A Manhattan appeals court has ruled that a defunct law firm be awarded 2 percent of a technology company's stock, based on a retainer agreement signed at the height of the dot-com boom.
The deal, signed in September 1998 and retroactive to June 1998, was for the firm of Goldston & Schwab to represent Bandwidth Technology Corp. for one year in exchange for four shares of the closely held company's stock, representing a 2 percent interest. The agreement was negotiated and signed by Bandwidth's then-president, Jonathan Star.
Goldston & Schwab broke up in November 1998, and the remaining partner, Alan Goldston, was discharged by a resolution of Bandwidth's shareholders in February 1999. The company refused to honor the retainer agreement on the grounds that Star had no authority to issue stock without the approval of Bandwidth's board of directors.
Manhattan Supreme Court Justice Rolando T. Acosta backed the company in a decision last year, finding the September 1998 agreement unenforceable. Justice Acosta has since joined the Appellate Division, 1st Department.
But the 1st Department unanimously reversed Thursday, ruling that Star's "apparent authority" to enter into the deal with Goldston & Schwab rendered any discussion of his actual authority to do so irrelevant and immaterial.
"Even where an officer acts to the detriment of corporate interests, the law imposes no duty on a third-party who deals with the corporation to inquire into its employee's actual authority," the panel of Justices Peter Tom, John T. Buckley, John W. Sweeny and Karla Moskowitz said in Goldston v. Bandwidth Technology Corp., 112098/04.
The judges further noted that the president of a corporation was generally presumed to have the authority to retain counsel and negotiate the terms of that retention. The very language of the February 1999 resolution by which Goldston was fired, the court pointed out, "clearly establishes that plaintiff was officially recognized as 'corporate attorney' and was regarded as defendants' general counsel, as successor to [Goldston & Schwab]."
Citing the fact that Bandwidth had signed a May 1999 deal with their investment advisors for 5 percent of the company's stock, the court said: "It is apparent that defendants are simply disinclined to honor the terms of their contractual arrangement with plaintiff."
The lawyers for Bandwidth, Jonathan D. Warner of Warner & Scheuerman, said Thursday he would seek leave to appeal the decision.
"The court changed the law with respect to the issuance of corporate stock," he said. "This was a complete abrogation of the power of the board of directors."
Startups' use of their equity to pay for legal and other professional services was a hallmark of the dot-com era. But the ultimate worthlessness of much of that stock contributed to the subsequent collapse of many previously high-flying technology law firms.
In its decision, the court noted a single share of stock in Bandwidth was valued at $10,000 in 1999, so that the law firm's share would have been worth $40,000. But both Warner and Goldston's lawyer, Neal Schwarzfeld of Schwarzfeld & Schwartz, said Thursday their clients thought the company was now worth much more, though neither is any longer counting on a Nasdaq listing. Rather, they are looking to patents the company holds that relate to its namesake Internet bandwidth technologies.
"There is great perceived value in the technology they have," said Warner, who declined further comment on Bandwidth's activities.
Schwarzfeld said he had scant information about Bandwidth but noted that, in its appeals brief, the company had itself said Goldston's share could be worth $7.8 million.
Source
