first denying possession, then claiming to have lost the copy. Although the record did not definitively establish what was in the QuickBooks files, that uncertainty was a product of Maria’s own conduct.

Under Ortega and CPLR 3126, courts may preclude a spoliator from offering proof favorable to them. The Second Department emphasized trial courts’ broad discretion in tailoring sanctions and affirmed preclusion covering “any matter … that is, was, or might have been recorded in the QuickBooks files.” This pragmatic sanction aligns with the principle that the spoliator bears the risk of uncertainty their misconduct creates.

Impact

• Capital Structure Discipline in Close Corporations: The decision reinforces that share issuances exceeding authorized capital are void unless validated by a formal amendment or a clear, unambiguous, and enforceable shareholder agreement intended to supersede the certificate. Minutes reflecting distribution of all authorized shares become powerful evidence to fix ownership in later disputes.
• Enhanced Scrutiny of Insider Deals: For transactions involving directors’ personal financial interests, Loreti demonstrates a strict application of BCL § 713. If material terms are not disclosed to and approved by informed shareholders, the transaction is vulnerable. The burden to prove contemporaneous fairness lies with the interested director, and failure on that showing can warrant summary judgment voiding the contract.
• ESI Governance and Litigation Holds: The affirmance of broad preclusion despite uncertainty about ESI contents underscores real-world risks when litigants mishandle digital financial records. Parties who destroy or “lose” core accounting files may be barred from presenting financial evidence across a wide scope, significantly impairing their litigation posture.
• Dissolution Proceedings: Fixing share ownership and voiding the management agreement will shape remedies in the underlying dissolution action (BCL § 1104-a), affecting buyout valuations, distributions, and claims of waste or oppression.

Complex Concepts Simplified

• Certificate of Incorporation: The foundational corporate charter. It caps the number of shares the corporation can issue. You cannot validly exceed that cap without formally amending the certificate.
• Shareholder Agreement: A contract among shareholders that can, in some circumstances, govern corporate affairs and even override certificate provisions—but only if there is clear, unambiguous evidence that the parties intended to do so. It is binding among the signatories, though it may not substitute for statutorily required steps in all contexts.
• Overissued Shares: Shares issued in excess of the number authorized by the certificate. They are void from inception unless the corporation validly increases its authorized shares or there is a binding, clearly overriding shareholder agreement.
• Business Judgment Rule: Courts generally do not second-guess decisions by disinterested, informed directors. However, where directors are interested (have a personal stake), statutory safeguards (BCL § 713) kick in and judicial scrutiny is appropriate.
• BCL § 713: New York’s interested-director statute. An interested deal is not automatically void, but:
  • It must be approved by informed, disinterested directors or shareholders; or
  • If not, the interested party must prove the deal was fair and reasonable at the time.
• Ratification: Later approval by shareholders can “cleanse” an interested transaction, but only if the shareholders were informed of the material terms at the time of ratification.
• Spoliation and CPLR 3126: Destroying or losing key evidence can result in sanctions, including preclusion from offering evidence on related topics. Courts may craft broad remedies when the spoliator’s conduct prevents knowing precisely what was lost.

Practical Guidance

• Before Issuing New Shares: Confirm authorized share capital in the certificate. If you need more shares, adopt a board resolution, put the amendment to a shareholder vote per BCL § 803, and file the amendment. Do not rely on informal agreements or assumptions.
• Shareholder Agreements: If you intend a shareholder agreement to supersede certificate terms, memorialize the intent in clear, unambiguous language, ensure all relevant shareholders are parties, and retain meticulous records. Recognize that some certificate changes still require statutory formalities.
• Interested Transactions: For any agreement where a director or officer stands to benefit:
  • Disclose all material terms to disinterested directors and/or shareholders in writing.
  • Obtain formal approval via minutes documenting the disclosures and votes.
  • Consider an independent fairness assessment or benchmarking to substantiate “fair and reasonable” terms contemporaneously.
• ESI and Accounting Records: Institute litigation holds immediately. Preserve original QuickBooks files and backups. Do not alter or delete source data. If files are in third-party custody (e.g., accountants), retrieve and escrow them. Noncompliance can result in sweeping preclusion that cripples your case.

Nuances and Open Questions

• Scope of Shareholder Agreements vs. Certificate Amendments: Loreti acknowledges that shareholder agreements can, in some cases, override certificate provisions among the parties. The court did not have to reach whether a shareholder agreement alone can validly increase authorized shares without a formal amendment, because no such clear agreement was shown. Practitioners should assume BCL § 803 governs changes to authorized capital.
• Fairness Standard Under BCL § 713: The decision reinforces that fairness is measured at the time of approval. Ex post justifications or benefits do not cure the absence of informed approval or contemporaneous fairness.
• Spoliation Preclusion Width: The Second Department’s affirmance of preclusion over “any matter” that “might have been recorded” signals that where a party’s misconduct prevents knowing the contours of lost ESI, courts may adopt broad sanctions calibrated to the prejudice caused.

Conclusion

Loreti delivers three clear messages for New York corporate practice and litigation:

• Capital structure matters: Share issuances cannot leapfrog the certificate’s authorized limit; overissued shares are void unless validated by proper amendment or a clearly overriding, enforceable shareholder agreement.
• Insider deals demand rigor: Interested-director contracts live or die by informed approval or demonstrable fairness at the time of approval. Absent either, they are vulnerable to summary adjudication.
• ESI preservation is non-negotiable: Destroying core digital accounting records invites expansive preclusion sanctions, even where the record cannot precisely define what was lost—because the spoliator bears the risk of that uncertainty.

In the broader legal landscape, the decision fortifies predictable corporate governance rules in closely held companies, incentivizes transparent procedures for related-party transactions, and underscores the judiciary’s willingness to impose meaningful consequences for discovery abuse. It will likely be cited for its crisp application of BCL §§ 501, 803, and 713, and for endorsing robust spoliation sanctions appropriate to the realities of electronic bookkeeping.