Faber believes a dispute would have been less likely had the brothers agreed in advance on a settlement amount or on a formula for determining the value.
The brothers did seek quotes for a life insurance policy when they assumed company ownership, Faber said, but they felt the quotes were too expensive. In retrospect, even the highest quote they received would have cost far less money than what has been spent in the legal fees since the one brother died.
Faber said he could not have imagined the events that eventually led to his current situation.
Relations between the two brothers deteriorated prior to the one brother’s death in 2003. The brothers accused one another of mismanagement, improper handling of funds and deceit.
In 2002, Eliot Faber advised his brother, through an attorney, that if the disruptive behavior continued, he would terminate him, in addition to seeking demands for compensatory and punitive damages. Eliot Faber told his brother that he was still open to an equitable buy-out agreement.
As bad as things had become, events took a turn for the worse in 2003 when the brother died in an automobile accident. Eliot Faber’s sister-in-law then became 40 percent owner of the company. Faber said he offered to buy her out for a certain amount, but she turned down the offer, claiming her 40 percent warranted a larger sum than Faber offered.
Faber eventually decided the only way to resolve the matter was through the justice system, and that has been a long and costly process that remains unsettled.
These weren’t Faber’s only problems. With his sister-in-law owning 40 percent of the business, he said he needed her cooperation to use company assets as collateral for loans, cooperation she would not give on account of their legal dispute. In order to borrow money for the business, Faber said he had to use his personal assets as collateral.
In 2007, Faber sued his sister-in-law demanding a judgment against his brother’s estate and for an accounting of all monies which he claimed his brother embezzled. The suit asked the court to determine the amount of money he was obliged to pay his deceased brother’s estate, taking into consideration the money he claims was embezzled.
2008: SISTER-IN-LAW FILES A COUNTERCLAIM
In 2008, Faber’s sister-in-law filed a counterclaim. The counterclaim asks the court to appoint a temporary receiver to manage the company until a complete accounting of its assets is performed. The counterclaim says Eliot Faber misappropriated funds for personal use and concealed activities from his brother. It seeks damages and asks that the company be dissolved.
A trial was scheduled in August of 2009. Faber, to support his valuation of the company, arranged to have an industry consultant testify on his behalf. He flew the consultant in and put him up in a hotel.
In a surprise move, the judge postponed the trial on the day it was scheduled, resulting in lost time for the consultant and Faber’s attorney. Faber estimates the lost hearing cost him $5,000.
WOULD A BUY-SELL AGREEMENT HAVE PREVENTED CONFLICT?
In the case of M&C Vending, a buy-sell agreement would have given a methodology for valuing the company.
“No matter what the issues are, you’re done; you don’t have to bother with any of the nonsense,” Faber said.
Barry Guaglardi, an attorney for the estate of the deceased brother and his widow, isn’t sure a buy-sell agreement would have resolved the issues. “If there are other claims beyond what the agreement allows for, that source of funds won’t be the end of the day,” Guaglardi said.
“A buy-sell agreement helps resolve the buyout of one shareholder by another or by the corporation, provided that the two shareholders haven’t violated duties to each other,” Guarglardi said. “It is designed to take the shareholder who passes away and provide a mechanism for the purchase of that shareholder’s interest. The life insurance policy will provide the source of funding under the buy-sell agreement. The buy-sell agreement doesn’t govern a violation of law by the person who is seeking to remain in the company of any rights of the decedent.”