author: Meyer, J. Gabrielli, J.

text:
    Abraham Zion et al., Respondents-Appellants, v Harold W. Kurtz et al., Appellants-Respondents.
    Argued February 7, 1980;
    decided April 29, 1980

      POINTS OF COUNSEL

      Edward L. Sadowsky, Stephen A. Ollendorff and Stacy L. Wallach for respondents-appellants.
    I. The stockholders’ agreement is unambiguous and requires joint action by the stockholders with certain specified exceptions. (Loch Sheldrake Assoc. v Evans, 306 NY 297; Mallad Constr. Corp. v County Fed. Sav. & Loan Assn., 32 NY2d 285; Raleigh Assoc. v Henry, 302 NY 467.) II. No part of the action is moot and defendants should be enjoined from violating the stockholders’ agreement. (Krieger v Krieger, 25 NY2d 364.) III. The stockholders’ agreement does not violate public policy and defendants may not rely upon their failure to amend the certificate of incorporation. (Rothschild v Title Guar. & Trust Co., 204 NY 458; Bisbing v Sterling Precision Corp., 34 AD2d 427; Bausch & Lomb Opt. Co. v Wahlgren, 1 F Supp 799, 68 F2d 660; Bervesovski v Warszawski, 28 NY2d 419.) IV. No claim has been stated for reformation of the stockholders’ agreement. V. Summary judgment on the second cause of action should have been granted in favor of plaintiffs.

      John J. Walsh, Rodney S. Dayan, J. Michael Schell and Michael M. Gordon for appellants-respondents.
    I. Section 3.01 is void as interpreted by the court below. (Greenspun v Lindley, 36 NY2d 473; Manson v Curtis, 223 NY 313; Triggs v Triggs, 46 NY2d 305; McQuade v Stoneham, 263 NY 323; Long

      Park v Trenton-New Brunswick Theatres Co., 297 NY 174; Matter of Abbey [Meyerson], 274 App Div 389, 299 NY 557; Mohawk Ins. Co. v Bankers Trust Co., 36 Misc 2d 1006; Fromkin v Merrall Realty, 30 Misc 2d 288, 15 AD2d 919; Matter of Glekel [Gluck], 30 NY2d 93; University Computing Co. v Lykes-Youngstown Corp., 504 F2d 518.) II. The court below should have denied summary judgment. (Millerton Agway Coop. v Briarcliff Farms, 17 NY2d 57; Andre v Pomeroy, 35 NY2d 361; Lachs v Fidelity & Cas. Co. of N. Y., 306 NY 357; National Conversion Corp. v Cedar Bldg. Corp., 23 NY2d 621; Nau v Vulcan Rail & Constr. Co., 286 NY 188; Strychalski v Mekus, 54 AD2d 1068; Lachs v Fidelity & Cas. Co. of N. Y, 306 NY 357; Hunt Foods & Inds. v Doliner, 26 AD2d 41; Lenkay Sani Prods. Corp. v Benitez, 47 AD2d 524; Mallad Constr. Corp. v County Fed. Sav. & Loan Assn., 32 NY2d 285.) III. Plaintiffs’ first cause of action is moot. (New York Foreign Trade Zone Operators v State Liq. Auth., 285 NY 272; Penato v George, 42 NY2d 908; Yanarella v McClane, 16 AD2d 982; Prashker v United States Guar. Co., 1 NY2d 584; Cutting Room Appliances Corp. v Finklestein, 33 AD2d 674; Park Ave. Clinical Hosp. v Kramer, 26 AD2d 613, 19 NY2d 958; Standardbred Owners Assn. v Yonkers Raceway, 1 AD2d 882.) IV. The counterclaim for reformation should not have been dismissed. (Werfel v Zivnostenska Banka, 287 NY 91; Curry v Mackenzie, 239 NY 267; Rock v Fidelity & Cas. Co. of N. Y., 16 AD2d 823; Dixon Realty Co. v Commercial Affiliates, 9 AD2d 665; Millerton Agway Coop. v Briarcliff Farms, 17 NY2d 57; Southard v Alford, 50 AD2d 664; Patrolmen’s Benevolent Assn. of City of N. Y. v City of New York, 27 NY2d 410; Sloane v Weber, 52 AD2d 1055; Egan Real Estate v McGraw, 40 AD2d 299; Smith v Posner, 85 Misc 2d 934, 49 AD2d 829.)
   OPINION OF THE COURT

Meyer, J.

On these appeals we conclude that when all of the stockholders of a Delaware corporation agree that, except as specified in their agreement, no "business or activities” of the corporation shall be conducted without the consent of a minority stockholder, the agreement is, as between the original parties to it, enforceable even though all formal steps required by the statute have not been taken. We hold further that the agreement made by the parties to this action was violated when the corporation entered into two agreements without the minority stockholder’s consent but was not violated by the formation of two subsidiaries, the minority stockholder’s consent having been obtained, and that the consent provision continues in existence as provided in the agreement. The order of the Appellate Division should, therefore, be modified, with costs to plaintiffs, as hereafter indicated.

Defendant Lombard-Wall Incorporated ("Lombard”) was owned by Equimark Corporation. Wishing to acquire Lombard, defendant Kurtz, a dealer in unregistered securities, caused a corporation originally known as H-K Entreprises, Inc., the name of which was later changed to Lombard-Wall Group, Inc. ("Group”), to be formed under Delaware law. Kurtz was the sole stockholder of Group, but neither Kurtz nor Group could provide the $4,000,000 needed to acquire Lombard from Equimark. It was in fact acquired with a short-term loan from a Swiss bank, shortly thereafter repaid from Lombard’s cash, loaned by Lombard to Group on Group’s noninterest bearing note.

Since Lombard’s business required book assets at the full value of $4,000,000 and Group had no assets other than Lombard’s stock, Group’s note to Lombard was secured by a nonrecourse guarantee from Half Moon Land Corporation, of which plaintiff Zion is the principal shareholder, collateralized by California lands owned by Half Moon. The loan agreement recited that Half Moon had made no representation as to the value of the land and Lombard and Group agreed that should Lombard’s accountants require additional acts or documents in order to maintain the value of the note, they would pay to Half Moon in advance all expenditures necessary to meet the accountants’ requirements.

At the time the note, loan agreement and guarantee were entered into Zion, Kurtz and Group entered into a stockholders’ agreement. Zion and Kurtz were the sole stockholders of Group at that time, Zion holding class A stock and Kurtz, class B. Section 3.01(a) of the agreement expressly provided that without the consent of the holders of class A stock:

"Anything in its Certificate of Incorporation or By-Laws to the contrary notwithstanding, the Corporation shall not:

"(a) Engage in any business or activities of any kind, directly or indirectly, whether through any Subsidiary or by way of a loan, guarantee or otherwise, other than the acquisition and ownership of the stock of L-W as contemplated by this Agreement, provided, however, that the Corporation or LW may obtain and pay the premiums for, and shall be the beneficiary of, term life insurance, if obtainable, on the lives of the Purchaser, Kurtz and such other executive personnel of the Corporation and/or L-W, and in such amounts, as the directors of the Corporation or L-W may from time to time approve or as otherwise expressly provided in this Agreement.”

Notwithstanding that provision, Group and Lombard some eight months thereafter, at the suggestion of Group’s accountants, entered into an agreement which made the previously noninterest bearing loan from Lombard to Group bear interest provided interest could be paid out of earnings, and an escrow agreement with Chase Manhattan Bank pursuant to which Group deposited $580,000 in bonds to secure payment of the note. The two agreements were authorized by Group’s board over Zion’s objection.

The stockholders’ agreement also provided for escrow of the class B stock, Zion’s attorneys being the escrow agent designated in the separately executed escrow agreement. On October 15, 1976, Zion signed on behalf of Half Moon and the class A stockholders letters consenting to the formation by Group of two wholly owned subsidiaries, Lombard-Wall Services, Inc., and Lombard-Wall Management Corporation. In both letters Lombard agreed to execute an appropriate amendment to the escrow agreement with Zion’s attorneys by which the shares of the two subsidiaries would be held subject to the same escrow agreement as was the class B stock. The two corporations were formed on December 9, 1976, following a resolution of Group’s directors, adopted unanimously at a meeting attended by Zion, which ratified formation of the subsidiaries "subject to the Amendment to the Shareholders’ Agreement and subject to the approval of the majority of the Class A stockholders.” Disagreement thereafter arose between the parties concerning what was an appropriate amendment to the escrow agreement, and no such agreement has ever been executed.

Plaintiffs thereafter began this action for declaratory and injunctive relief, asking in their first cause of action that the interest and escrow agreements executed without Zion’s consent be declared in violation of the stockholders’ agreement and annulled, and in the second cause of action that the formation of the subsidiaries be declared in violation of the agreement and that they be dissolved. Defendants’ answer in addition to a number of affirmative defenses stated a counterclaim for reformation on the ground that if the stockholders’ agreement prohibited execution of the interest and escrow agreements the stockholders’ agreement "did not set forth the actual understanding and agreement of the parties.”

Plaintiffs moved for severance of and summary judgment on their first cause of action and for summary judgment dismissing the counterclaim. Defendants cross-moved for summary judgment dismissing the second cause of action. Special Term, finding issues of fact as to both causes of action, denied both motions. The Appellate Division reversed, concluding that defendants were entitled to summary judgment dismissing the second cause of action, but that plaintiffs were entitled to summary judgment dismissing the counterclaim and on their first cause of action declaring that execution of the interest and escrow agreements violated the shareholders’ agreement and should be enjoined.

Just prior to the Appellate Division decision Group made the final payment on the note and caused the escrow agreement with Chase Manhattan to be released. On defendants’ motion to the Appellate Division reciting those facts, that court filed a supplemental memorandum amending its previous decision to limit relief on the first cause of action to the declaration of a past violation. The order entered by the Appellate Division, and the judgment entered pursuant to it by the county clerk so declare, but state that the above-quoted provision of the agreement has expired by its terms and that any declaration as to future violation of it "is moot, there no longer being an agreement capable of future violation.”

For the reasons hereafter stated we conclude (1) that under Delaware law, which governs, the provision proscribing corporate action without the consent of a minority stockholder is not against the public policy of that State and under the circumstances of this case is enforceable even though not incorporated in the corporation’s charter, (2) that plaintiffs are entitled to summary judgment declaring that execution of the interest and escrow agreements violated the shareholders’ agreement, (3) that plaintiffs are entitled to judgment dismissing the reformation counterclaim, (4) that defendants are entitled to judgment dismissing the second cause of action, without prejudice, however, to such action as plaintiffs may be advised to take to obtain the deposit in escrow of the shares of the two subsidiaries, and (5) that though plaintiffs are not entitled to injunctive relief on the present complaint, the interest and escrow agreements having terminated, payment of the note did not terminate the restriction on corporate action by Group without consent of the class A stockholders. The Appellate Division order should, therefore, be modified as in (4) and (5) above indicated, and, as so modified, should be affirmed.

I

The stockholders’ agreement expressly provided that it should be "governed by and construed and enforced in accordance with the laws of the State of Delaware as to matters governed by the General Corporation Law of that State”, and that is the generally accepted choice-of-law rule with respect to such "internal affairs” as the relationship between shareholders and directors (cf. Greenspun v Lindley, 36 NY2d 473, 478; see Restatement, Conflict of Laws 2d, § 302, Comment g). Subdivision (a) of section 141 of the General Corporation Law of Delaware provides that the business and affairs of a corporation organized under that law "shall be managed by a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” Included in the chapter referred to are provisions relating to close corporations, which explicitly state that a written agreement between the holders of a majority of such a corporation’s stock "is not invalid, as between the parties to the agreement, on the ground that it so relates to the conduct of the business and affairs of the corporation as to restrict or interfere with the discretion or powers of the board of directors” (§ 350) or "on the ground that it is an attempt by the parties to the agreement or by the stockholders of the corporation to treat the corporation as if it were a partnership” (§ 354), and further provides that "The certificate of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than the board of directors” and that such a provision may be inserted in the certificate by amendment if "all holders of record of all of the outstanding stock” so authorize (§ 351).

Clear from those provisions is the fact that the public policy of Delaware does not proscribe a provision such as that contained in the shareholders’ agreement here in issue even though it takes all management functions away from the directors. Folk, in his work on the Delaware Corporation Law, states concerning section 350 that "Although some decisions outside Delaware have sustained 'reasonable’ restrictions upon director discretion contained in stockholder agreements, the theory of § 350 is to declare unequivocally, as a matter of public policy, that stockholder agreements of this character are not invalid” (at p 518), that section 351 "recognizes a special subclass of close corporations which operate by direct stockholder management” (at p 520), and with respect to section 354 that it "should be liberally construed to authorize all sorts of internal agreements and arrangements which are not affirmatively improper or, more particularly, injurious to third parties” (at p 526).

Defendants argue, however, that Group was not incorporated as a close corporation and the stockholders’ agreement provision was never incorporated in its certificate. The answer is that any Delaware corporation can elect to become a close corporation by filing an appropriate certificate of amendment (Del General Corporation Law, § 344) and by such amendment approved by the holders of all of its outstanding stock may include in its certificate provisions restricting directors’ authority (ibid., § 351). Here, not only did defendant Kurtz agree in paragraph 8.05(b) of the stockholders’ agreement to "without further consideration, do, execute and deliver, or cause to be done, executed and delivered, all such further acts, things and instruments as may be reasonably required more effectively to evidence and give effect to the provisions and the intent and purposes of this Agreement”, but also as part of the transaction by which the Half Moon guarantee was made and Zion became a Group stockholder, defendant Kurtz, while he was still the sole stockholder and sole director of Group, executed a consent to the various parts of the transaction under which he was "authorized and empowered to execute and deliver, or cause to be executed and delivered, all such other and further instruments and documents and take, or cause to be taken, all such other and further action as he may deem necessary, appropriate or desirable to implement and give effect to the Stockholders Agreement and the transactions provided for therein.” Since there are no intervening rights of third persons, the agreement requires nothing that is not permitted by statute, and all of the stockholders of the corporation assented to it, the certificate of incorporation may be ordered reformed, by requiring Kurtz to file the appropriate amendments, or more directly he may be held estopped to rely upon the absence of those amendments from the corporate charter (Matter of Farm Inds., 41 Del Ch 379, 392-397; Beresovski v Warszawski, 28 NY2d 419; Elyea v Lehigh Salt Min. Co., 169 NY 29, 33; Lorillard v Clyde, 86 NY 384, 389; Kent v Quick-Silver Min. Co., 78 NY 159, 187; Millspaugh v Cassedy, 191 App Div 221; see Delaney, The Corporate Director: Can His Hands Be Tied In Advance, 50 Col L Rev 52, 66).

The result thus reached accords with the weight of authority which textwriter F. Hodge O’Neal tells us sustains agreements made by all shareholders dealing with matters normally within the province of the directors (1 Close Corporations, § 5.24, p 83), even though the shareholders could have, but had not, provided similarly by charter or by-law provision sanctioned by statute (ibid., § 5.19, pp 73-74). Moreover, though we have not yet had occasion to construe subdivision (b) of section 620 of the Business Corporation Law, which did not become effective until September 1, 1963, it is worthy of note that in adopting that provision the Legislature had before it the Revisers’ Comment that: "Paragraph (b) expands the ruling in Clark v. Dodge, 269 N. Y. 410, 199 N. E. 637 (1936), and, to the extent therein provided, overrules Long Park, Inc. v. Trenton-New Brunswick Theatres Co., 297 N. Y. 174, 77 N. E. 2d 633 (1948), Manson v. Curtis, 223 N. Y. 313, 119 N. E. 559 (1919) and McQuade v. Stoneham, 263 N. Y. 323, 189 N. E. 234 (1934).” Thus it is clear that no New York public policy stands in the way of our application of the Delaware statute and decisional law above referred to (cf. Grad v Roberts, 14 NY2d 70; 3 White, New York Corporations [13th ed], par 620.01[1]; Kessler, Shareholder-Managed Close Corporation Under the New York Business Corporation Law, 43 Fordham L Rev 197; Hoffman, New Horizons For The Close Corporation in New York Under Its New Business Corporation Law, 28 Brooklyn L Rev 1, 9-10).

II

Defendants’ arguments against summary judgment for plaintiffs on the first cause of action center on the use in section 3.01 of the word "engage”, which they suggest involves continuity of action rather than a single act, the presence of other proscriptions that would be unnecessary if section 3.01(a) by itself gave Zion an absolute veto over corporate action, and the purpose of the guarantee which was to maintain the $4,000,000 value of Group’s note to Lombard.

The difficulty with limiting the provision to multiple action is that though in many contexts "engage” does denote more than a single transaction (People v Bright, 203 NY 73; Black’s Law Dictionary [4th ed], p 622), its meaning is necessarily governed by the context in which it is used. Defendants’ argument ignores the fact that the parties agreed, as indicated by what they wrote, that without Zion’s consent Group would not engage in "any business or activities of any kind, directly or indirectly, whether through any Subsidiary or by way of a loan, guarantee or otherwise” (emphasis supplied). As we have held in Randall v Bailey (288 NY 280, 285; accord Shilbury v Board of Supervisors of County of Sullivan, 54 Misc 2d 979, 982 [Cooke, J.]), the word "any” means "all” or "every” and imports no limitation. It is difficult to imagine (short, as the old chestnut puts it, of adding in the opening clause of section 3.01 after "Corporation” the word "positively”) a more comprehensive proscription than one against "any business or activities of any kind, directly or indirectly”. The more so is that true of a paragraph which then excepts two specifics— acquisition of Lombard stock and insurance on the lives of key personnel — the first of which was a one-time rather than a multiple transaction.

Nor can it successfully be argued that because the additional proscriptions against sale or pledge of Lombard stock, merger with any corporation other than Lombard, amendment of Group’s certificate of incorporation and issuance of additional stock are set forth in subdivisions of section 3.01 lettered (b) through (e) rather than as additional subparagraphs of subdivision (a) the broad sweep of the latter must be held limited because the former would otherwise be meaningless. So to hold puts an extraordinary premium on the form of outlining rather than the substance of content, but more importantly overlooks the necessity of such protections for a minority stockholder-guarantor in Zion’s position. Any careful legal draftsman, intent upon protecting his client’s interests and familiar with the history, for example, of contract indemnification clauses from Thompson-Starrett Co. v Otis Elevator Co. (271 NY 36) through Levine v Shell Oil Co. (28 NY2d 205) and Margolin v New York Life Ins. Co. (32 NY2d 149), would make indelibly clear that the (b) through (e) proscriptions were "expressed in unequivocal terms” (Thompson-Starrett, supra, at p 41), even though they were encompassed by the language of subdivision (a), lest a court conclude that by subdivision (a) alone "the parties must have meant something else” (Levine, supra, at p 211).

The purpose of the guarantee provides no stronger a basis for reading into subdivision (a) or the contract as a whole the right to enter into the interest and escrow agreements without Zion’s consent. The stockholders’ agreement makes reference to the loan agreement between Group, Lombard and Half Moon. While the loan agreement spells out the importance of the Group note continuing to be valued at the-guaranteed amount as adjusted from time to time, the purpose of that provision, as its wording makes clear, is to protect Half Moon against a claim that it made a representation as to the value of the California real estate and to require that Group and Lombard pay to Half Moon any sums required by Lombard’s independent accountants to be expended for additional documentation, subdivision, zoning change or easement. Having expressly agreed that they would take specific action to support the value of the note should their independent accountants require it, defendants cannot now argue that the accountants’ view that the interest and escrow agreements were necessary to support the value of the note authorized them to enter into such agreements without Zion’s consent, though not expressly excepted from the proscription of section 3.01(a).

The intention of the parties being determinable from the words of their written agreements, interpretation of those agreements was for the court and summary judgment based on that interpretation was proper (Mallad Constr. Corp. v County Fed. Sav. & Loan Assn., 32 NY2d 285, 291).

III

What has been so far written disposes also of the contention that there was any mutual mistake warranting reformation of the contract. The extensive and intricate provisions of the various interrelated documents executed by the parties make crystal clear that this was an arm’s length transaction in which plaintiffs sought the protection of a veto over any "business or activities” of Group other than those expressly spelled out in the stockholders’ agreement. Defendants, of course, were not required to accede to the provision, but then neither was Zion obligated to provide Half Moon’s guarantee. That Kurtz may not have foreseen the necessity for the interest and escrow agreements the accountants later thought required at best establishes a unilateral mistake on his part in not negotiating for a further exception to Zion’s veto power. Nothing in defendants’ papers other than the conclusory allegations that should the court interpret the provisions of section 3.01(a) as Zion does "then there was a mutual mistake of fact” because Zion’s interpretation "is utterly contrary to the basic understanding of all parties” suggests any legal basis for reformation and those allegations are, of course, insufficient to defeat summary judgment on the counterclaim.

IV

With respect to the second cause of action, however, the shoe is on the other foot. While the consents to formation of the two subsidiaries were granted by indorsement on letters from Lombard reciting Lombard’s agreement to appropriate amendment of the escrow with Zion’s attorneys to cover the subsidiaries’ shares issued to Lombard, the first suggestion that consent was conditioned upon the actual deposit of stock was not made until more than a month thereafter in a letter from Zion’s attorneys. The fact that the shares could not be issued until the corporations were formed indicates that the deposit of the stock was not intended as a condition of consent, and that would be the usual construction of the language of the letters, which are phrased in terms of promise rather than condition (cf. Weisner v 791 Park Ave. Corp., 6 NY2d 426, 434; Borax v Borax, 3 AD2d 404, 405, affd without discussion of the point 4 NY2d 113; see Restatement, Contracts 2d, [Tent Draft No. 7], § 253, subd [2], and Comment d; 3A Corbin, Contracts, § 663; 5 Williston, Contracts [3d ed], §§ 664, 665). Moreover, the corporate resolution authorizing formation of the subsidiaries "subject to” the consents which defendants already had is insufficient to create an issue of fact on that score.

Summary judgment was, therefore, properly granted to defendants on the second cause of action, but since as indicated below the consent agreement has not terminated, dismissal of the second cause of action should be stated to be without prejudice to such further action as plaintiffs may be advised to take to obtain escrow deposit of the shares of the subsidiaries. Unless that is done it will not be clear that in dismissing the second cause of action the court has not passed upon whether performance of the escrow deposit agreement may be had.

V

The Appellate Division’s conclusion that there was no longer any agreement capable of future violation was based upon Group’s payment to Lombard of the balance due on the note which defendants contend terminated the "loan period” during which section 3.01 was by its terms to remain in effect. Plaintiffs argue that the "loan period” as defined in the stockholders’ agreement did not end until Group no longer had any obligation, contingent or otherwise, to Half Moon and that Half Moon’s assertion of a claim for attorneys’ fees is still unpaid. It is unnecessary to pass upon that question for article IV of the agreement expressly states that, with stated exceptions, the provisions of section 3.01 are applicable even after the "loan period” has expired.

Notwithstanding that fact plaintiffs are not entitled to injunctive relief in this action, predicated as its only remaining cause of action is on execution of the interest and escrow agreements. Those agreements having been terminated, there simply is no need for an injunction to terminate them. The court has not overlooked the statements in plaintiffs’ brief that defendants breached section 3.01 by Group’s borrowing to pay off the note and that a separate action for a declaration to that effect has been begun. Whether plaintiffs are correct in that contention and if so whether injunctive relief is warranted must await determination of that action, however, and furnishes no basis for injunctive relief in this action.

That is true, however, not because section 3.01 has terminated but because the interest and escrow agreements have been terminated. It was, therefore, error for the Appellate Division on the basis of the papers before it to direct judgment declaring section 3.01 terminated. Accordingly, its order must be modified by deleting that direction.

For the foregoing reasons the order of the Appellate Division should be modified, as above indicated.

Gabrielli, J.

(dissenting in part). I agree with the majority’s conclusion that plaintiff’s cause of action concerning the formation of two subsidiary corporations must be dismissed. Plaintiff agreed unconditionally to the creation of these subsidiaries and therefore has no basis for complaining that this corporate activity was undertaken without his consent. Because I conclude that the agreement requiring plaintiff’s consent was invalid under well-established public policies, however, I deem it unnecessary to consider whether plaintiff’s unconditional consent was actually obtained. Instead, I would hold that plaintiff’s consent was not required as a condition precedent to the creation of the subsidiaries, since the agreement from which his right to consent is derived is an illegal attempt by shareholders to deprive the board of directors of its inherent authority to exercise its discretion in managing the affairs of the corporation. But, for the same reason, and contrary to the majority’s holding, I would reverse the determination of the Appellate Division with respect to plaintiffs first cause of action and hold that plaintiff cannot maintain a suit based upon defendants’ failure to obtain his consent prior to executing the disputed interest and escrow agreements.

It is beyond dispute that shareholder agreements such as the one relied upon by plaintiff in this case are, as a general rule, void as against public policy. Section 3.01 of the agreement, as interpreted both by plaintiff and by a majority of this court, would have precluded the board of directors of Group from taking any action on behalf of the corporation without first obtaining plaintiff’s consent. This contractual provision, if enforced, would effectively shift the authority to manage every aspect of corporate affairs from the board to plaintiff, a minority shareholder who has no fiduciary obligations with respect to either the corporation or its other shareholders. As such, the provision represents a blatant effort to "sterilize” the board of directors in contravention of the statutory and decisional law of both Delaware and New York.

Under the statutes of Delaware, the State in which Group was incorporated, the authority to manage the affairs of a corporation is vested solely in its board of directors (Del General Corporation Law, § 141, subd [a]). The same is true under the applicable New York statutes (Business Corporation Law, § 701). Signficantly, in both States, the courts have declined to give effect to agreements which purport to vary the statutory rule by transferring effective control of the corporation to a third party other than the board of directors (see Abercrombie v Davies, 35 Del Ch 599, 604-611, revd on other grounds 36 Del Ch 371; Adams v Clearance Corp., 35 Del Ch 459, 464-466; Long Park, Inc. v Trenton-New Brunswick Theatres Co., 297 NY 174, 178-179; McQuade v Stoneham, 263 NY 323; Manson v Curtis, 223 NY 313, 323; Matter of Abbey [Meyerson], 274 App Div 389, affd 299 NY 557; cf. Matter of Farm Inds., 41 Del Ch 379, 390; Triggs v Triggs, 46 NY2d 305; Matter of Glekel [Gluck], 30 NY2d 93; see, also, University Computing Co. v Lykes-Youngstown Corp., 504 F2d 518, 532 [applying Delaware law]; see, generally, Delaney, The Corporate Director: Can His Hands Be Tied in Advance, 50 Col L Rev 52, 54-57). The common-law rule in Delaware was aptly stated in Abercrombie v Davies (35 Del Ch, at p 611, supra): "So long as the corporate form is used as presently provided by our statutes this Court cannot give legal sanction to agreements which have the effect of removing from directors in a very substantial way their duty to use their own best judgment on management matters”.

True, the common-law rule has been modified somewhat in recent years to account for the business needs of the so-called "close corporation”. The courts of our State, for example, have been willing to enforce shareholder agreements where the incursion on the board’s authority was insubstantial (Clark v Dodge, 269 NY 410) or where the illegal provisions were severable from the otherwise legal provisions which the shareholder sought to enforce (Triggs v Triggs, 46 NY2d 305, supra). Neither the courts of our State nor the courts of Delaware, however, have gone so far as to hold that an agreement among shareholders such as the agreement in this case, which purported to "sterilize” the board of directors by completely depriving it of its discretionary authority, can be regarded as legal and enforceable. To the contrary, the common-law rule applicable to both closely and publicly held corporations continues to treat agreements to deprive the board of directors of substantial authority as contrary to public policy.

Indeed, there heretofore has been little need for the courts to modify the general common-law rule against "sterilizing” boards of directors to accommodate the needs of closely held corporations. This is because the Legislatures of many States, including New York and Delaware, have enacted laws which enable the shareholders of closely held corporations to restrict the powers of the board of directors if they comply with certain statutory prerequisites (Del General Corporation Law, §§ 350, 351; Business Corporation Law, § 620, subd [b]). The majority apparently construes these statutes as indications that the public policies of the enacting States no longer proscribe the type of agreement at issue here in cases involving closely held corporations. Hence, the majority concludes that there is no bar to the enforcement of the shareholder agreement in this case, even though the statutory requirements for close corporations were not fulfilled. I cannot agree.

Under Delaware law, as the majority notes, the shareholders of a close corporation are free to enter into private, binding agreements among themselves to restrict the powers of their board of directors (Del General Corporation Law, § 350). The same appears to be true under the present New York statutes (Business Corporation Law, § 620, subd [b]). Both the Delaware and the New York statutory schemes, however, contemplate that such variations from the corporate norm will be recorded on the face of the certificate of incorporation (Del General Corporation Law, § 351; Business Corporation Law, § 620, subd [b]). New York additionally requires that the existence of a substantial restriction on the powers of the board "shall be noted conspicuously on the face or back of every certificate for shares issued by [the] corporation” (Business Corporation Law, § 620, subd [g]). Significantly, in both Delaware and New York, a provision in the certificate of incorporation restricting the discretion of the board has the effect of shifting liability for any mismanagement from the directors to the managing shareholders (Del General Corporation Law, § 351, subds [2]-[3]; Business Corporation Law, § 620, subd [f]).

In my view, these statutory provisions are not merely directory, but rather are evidence of a clear legislative intention to permit deviations from the statutory norms for corporations only under controlled conditions. In enacting these statutes, which are tailored for "close corporations”, the Legislatures of Delaware and New York were apparently attempting to accommodate the needs of those who wished to take advantage of the limited liability inherent in the corporate format, but who also wished to retain the internal management structure of a partnership (see, generally, 1 O’Neal, Close Corporations, § 5.02). At the same time, however, the Legislatures were obviously mindful of the danger to the public that exists whenever shareholders privately agree among themselves to shift control of corporate management from independent directors to the shareholders, who are not necessarily bound by the fiduciary obligations imposed upon the board. In order to protect potential purchasers of shares and perhaps even potential creditors of the corporation, the Legislatures of Delaware and New York imposed specific strictures upon incorporated businesses managed by shareholders, the most significant of which is the requirement that restrictions on the statutory powers of the board of directors be evidenced in the certificate of incorporation. This requirement is an essential component of the statutory scheme because it ensures that potential purchasers of an interest in the corporation will have at least record notice that the corporation is being managed in an unorthodox fashion. Absent an appropriate notice provision in the certificate, there can be no assurance that an unsuspecting purchaser, not privy to the private shareholder agreement, will not be drawn into an investment that he might otherwise choose to avoid.

Since I regard the statutory requirements discussed above as essentially prophylactic in nature, I cannot subscribe to the notion that the agreement in this case should be enforced merely because there has been no showing that the interests of innocent third parties have actually been impaired. As is apparent from the design of the relevant statutes, the public policies of our own State as well as those of the State of Delaware remain opposed to shareholder agreements to "sterilize” the board of directors unless notice of the agreement is provided in the certificate of incorporation. Where such notice is provided, the public policy objections to the agreement are effectively eliminated and there is no further reason to preclude enforcement (see Lehrman v Cohen, 43 Del Ch 222, 235). On the other hand, where, as here, the shareholders have entered into a private agreement to "sterilize” the board of directors and have failed to comply with the simple statutory prerequisites for "close corporations”, the agreement must be deemed void and unenforceable in light of the inherent potential for fraud against the public. Indeed, since it is this very potential for public harm which renders these agreements unlawful, the mere fortuity that no one was actually harmed, if that be the case, cannot be the controlling factor in determining whether the agreement is legally enforceable. For the same reason, the illegality in the instant agreement cannot be cured retroactively, as the majority suggests, by requiring defendants to file the appropriate amendments to the certificate of incorporation. And, of course, it is elementary that a party to an agreement cannot be estopped from asserting its invalidity when the agreement is prohibited by law or is contrary to public policy (e.g., Brick v Campbell, 122 NY 337).

By its holding today, the majority has, in effect, rendered inoperative both the language and the underlying purpose of the relevant Delaware and New York statutes governing "close corporations”. According to the majority’s reasoning, the only requirements for upholding an otherwise unlawful shareholder agreement which concededly deprives the directors of all discretionary authority are that all of the shareholders concur in the agreement and that no "intervening rights of third persons” exist at the time enforcement of the agreement is sought. The statutes in question also recognize these factors as conditions precedent to the enforcement of shareholder agreements to "sterilize” a corporate board of directors (Del General Corporation Law, § 351; Business Corporation Law, § 620, subd [b], pars [l]-[2]; subd [g]). But the laws of both jurisdictions go further, requiring in each case that the "close corporation” give notice of its unorthodox management structure through its filed certificate of incorporation. The obvious purpose of such a requirement is to prevent harm to the public before it occurs. If, as the majority’s holding suggests, this requirement of notice to the public through the certificate of incorporation is without legal effect unless and until a third party’s interests have actually been impaired, then the prophylactic purposes of the statutes governing "close corporations” would effectively be defeated. It is this aspect of the majority’s ruling that I find most difficult to accept.

For all of the foregoing reasons, I must respectfully dissent and cast my vote to modify the order of the Appellate Division by directing dismissal of plaintiff’s first cause of action.

Judges Jasen, Jones and Fuchsberg concur with Judge Meyer; Judge Gabrielli dissents in part and votes to modify in a separate opinion in which Chief Judge Cooke and Judge Wachtler concur.

Order modified, with costs to plaintiffs, in accordance with the opinion herein and, as so modified, affirmed.

      . The agreement prohibited transfer of stock by Zion and Kurtz except by a so-called "exempt transfer”. Exempt transfers were made by each, but the agreement required any transferee to accept its terms and defendant’s affidavit recites that transfers made by himself as well as by Zion were made subject to the terms, restrictions and conditions of the agreement. Moreover, the, agreement provided that during the lifetime of Zion any consent of class A stock should be given by Zion and during the lifetime of Kurtz any consent of class B stock should be given by Kurtz. The opinion, therefore, speaks of Zion and Kurtz as though they were in fact the sole stockholders during all of the events referred to.

      . In the agreement "Corporation” refers to Group and "L-W” to Lombard.

      . The fallacy of the dissent is that it converts a shield into a sword. The notice devices on which the concept of the dissent turns are wholly unnecessary to protect the original parties, who may be presumed to have known what they agreed to. To protect an original party who has not been hurt (indeed, has expressly agreed to the limitation he is being protected against and affirmatively covenanted to see to it that all necessary steps to validate the agreement were taken) because a third party without notice could have been hurt had he been involved can only be characterized as a perversion of the liberal legislative purpose demonstrated by the Delaware statutes quoted in the text above.

      . That provision reads: "(b) A provision in the certificate of incorporation otherwise prohibited by law because it improperly restricts the board in its management of the business of the corporation, or improperly transfers to one or more shareholders or to one or more persons or corporations to be selected by him or them, all or any part of such management otherwise within the authority of the board under this chapter, shall nevertheless be valid: (1) If all the incorporators or holders of record of all outstanding shares,. whether or not having voting power, have authorized .such provision in the certificate of incorporation or an amendment thereof; and (2) If, subsequent to the adoption of such provision, shares are transferred or issued only to persons who had knowledge or notice thereof or consented in writing to such provision.”

      . (1961 Legis Doc No. 12, at p 40.)

      . But note that Black’s Fifth Edition (at p 474) drops that part of the definition which states that more than a single transaction is denoted by "engage”.

       Since their interests and rights are identical in the present appeal, plaintiffs Zion and Gross will be referred to in the singular as "plaintiff” for the sake of convenience.


source: Caselaw Access Project

author: Chief Judge Cooke.

license: Public Domain

text:
    State Division of Human Rights on the Complaint of Martha F. Valdemarsen, Respondent, v Genesee Hospital, Appellant.
    Argued March 18, 1980;
    decided April 29, 1980

      POINTS OF COUNSEL

      Richard N. Chapman and James A. Spitz, Jr., for appellant.
    The commissioner did not exceed his authority by reopening the investigation of the complaint herein; the order of the appeal board, as affirmed by the court below, should be reversed. (Matter of Mize v State Div. of Human Rights, 33 NY2d 53; Matter of Bernstein v Toia, 43 NY2d 437, 950; Matter of Howard v Wyman, 28 NY2d 434, 29 NY2d 749; State Div. of Human Rights v New York State Drug Abuse Control Comm., 59 AD2d 332; Matter of Joseph Burstyn, Inc. v Wilson, 303 NY 242, 343 US 495; Equitable Trust Co. of N. Y. v Hamilton, 226 NY 241; People ex rel. Finnegan v McBride, 226 NY 252; Union Carbide Corp. v State Div. of Human Rights, 43 AD2d 911; State Div. of Human Rights v Chicago Pneumatic Tool Co., 67 AD2d 1095.)

      Emmelyn Logan-Baldwin for respondent.
    I. The division’s regulation on reopening goes beyond the Human Rights Law and is invalid as an impermissible administrative amendment to the statute; the commissioner’s reopening of the probable cause finding is invalid. (State Div. of Human Rights v New York State Drug Abuse Control Comm., 59 AD2d 332; Matter of Gross v New York City Alcoholic Beverage Control Bd., 7 NY2d 531; People ex rel. Chase v Wemple, 144 NY 478; People ex rel. Finnegan v McBride, 226 NY 252; Matter of Equitable Trust Co. of N. Y. v Hamilton, 226 NY 241; People ex rel. Hotchkiss v Board of Supervisors of County of Broome, 65 NY 222; Matter of Joseph Burstyn, Inc. v Wilson, 303 NY 242, 343 US 495; Union Carbide Corp. v State Div. of Human Rights, 43 AD2d 911; State Div. of Human Rights v Chicago Pneumatic Tool Co., 67 AD2d 1095; South African Airways v New York State Div. of Human Rights, 35 AD2d 516.) II. In the alternative, with respect to the reopening of the probable cause finding, the commissioner violated the procedural safeguards of the rule; complainant was denied due process of law. (Goldberg v Kelly, 397 US 254.)

      Ann Thacher Anderson, Harry Starr and Joan Ruby Lam-pert for State Division of Human Rights, amicus curiae.

    I. A nonfinal procedural determination of "probable cause” made after informal preliminary investigation by a subordinate of the commissioner may be reviewed by the commissioner and "reopened” for further investigation, absent express statutory language withholding the power to review such determination. (Matter of Venes v Community School Bd. of Dist. 26, 43 NY2d 520.) II. An administrative determination which is nonfinal or administrative and not subject to appellate review may be reconsidered and revoked. (People ex rel. Finnegan v McBride, 226 NY 252; Matter of Siegel v Mangan, 258 App Div 448; Matter of Kilgus v Board of Estimate of City of N. Y.,
      308 NY 620; Matter of Equitable Trust Co. of N. Y. v Hamilton, 226 NY 241; State Div. of Human Rights v Chicago Pneumatic Tool Co., 67 AD2d 1095; Mitchell v National Broadcasting Co., 553 F2d 265; South African Airways v New York State Div. of Human Rights, 35 AD2d 516; Board of Educ. v State Div. of Human Rights, 68 Misc 2d 1035.) III. Courts may not disregard an agency rule of practice adopted pursuant to statutory power, permitting reopenings, and not in conflict with the purposes and design of the statute. (Union Carbide Corp. v State Div. of Human Rights, 43 AD2d 911; Connolly v O'Malley, 17 AD2d 411; Matter of Howard v Wyman, 28 NY2d 434.)
   OPINION OF THE COURT

Chief Judge Cooke.

We weigh the power of the State Commissioner of Human Rights to reopen a proceeding and alter a decision of a regional director — an employee designated by the commissioner to administer a regional office of the Division of Human Rights (9 NYCRR 465.1). Basic to the issue is whether a regulation of said division (9 NYCRR 465.18, formerly 9 NYCRR 465.13), which grants such authority, is in conflict with section 297 of the Executive Law.

The State Human Rights Appeal Board ruled that the commissioner, acting under the regulation, improperly altered the decision of the regional director. The Appellate Division agreed with this view and affirmed. There should be a reversal.

The controversy concerns a verified complaint filed with the Division of Human Rights by Ms. Valdemarsen, a 62-year-old blind woman who worked for Genesee Hospital as a medical transcriber. Ms. Valdemarsen charged Genesee Hospital with unlawfully discriminating on the basis of age and disability (see Executive Law, art 15). After conducting an investigation, a regional director of the Division of Human Rights issued a determination finding that there was probable cause to believe the allegation that the hospital had practiced discrimination because of disability, but not as to age discrimination. Shortly thereafter, and despite a request for reconsideration by the hospital, the regional director issued a "Determination After Investigation” which incorporated these findings. However, a notice of hearing was not issued.

In accordance with routine procedure, the regional director forwarded complainant’s file to the Case Review Unit of the Division of Human Rights. The unit recommended that the commissioner reopen the finding of probable cause on the disability discrimination claim. On his own motion, the commissioner vacated the probable cause finding on the ground of insufficient evidence, and directed that the proceeding be reopened for further investigation by the regional director. After additional review, the regional director issued a “Determination and Order After Reopening”, in which it was stated that there was no probable cause to believe the hospital engaged in unlawful discrimination.

Complainant in turn appealed to the Human Rights Appeal Board, which found that the commissioner’s reopening of the proceeding violated section 297 of the Executive Law (subd 4, par a). According to the board, once a regional director issues a determination of probable cause, section 297 requires that the matter proceed to a public hearing. Thus, the board annulled the order of the division made after the reopening, and remanded for a public hearing. The Appellate Division unanimously affirmed the board’s ruling.

The Division of Human Rights, created by section 293 of the Executive Law has been charged with the duty of enforcing and implementing the provisions of the Human Rights Law (Executive Law, §§ 294, 296, 297). Among its various powers, the division, acting by and through the commissioner or his or her representative, is authorized ”[t]o receive, investigate and pass upon complaints alleging violations” of the Human Rights Law (Executive Law, § 295, subd 6, par [a]). To carry out its functions, the division may "appoint such officers, attorneys, clerks and other employees and agents * * * as it may deem necessary” (id., § 295, subd 3). Finally, the agency “shall establish rules of practice to govern, expedite and effectuate” the procedures of the law (id., § 297, subd 4, par d).

Pursuant to its authority, the division created the position of regional director and delegated to those so designated the power to conduct probable cause investigations (9 NYCRR 465.1 [e]; 465.6 [a]). But the division also promulgated a regulation reserving to the commissioner the ultimate power to decide whether a matter should proceed to a hearing: "The commissioner * * * may, on his or her own motion or on application of a party, whenever justice so requires, prior to the issuance of a notice of hearing, reopen a proceeding and take such action as may be deemed necessary” (9 NYCRR 465.18 [a]). It is this regulation upon which the commissioner relied. Of course, if it contravenes the will of the Legislature, as expressed in the statute, the regulation must fall. Administrative agencies " 'have no authority to create a rule out of harmony with the statute’ ” (Finger Lakes Racing Assn. v New York State Racing & Wagering Bd., 45 NY2d 471, 480-481, quoting Matter of Jones v Berman, 37 NY2d 42, 53).

Both the appeal board and the Appellate Division held that the regulation conflicts with section 297 (subd 4, par a) of the Executive Law which at the time provided in pertinent part: "Within sixty days after a complaint is filed * * * unless the division has dismissed the complaint or issued an order stating the terms of a conciliation agreement not objected to by the complainant, the division shall cause to be issued and served a written notice” requiring the respondent to answer the complaint at a public hearing. In effect, the statute requires that a complaint be brought to the hearing stage within a designated time, unless dismissed or conciliated. The time periods are directory only and, "Absent some showing of substantial prejudice, noncompliance” does not oust the division of jurisdiction (Union Free School Dist. No. 6 of Towns of Islip & Smithtown v New York State Human Rights Appeal Bd., 35 NY2d 371, 381).

Although section 297 (subd 4, par a) specifies that a public hearing be held unless the complaint is dismissed or conciliated, nowhere does it prescribe which official of the agency is to determine whether the dismissal is in order. And surely the division possesses power to dismiss unfounded complaints, and need not conduct the empty ritual of a formal hearing where it is not warranted (Executive Law, § 297, subd 2). That being so, it was proper for the division to establish the procedure for probable cause determinations, and to designate the official to make such a finding. The regulation at issue represents one portion of that procedural scheme.

The agency created the office of regional director, who is responsible for evaluating probable cause in the first instance. It authorized the commissioner, who is the head of the division, to review the regional director’s findings prior to the issuance of a hearing notice and to take such action as he or she deems necessary. These regulations, rather than conflicting with the statute, merely fill in interstices in the regulatory scheme. Simply stated, because section 297 (subd 4, par a) only requires that a hearing be held if the complaint is not dismissed, and does not prescribe a dismissal procedure, a regulation which empowers the commissioner to review the dismissal process cannot conflict with the statute. It is interesting to note that a contrary view would deny the division authority to qualify the power conferred upon regional directors, officers created and appointed by the division.

Thus, there was no infirmity in the order of the commissioner which reopened the proceeding and directed further investigation. It was error for the appeal board to annul that order.

Accordingly, the order of the Appellate Division should be reversed, with costs, the order of the appeal board annulled, and the order of the Human Rights Division reinstated.

Judges Jasen, Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur.

Order reversed, etc.

       The statute was subsequently amended in certain respects (L 1977, ch 729, § 2).


author: Chief Judge Cooke. .

text:
    In the Matter of Leonard Economico, Appellant, v Village of Pelham, Respondent.
    Submitted February 15, 1980;
    decided April 29, 1980

      POINTS OF COUNSEL

      Frederick J. Adler for appellant.
    I. Is a hearing or the opportunity to be heard a constitutional requirement before a permanent civil service employee may be discharged from his job? (Lane v Johnson, 283 NY 244; People v Grogan, 260 NY 138; Connecticut Mut. Life Ins. Co. v Moore, 297 NY 1, 333 US 541; Schafran & Finkel v Lowenstein & Sons, 280 NY 164; Central Sav. Bank in City of N. Y. v City of New York, 279 NY 266; People ex rel. Consolidated Water Co. of Utica v Maltbie, 275 NY 357; Matter of Miller v Long Is. Univ., 85 Misc 2d 393; Matter of Plummer v Klepak, 63 AD2d 983.) II. Does statutory interpretation compel a finding that a labor contract provision executed under the mandate of the Taylor Law supersede a conflicting statutory provision of the Civil Service Law? (Matter of Teachers Assn., Cent. High School Dist. No. 3 [Board of Educ.], 34 AD2d 351; Hoar v City of Yonkers, 295 NY 274; Underhill v Valentine, 267 App Div 778; Matter of Dell, 56 Misc 2d 1017; Sterling v Lapidus, 10 AD2d 180; Matter of Civil Serv. Employees Assn. v Helsby, 31 AD2d 325, 24 NY2d 993; Caso v District Council 37, Amer. Federation of State, County & Municipal Employees, AFL-CIO, 43 AD2d 159; City of Auburn v Nash, 34 AD2d 345.) III. Is the granting of unlimited sick leave in collective bargaining agreement constitutional, and not a gift of the public funds? IV. Is section 73 of the Civil Service Law in derogation of the common law and to be strictly construed? (O’Leary v Board of Educ., 93 NY 1; Dubins v City of New York, 177 Misc 675; Downey v City of New York, 84 Misc 435; People ex rel. Grimshaw v Prendergast, 132 App Div 937, 197 NY 538;
      Penoyar v Kelsey, 150 NY 77; People ex rel. Haverty v Barker, 1 App Div 532, 149 NY 607; Fitzsimmons v City of Brooklyn, 102 NY 536.) V. Did the court err in failing to sign the proposed order with notice of settlement, submitted by appellant herein and which provided, among other things, that appellant herein was entitled to all of the emolument of his office and directing respondent herein to compute and pay to appellant herein all sums of money which are his due from the Village of Pelham from July 7, 1977? VI. Was appellant constantly absent for one year or more, by reason of a disability?

      Murray Steyer for respondent.
    I. The court below was clearly correct in holding that the absence of a hearing did not constitute a denial of due process. (Board of Curators, Univ. of Mo. v Horowitz, 435 US 78; Mitchell v Grant Co., 416 US 600; Anti-Fascist Comm. v McGrath, 341 US 123; Matter of Sanford v Rockefeller, 35 NY2d 547, 421 US 973; Semple v Miller, 38 AD2d 174; Mathews v Eldridge, 424 US 319; Matter of Papasidero v Fasano, 19 NY2d 440; Matter of Plummer v Klepak, 63 AD2d 983.) II. Article XVI of the collective bargaining agreement is clearly invalid because (a) it is in direct contravention of section 73 of the Civil Service Law, and (b) it violates general law and public policy. (Matter of Union Free School Dist. No. 2 of Town of Cheektowaga v Nyquist, 38 NY2d 137; Matter of Cohoes City School Dist. v Cohoes Teachers Assn., 40 NY2d 774; Matter of Susquehanna Val. Cent. School Dist. at Conklin [Susquehanna Val. Teachers’ Assn.], 37 NY2d 614; Syracuse Teachers Assn. v Board of Educ., 35 NY2d 742; Matter of Acting Supt. of Schools of Liverpool Cent. School Dist. [United Liverpool Faculty Assn.], 42 NY2d 509; O’Leary v Board of Educ., 93 NY 1; People ex rel. Grimshaw v Prendergast, 132 App Div 937, 197 NY 538; Caso v District Council 37, Amer. Federation of State, County & Municipal Employees, AFL-CIO, 43 AD2d 159; Matter of Teachers Assn., Cent. High School Dist. No. 3 [Board of Educ.], 34 AD2d 351.)
   OPINION OF THE COURT

Chief Judge Cooke. .

At issue is whether, consistent with due process strictures, petitioner, a tenured public employee, may be dismissed from service without a hearing pursuant to section 73 of the Civil Service Law, after he had been concededly absent from his position for a period in excess of 18 months as a result of a non service related disability. An ancillary question concerns the construction and validity of a provision in a collective bargaining agreement which purports to truncate the rights of the Village of Pelham to terminate the employment status of those unable to work due to nonservice related disabilities by granting those employees “unlimited sick leave with pay”.

Petitioner began working as a policeman for the Village of Pelham in 1971 and eventually attained permanent civil service status. On January 27, 1976, he was injured in an automobile accident not related to his employment and was immediately placed on paid sick leave. The severity of these injuries was sharply disputed and in October, 1976, petitioner was ordered to report back to work by the chief of police. Petitioner, claiming he was still unfit for duty, refused to comply and the village discontinued his sick leave pay. Ultimately, an arbitrator ruled that the village had improperly discontinued petitioner’s sick leave pay and directed that all of these funds due him be paid.

By resolution dated August 2, 1977 — some 18 months after the automobile accident — the village board of trustees terminated petitioner’s employment on the basis of his continuing nonservice related disability. That resolution was enacted pursuant to section 73 of the Civil Service Law which provides in part: “When an employee has been continuously absent from and unable to perform the duties of his position for one year or more by reason of a disability, other than a disability resulting from occupational injury or disease as defined in the workmen’s compensation law, his employment status may be terminated and his position filled by a permanent appointment.”

Following termination, petitioner commenced this article 78 proceeding claiming that his due process rights were transgressed in that he had not been afforded a hearing prior to dismissal and that his dismissal was in contravention of his rights under the collective bargaining agreement granting village policemen unlimited sick leave. In his prayer for relief, petitioner sought reinstatement and restoration to sick leave status. Special Term granted the requested relief but a sharply divided Appellate Division reversed and dismissed the proceeding (67 AD2d 272). We now affirm.

The constitutional guarantee of due process of law (US Const, 5th, 14th Arndts; NY Const, art I, § 6) is perhaps our greatest bulwark against unlimited power of the sovereign. Its essence is fundamental fairness. It demands that the government treat all justly by granting to the individual against whom governmental decisions operate the right to be heard. Broadly stated, the requirements of the due process clause are implicated whenever the enforcement power of the State, its subdivisions or its delegates are employed to deprive an individual of a liberty or property interest created or recognized by State law (Board of Regents v Roth, 408 US 564, 570). But, unlike some legal principles, the requirements of due process do not command that an inflexibly ordained procedure be applied to every case in which some right or status recognized by State law is threatened with alteration or extinguishment. Rather, each case turns on an independent analysis of the governmental and private interests exposed to State action. This inquiry focuses primarily on the nature of the private interest subjected to the official action and the risk of erroneous deprivation of that interest through the administrative procedures utilized. Also considered, although with less weight, is the governmental interest in affecting the private interest together with the fiscal and administrative burdens additional procedural safeguards would entail (see Goldberg v Kelly, 397 US 254, 263-271).

The due process protection afforded a public employee threatened with dismissal is dependent upon whether the employee has acquired a liberty or property interest in his employment (Matter of Petix v Connelie, 47 NY2d 457, 459). Although all are protected against arbitrary action (Matter of Cassidy v Municipal Civ. Serv. Comm. of City of New Rochelle, 37 NY2d 526), it is only after the employee demonstrates a legitimate claim of entitlement to continued employment that due process considerations are implicated. This requires an examination of State law to characterize the nature of the relationship that exists between the government and the employee (Board of Regents v Roth, 408 US 564, 577, supra).

It is undisputed that, as a permanent civil service employee (see Civil Service Law, §§ 58, 63), petitioner held a recognized property interest in his position (see Matter of Simpson v Wolansky, 38 NY2d 391). That interest, however, was not an open-ended one. For, while the State may create property interests subject to due process safeguards, it may, in furtherance of a legitimate State interest, designedly prevent the accrual of protected property rights or circumscribe the instances in which those rights will be recognized (see Arnett v Kennedy, 416 US 134, 152). A tenured civil servant, then, has no entitlement to continued employment in perpetuity. The public policy of the State, by the terms of its statutes, regulations and common law, defines the scope and contours of that interest (Bishop v Wood, 426 US 341, 344). By way of illustration, the public interest would be ill served if its officers could remain in office despite an adjudication that there has been a violation of the public trust. Accordingly, section 30 (subd 1, par e) of the Public Officers Law provides that the property interest of a public officer in his position is extinguished upon his conviction of a felony (see Matter of Toro v Malcolm, 44 NY2d 146).

Likewise the interest of the State in maintaining the efficiency and continuity of its civil service is a substantial one. In its capacity as an employer, therefore, the government must have broad discretion and control over the management of its personnel and internal affairs (cf. Matter of Petix v Connelie, 47 NY2d 457, supra). The absence of a public employee from his position for a prolonged period unduly impairs the efficiency of an office or agency. In many cases, the duties of the absent employee must be absorbed by the remaining staff because temporary replacements are difficult to obtain. Continued performance of the business of government necessitates that there be a point at which the disabled officer may be replaced. These considerations were the practical impetus behind enactment of section 73 of the Civil Service Law (NY Legis Ann, 1965, pp 91-92). At the same time, operation of the statute serves to protect the interests of the affected employee. It relieves him of the travails of undergoing a disciplinary proceeding based upon absence from work which may carry with it the stigma of incompetency or even worse. Moreover, once removed, the statute affords the employee an opportunity to re-enter public service if he recovers and is fit to resume the duties of his position.

Section 73, then, grants civil servants something less than an unrestricted property right to continued employment subject to the full panoply of due process protections. It does so. by granting to permanent civil servants an entitlement to continued employment inextricably entwined with the limitations contained in the statute for determining that right, viz., no continuous absence from work for one year or more on account of a nonservice related disability. Thus, the contours of petitioner’s entitlement to his position are circumscribed by the parameters of section 73 which, in this case, created an interest inferior to a full property right. Once it was demonstrated that petitioner’s condition satisfied the objective criteria triggering application of section 73, his property interest in the position could be extinguished in the sound discretion of the appointing authority (cf. Matter of Shedlock v Connelie, 48 NY2d 943).

However, the fact that section 73 circumscribes the contours of petitioner’s property interest does not mean that, consistent with the dictates of procedural due process, the statute may be utilized in every case without affording the affected employee any right to be heard. There is a marked distinction between those substantive entitlements created by State law and the procedural limitations imposed upon the power to abolish that right. Although the Legislature conceivably could elect not to confer any property interest in government employment (Bishop v Wood, 426 US 341, supra), it may not authorize extinguishment of that interest, once conferred, without appropriate procedural safeguards (Matter of Johnson v Director, Downstate Med. Center, State Univ. of N. Y., 41 NY2d 1061; Morrissey v Brewer, 408 US 471). Simply stated, the Constitution treats certain core procedural protections— notice and an opportunity to be heard — as mandatory incidents attendant to the final extinguishment of a property interest on stated substantive grounds.

Although there is no provision for a hearing contained in section 73, in some instances a hearing may be required to satisfy the demands of due process. As the statute conditions the continued existence of a property interest on the absence of certain specified objective criteria, where the facts underlying operation of the statute are in dispute the affected employee must be afforded an opportunity to be heard before that interest is finally extinguished (Mathews v Eldridge, 424 US 319, 334). For example, if the employee maintains that his disability arose in the course of his employment or there is a dispute concerning the length of time the employee has been disabled, the opportunity to be heard must be afforded.

Where the operative facts triggering application of section 73 are disputed, it may be preferable from an administrative point of view to hold the required hearing prior to termination. But there is no constitutional impediment to holding a posttermination hearing (Matter of Sanford v Rockefeller, 35 NY2d 547, 554-555, app dsmd sub nona. Sanford v Carey, 421 US 973; see, also, Matter of Horodner v Fisher, 38 NY2d 680). This result obtains when the interest of the public employer is weighed against the interest of the employee in continued public employment. As noted previously, the interest of the governmental employer in being able to act expeditiously to remove an absent employee is substantial. Moreover, the issues at a section 73 hearing are sharply focused, easily documented and amenable to prompt resolution. In many cases, administrative action will turn upon routine, unbiased medical reports and the attendance records of the agency itself. The countervailing interest of the employee in continuation of his employment status, while strong, is not an overriding one. Since an employee whose position is terminated is awarded full retroactive relief, including back pay and reinstatement, if he prevails, the sole interest implicated is that of uninterrupted receipt of his income during the brief period between termination and the hearing. To be sure, in some instances even a brief interruption of income could constitute a serious hardship. But in most cases, in addition to access to private resources, employment in the private sector or many forms of government assistance will become available upon termination (compare Goldberg v Kelly, 397 US 254, supra).

In the present case, the failure of petitioner to be afforded a hearing worked no constitutional deprivation. Underlying the necessity for a due process hearing is some factual dispute impacting upon the employer’s right to discharge (Codd v Velger, 429 US 624). Nowhere has petitioner disputed that he has been absent from work for more than one year on account of a disability or that his disability was nonservice related. Indeed, to this day petitioner maintains that he is still disabled and requests that the village restore him to sick leave status. This failure to dispute any of the operative facts underlying the village’s invocation of section 73 is fatal to his claim that he was entitled to a hearing. The primary purpose of a hearing in this context would be to afford petitioner the opportunity to challenge the information in the hands of the village concerning his disability. When the operative facts are not in dispute, a hearing is unnecessary.

Finally, we reject petitioner’s claim that article XVI of the collective bargaining agreement barred his dismissal. In essence, he asserts that article XVI constitutes a perpetual job security clause for those suffering nonservice related disabilities. However, article XVI, by its plain terms, provides for unlimited sick leave benefits to employees of the village; it does not even purport to alter the right of the village to terminate those employees on sick leave who satisfy the criteria of section 73.

Even if article XVI could be construed in the unusual manner petitioner submits, public policy would prevent its enforcement. While a municipal employer may agree to provide preference for the filling of vacancies to certain individuals (Matter of Port Washington Union Free School Dist. v Port Washington Teachers Assn., 45 NY2d 746), it may not surrender its ultimate appointing authority (see Matter of Cohoes City School Dist. v Cohoes Teachers Assn., 40 NY2d 774, 778). Similarly, whereas there is no prohibition against the establishment of a limited job security clause in a collective bargaining agreement (Matter of Board of Educ. v Yonkers Federation of Teachers, 40 NY2d 268, 271), public policy prohibits an employer from bargaining away its right to remove those employees satisfying the plain and clear statutory requisites for termination.

Accordingly, the order of the Appellate Division should be affirmed, with costs.

Judges Jasen, Gabrielli, Jones, Wachtler, Fuchsberg and Meyer concur.

Order affirmed.

       "An employee who is sick or injured may have unlimited sick leave with pay, subject to the right of the Village to deny or discontinue pay to any employee who is capable of working or whose absence is caused by an injury incurred while working for another employer.”


author: Fuchsberg, J. Gabrielli, J.

text:
    The People of the State of New York, Respondent, v Donald Bouton, Appellant.
    Argued January 8, 1980;
    decided April 29, 1980

      POINTS OF COUNSEL

      Douglas P. Rutnik, Public Defender (Paul E. Cheeseman of counsel), for appellant.
    I. The trial court’s denial of defendant’s motion to suppress certain statements constituted reversible error. (Wong Sun v United States, 371 US 471; Brown v Illinois, 422 US 590; People v Martinez, 37 NY2d 662; People v Rodney P., 21 NY2d 1; People v Pugliese, 26 NY2d 478; People v Yukl, 25 NY2d 585; People v Kisin, 28 AD2d 654; People v Malinsky, 15 NY2d 86.) II. Defendant was deprived of a fair trial by an impartial jury. (Duncan v Louisiana, 391 US 145; People v Sprague, 217 NY 373; People v Whitmore, 45 Misc 2d 506; People v Diaz-Rosa, 22 AD2d 755; People v Dockum, 285 App Div 510; People v Bartone, 12 Misc 2d 926; Fahy v Connecticut, 375 US 85; People v Sobieskoda, 235 NY 411; People v Mleczko, 298 NY 153; People v Bacon, 207 Misc 31.) III. The trial court’s refusal to allow defendant to introduce evidence of his good character constituted reversible error. (People v Van Gaasbeck, 189 NY 408; Cancemi v People, 16 NY 501; People v Malinowski, 43 AD2d 189; People v Colantone, 243 NY 134; People v Trimarchi, 231 NY 263; People v Conrow, 200 NY 356; People v Collins, 265 App Div 756; People v Miller, 35 NY2d 65; Edgington v United States, 164 US 361; People v Lingley, 207 NY 396.) IV. The trial court committed reversible error by granting the District Attorney’s motion to admit into evidence certain testimony relating to the sexual activity of defendant which was not alleged in the indictment. (People v Goldstein, 295 NY 61; People v McKinney, 24 NY2d 180; People v Schwartzman, 24 NY2d 241; People v Dales, 309 NY 97; People v Feldman, 296 NY 127; People v Liller, 20 NY2d 727; People v Thau, 219 NY 39; People v Thompson, 212 NY 249; Funk v United States, 290 US 371; People v Posner, 273 NY 184.) V. The sentence was unduly harsh and excessive as a matter of law. (People v Guiden, 5 AD2d 975; People v Corapi, 42 Misc 2d 247; People v Johnson, 252 NY 387; Williams v New York, 377 US 939; People v Silver, 10 AD2d 274; People v Burghardt, 17 AD2d 912; People v Mosher, 24 AD2d 47; People v Blumenthal, 283 App Div 784; Furman v Georgia, 408 US 238.)

      Sol Greenberg, District Attorney (George H. Barber and Ilene R. Bergman of counsel), for respondent.
    I. The trial court properly denied defendant’s motion to suppress his signed statements. (People v Rizzo, 40 NY2d 425; People v Morales, 42 NY2d 129; People v Wharton, 46 NY2d 924; People v Oden,
      36 NY2d 382; People v Miner, 42 NY2d 937.) II. Defendant was not deprived of a fair trial by an impartial jury. (People v Diaz-Rosa, 22 AD2d 755; People v Dockum, 285 App Div 510; People v Bartone, 12 Misc 2d 926; People v Crimmins, 36 NY2d 230; People v Bacon, 207 Misc 31; People v Migliori, 269 App Div 996; People v Cocco, 305 NY 282; People v Durling, 303 NY 382; People v Ciaccio, 47 NY2d 431; People v Lupo, 305 NY 448.) III. The trial court properly refused to admit negative testimony of defendant’s good character by people who did not live in his neighborhood. (People v Van Gaasbeck, 189 NY 408; People v Colantone, 243 NY 134; People v Buccufurri, 158 App Div 186.) IV. The trial court acted properly by allowing testimony concerning sexual acts of defendant at times not specified in the indictment. (People v Thompson, 212 NY 249; People v Molineux, 168 NY 264.) V. The sentence imposed was not unduly harsh and excessive as a matter of law. (People v Rytel, 284 NY 242.)
   OPINION OF THE COURT

Fuchsberg, J.

Defendant Donald Bouton appeals from an order of the Appellate Division affirming a judgment entered upon a verdict of a jury, which found him guilty of sodomy (Penal Law, § 130.50, subd 1; § 130.45) and sexual abuse (Penal Law, § 130.65, subd 1). The charges stemmed from an investigation of defendant’s allegedly lascivious conduct toward two juvenile complainants while they were at his home visiting his young son one day in 1977.

The indictment on which the defendant was tried further accused him of separate counts of statutory rape which he allegedly committed on December 18, 1972 and on November 18, 1973 by engaging in sexual intercourse with an underage female who then ran his household. In the course of the joint trial, at which both the 1977 and the 1972-1973 episodes were aired, the prosecution, as part of its case and over objection, introduced evidence that the cohabitation between the defendant and his teen-age housekeeper was not confined to the two instances specified in the accusatory instrument, but was part of a continuing relationship during the course of which they engaged in ádditional, though uncharged, sexual activity almost daily over a period of years. Despite this proof, the jury found the defendant not guilty of statutory rape. Whether it adversely influenced the result on the other counts is, of course, beyond our ken.

To support his present quest for vacatur of his convictions, Bouton relies on manifold assignments of error. Those which warrant our attention, taken in the order in which the events underlying them occurred, are (1) that inculpatory station house statements taken from the defendant should have been suppressed as the product of an unlawful arrest, (2) that the proffered proof of the extensiveness of defendant’s alleged relationship with his housekeeper should have been excluded, (3) that it was error for the trial court to reject his offer of proof of reputation, (4) that the jury’s deliberations were contaminated when documents which had been ruled inadmissible by the Trial Judge and were therefore marked only for identification found their way into the jury room during its deliberations, and (5) that the sanctity of the jury’s deliberations was further violated by a court clerk’s unauthorized intrusion into its precincts. We believe that at least two of the points mandate reversal.

The first of these, raised by a motion to suppress the statements Bouton had given to the police, contended they were the aftermath of an unlawful arrest (see People v Martinez, 37 NY2d 662; CPL 140.10, subd 1, par [b]). It is settled law that such a challenge casts on the prosecution the burden of coming forward with evidence that the arrest met the probable cause standard (see People v Malinsky, 15 NY2d 86, 91, n 2). Summary statements that the police had arrived at a conclusion that sufficient cause existed will not do. As on a warrant application, it is the responsibility of the neutral court, not the police, to determine whether the latter were justified in making the serious intrusion that the deprivation of another’s liberty constitutes. For that purpose, the court must be presented with facts, not assurances. The record shows that only the latter were offered to the Judge in this case.

The People’s sole witnesses at the pretrial suppression hearing were the two police officers who had effected the actual arrest. Though each testified in detail about his role in the arrest and interrogation, neither provided any specific information to support the claim that the investigation had by then unearthed sufficient facts to render suspicion of defendant reasonable. As to the investigation emanating from the son’s playmates’ complaints, one officer, in conclusory and uninformative terms, merely advised the court that he had been "familiar” with the case. As to the relationship between Bouton and his young housekeeper, the officer’s equally inadequate explanation was that the contents of the admissions which were the subject of the hearing were not new to him. However, he again failed to reveal either the source of this knowledge or the occasion for his acquisition of it. Moreover, though he also testified he had advised the defendant of accusatory statements the police had obtained from the complainants, the court was not told the substance of such statements or when or how they were obtained. To add to the obscurity, the second officer’s testimony, if possible, was even more vacuous.

Yet the court ruled that probable cause was demonstrated by the single officer’s testimony that "he had spoken to the various complainants” in the case. This was worth nothing. True, the officers who made the arrest need not personally have possessed reasonable grounds to believe the defendant had committed a crime; it could suffice that someone, somewhere in the investigative hierarchy did. One way or the other, however, it was incumbent upon the prosecution to point out the basis for this belief (see People v Holup, 29 AD2d 923). Because it failed to do so, the suppression Judge was reduced to sizing up the arresting officers rather than the evidence on which they had proceeded. The confessions should therefore have been suppressed (see People v Havelka, 45 NY2d 636). But, since, even absent the confessions, the testimony of the complainants did not leave the People bereft of a prima facie case, this ruling calls for a new trial rather than dismissal of the indictment (CPL 470.20, 470.40).

The alternative ground on which we premise our reversal derives from the delivery into the jury room of exhibits which the Trial Judge had barred. This event occurred the morning of the day the verdict was announced. The jurors had arrived approximately half an hour before the clerk, and a court matron, presumably propelled by a burst of misplaced zeal, undertook to procure the exhibits for them. As it turned out, these documents had been stored for safekeeping with other items that had never been admitted into evidence, and the whole batch was delivered to the jury en masse. Potentially most prejudicial of these were two versions of defendant’s confessions from which reference to uncharged sexual activity had not been redacted. Other exhibits for identification the unauthorized disclosure of which was likely to prejudice were hearsay laden psychiatric medical records of the statutory rape complainant and welfare records of her mother.

As a sequel to the tainting introduction of this forbidden material, when the clerk, upon arriving, discovered what had transpired, she added a further complication by taking it on herself to make an unauthorized entry into the jury room to retrieve the unadmitted exhibits from the hands of the jurors. As she was to disclose to the Trial Judge later, when the clerk observed from their location in the room that the exhibits appeared to have been scrutinized, she made free to admonish the jurors for having done so, a circumstance which defendant’s counsel was later to argue inhibited candid responses by the jurors at the court’s subsequent hearing on the incident. Even so, at least two jurors acknowledged that the excluded exhibits had been examined. The defense motion for a mistrial was nonetheless denied on the ground that the breaches of the jury barrier were harmless in view of the jurors’ testimony that, at the time of the flawed production of the exhibits, they had already reached agreement on the counts of which the defendant was convicted.

CPL 310.20 (subd 1) grants the trial court discretion to allow the jury to view any exhibit received in evidence at trial, but no provision authorizes submission of unadmitted exhibits. Departure from that rule affects important rights. Since an unadmitted exhibit has not undergone the test of cross-examination, its consideration by the jury directly infringes on the defendant’s right of confrontation. And, when the exhibit contains material specifically found by the court to be inadmissible (e.g., the unredacted confessions here), its presentation to the jury negates the very rights sought to be vindicated by the exclusionary ruling.

In our view this error was not harmless. Though the jurors by then may already have formed tentative opinions, because it was their privilege to change their minds until the verdict had been rendered, it is impossible to say whether this possibility was undermined and their inchoate determinations reinforced by the viewing of the judicially excluded matter. Any post hoc rationalization to the contrary is necessarily speculative (see People v Diaz-Rosa, 22 AD2d 755; People v Dockum, 285 App Div 510, 513; People v Bartone, 12 Misc 2d 926, 930-931).

Nor may we ignore the related entry of the court clerk into the jury room, even though it appears to have been well motivated by her desire to salvage the erroneously delivered exhibits posthaste. The strong public policy favoring the absolute confidentiality of jury deliberations is not lightly to be disregarded (see CPL 310.10; cf. People v Ciaccio, 47 NY2d 431). While the fortuitous circumstances occasioning this intrusion are not likely to recur on retrial, we again take the opportunity to caution that only in the rarest and most inescapable of circumstances may so-called "emergencies” be dealt with other than under the direction of the trial court. The rights of the parties and the appearance of propriety demand strict adherence to that practice. (See, generally, People ex rel. Nunns v County Ct. of Nassau County, 188 App Div 424, 430; People v Bacon, 207 Misc 31.)

We now turn to the complaint that the court erred in precluding the calling of character witnesses who did not reside in the community in which Bouton lived. Alerted to defendant’s plan to do so, the District Attorney applied for an advance ruling on the matter. At this the Judge, without awaiting a response from counsel, advised that he would not permit evidence of reputation from witnesses who did not reside in the "same residential neighborhood” as defendant if their testimony would be directed to "negative reputation under People versus Van Gaasbeck [189 NY 408]”. After counsel indicated somewhat generally that he was prepared to call four witnesses who would testify to defendant’s freedom from an adverse reputation "so far as his morals are concerned” among those who had known him in the jewelry business community in which he had actively trafficked for up to 30 years, the court, while firmly adhering to its disposition of the matter, offered defendant the opportunity to amplify the record by putting the witnesses on the stand in the absence of the jury. Though counsel, by his election to stand instead on the colloquy, has left the matter of preservation of this point for review in some doubt, because the issue may be pressed at the new trial some guiding observations are in order.

It goes without saying that a defendant in a criminal prosecution may introduce evidence that his character is such as to render it improbable that he committed the crime of which he is accused (People v Van Gaasbeck, 189 NY 408). While the nature of the defendant’s character is the object of the proof, reputation — the aggregate tenor of what others say or do not say about him — is the raw material from which that character may be established. Perhaps the most impressive measure of the respect the law accords the community’s ability to judge character is that the reputation of an accused for traits which, in the common experience of mankind, would tend to make it unlikely that he committed a particular offense may in and of itself give rise to a reasonable doubt of guilt where none would otherwise exist (People v Trimarchi, 231 NY 263, 266; see 1 Underhill, Criminal Evidence [6th ed, 1973], §§ 192, 196; 1 Wigmore, Evidence [3d ed, 1940], § 56).

The rule, however, is subject to a number of qualifications of which here relevant is the limitation that the reputation be specific to a particular community. In the relatively immobile societal climate in which the rule originally developed, the inhabitants of the geographical area in which a defendant resided were assumed to comprise the only community in which the general opinion of him would be a reliable gauge of character. However, the law has not been static in this regard. In harmony with the dynamics of modern social organization, particularly the phenomenon of urbanization, it came to recognize that an individual may have multiple and varied bases around which a reputation might form. So, he might be better known in the community of his employment and in the circle of his vocational fellows, where opportunities to evidence the traits at stake may occur with greater frequency than in the environs of his dwelling place, nestled in the anonymity of a large city or suburb (e.g., State v Jackson, 373 SW2d 4 [Mo]).

Thus, People v Colantone (243 NY 134) stands for the proposition that it is error to exclude proof of an accused’s favorable reputation within such parochial realms as a school, an infantry company and a veterans’ organization. (See, also, Thomas v People, 67 NY 218.) The principle is simple. A reputation may grow wherever an individual’s associations are of such quantity and quality as to permit him to be personally observed by a sufficient number of individuals to give reasonable assurance of reliability (5 Wigmore, Evidence [Chadbourn rev, 1974], § 1616). In short, the evidence must demonstrate a reputation rather than merely "individual and independent dealings” (People v Colantone, 243 NY, at p 139, supra; see, generally, Ladd, Techniques and Theory of Character Testimony, 24 Iowa L Rev 498).

Given these criteria, the court’s pronouncement that provable reputation would be limited to that current in one’s "residential neighborhood” was, as noted, too restrictive (see, also, United States v Parker, 447 F2d 826; People v Cobb, 45 Cal 2d 158; People v Kronk, 326 Mich 744; State v Jackson, 373 SW2d 4 [Mo], supra). And, the fact that the offer consisted solely of "negative evidence” — i.e., the absence of adverse comment on the pertinent aspects of defendant’s character— could not in itself be the basis for an exclusionary ruling (People v Van Gaasbeck, 189 NY 408, supra).

It follows that, in light of the milieu from which counsel assured the court he would draw his witnesses, analysis should focus particularly on the breadth of defendant’s business contacts. Surely, it is not to be assumed out of hand that a person pursuing an occupation for as long as 30 years may not have had the opportunity to engage in transactions involving individuals sufficient in number to constitute a reliable source of reputation, always bearing in mind, of course, that, in a business milieu as in a residential one, the predicate for the admission of testimony of reputation is a showing that the witnesses were in a position to know the nature of the defendant’s general reputation (People v O’Regan, 221 App Div 331).

Finally, we offer some anticipatory comment against the possibility that at the second trial the People will again press for the introduction of evidence to show that Bouton and his partner in the statutory rape episodes of which he was acquitted had engaged in other, uncharged instances of such conduct almost daily for three years. The acquittal precludes further use of these instances because they do not share the crucial features of similarity of conduct, identity of victim and contemporaneity of occurrence with the sexual abuse charges that remain. Thus, there is no longer any premise for ruling that the probative value of these events overrides the risk that the defendant might be condemned for acts other than those for which he is being tried (People v Thompson, 212 NY 249; see, also, People v Molineux, 168 NY 264, 291-294; Stone, Rule of Exclusion of Similar Fact Evidence: America, 51 Harv L Rev 988, 1034; Anns., 167 ALR 565, 77 ALR2d 841, 88 ALR3d 8).

For these reasons, and with the accompanying observations, the order of the Appellate Division should be reversed and a new trial ordered.

Gabrielli, J.

(dissenting). The majority reverses the order of the Appellate Division on two stated grounds: (1) that certain confessions made by the defendant should be suppressed since, as they claim, the defendant’s arrest was made without probable cause and any statements made by the defendant thereafter were improperly received in evidence and (2) that the inadvertent delivery of unadmitted exhibits to the jury also requires a new trial.

In view of my analysis and vote to affirm, I shall not address the majority’s inappropriate and unnecessary dictum (p 140) relating to the admissibility of evidence of past intimacies between the same parties in statutory rape cases.

It is beyond dispute that the police had probable cause to believe that the defendant had committed the crime of sodomizing and raping the young victims. The suppression hearing minutes indicate that defendant was given adequate Miranda warnings and that his admissions were in all respects voluntary. It also stands undisputed that the police officers had previously taken detailed statements from the three victims, two of whom were but 11 years old, prior to the arrest of the defendant. Although these statements were not employed or placed in evidence at the suppression hearing, it is clear that not only were they in the possession of the police before the arrest was made, but, in fact, one of the arresting officers testified at the suppression hearing that everything contained in defendant’s statement was known to the officers prior to the arrest, obviously referring to the detailed information supplied by the victims’ statements. The testimony of Officer Gavigan in this regard certainly incorporated by reference, at the very least, the information previously obtained from the victims.

As to the holding that the jury deliberations were tainted by the viewing of certain material excluded from evidence, I find no ground for reversal. On the final morning of their deliberations, the jury requested several exhibits. Unfortunately, the court matron delivered to the jury the wrong exhibits. When the court learned of the mistake, each of the jurors was questioned in camera and 11 of the jurors stated that they had completed their deliberations on the first five charges and had already decided upon guilty verdicts on the second, third, fourth and fifth counts of the indictment. The twelfth juror stated that the jurors were still undecided concerning the first count, but agreed with the others that they had all determined to convict defendant on counts two through five by the time the jurors had convened on the morning in question. It is important to note that the ultimate verdict was one of acquittal on the first and sixth counts and, as found by the trial court, the mistake in delivering the wrong exhibits to the jury had not affected its deliberations. Consequently, reversal is certainly not called for in these circumstances.

Accordingly, I vote to affirm the order of the Appellate Division and sustain the convictions of sodomy in the first degree, sodomy in the second degree and the two counts of sexual abuse in the first degree involving these three young children.

Chief Judge Cooke and Judges Jones, Wachtler and Meyer concur with Judge Fuchsberg; Judge Gabrielli dissents and votes to affirm in a separate opinion in which Judge Jasen, concurs.

Order reversed, etc.

      . No motion to sever was ever made (see CPL 200.20, subd 3).

      . This result obtains irrespective of the administration of Miranda warnings and the voluntariness of the confessions, for in the absence of proof to the contrary the arrest was presumptively without foundation in probable cause (see Dunaway v New York, 442 US 200).