During her many years as Presiding Justice of the Brooklyn Commercial Division, New York Supreme Court Justice Carolyn E. Demarest (Ret.) decided numerous important and challenging business divorce cases. I should know, having featured on this blog in the last 10 years no less than 19 of her decisions.

Among them, and likely the one with the most lasting impact, is the Mizrahi case in which Justice Demarest issued two major post-trial decisions granting dissolution of an LLC based on financial infeasibility and ordering a closed auction between the two 50/50 members, before the Appellate Division on appeal by the petitioner made new law by ordering an “equitable buy-out” of the respondent member.

Another of my favorites is the Cortes case, also a post-trial decision, in which Justice Demarest granted common-law dissolution of a restaurant business conditioned on a buy-out of the minority shareholder reflecting his share of millions in cash “skimmed” by the controlling shareholders from a restaurant business as established by sophisticated forensic analysis.

I was among many lawyers saddened by Justice Demarest’s decision last year to hang up her robes. She truly was one of the best trial court judges around, not to mention losing one of my most prolific sources of blog fodder.

The good news is, soon after leaving the bench Justice Demarest joined the Manhattan office of JAMS where she serves as an arbitrator and mediator in complex commercial cases. With 34 years on the bench, a deep understanding of the substantive law governing relations among co-owners of closely held business entities, and equally extensive experience with business valuation, it’s hard to imagine a more qualified neutral in business divorce matters.

I recently had the pleasure of interviewing Justice Demarest for my Business Divorce Roundtable podcast. You can hear the interview by clicking on the link at the bottom of this post.

The interview features Justice Demarest’s thoughts on the many challenges presented by business divorce cases. Naturally I had to ask her about the Mizrahi case and a few others she decided. We also talk about the mediation of business divorce cases.

So give it a listen and if you like it, I’d be grateful if you post a good review on iTunes which will help spread the word.

Franklin C. McRoberts, counsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group, prepared this article.


A business’s failure to pay state taxes can be a problem if the entity later wants to bring a lawsuit, or its non-controlling owners want to sue on the entity’s behalf.

Under Section 203-a of the New York Tax Law, a New York business entity’s failure to pay franchise taxes for two years can result in automatic dissolution of the entity by proclamation of the New York State Secretary of State. Once a corporation is dissolved by proclamation for failure to pay franchise tax, it “does not enjoy the right to bring suit in the court of this state, except in [very] limited respects specifically permitted by statute.” Moran Enterprises, Inc. v Hurst, 66 AD3d 972 [2d Dept 2009].

What happens when an out-of-state entity, or shareholders on the entity’s behalf, attempt to sue in a New York court, despite the business not having paid taxes for several years in its home state? New York County Commercial Division Justice Anil C. Singh recently considering that question, specifically with respect to a Delaware entity, in Juma Technology Corp. v Servidio, Decision and Order, Index No. 151483/2016 [Sup Ct, NY County May 24, 2017]. Continue Reading Minority Shareholders’ Derivative Suit Foiled by Voiding of Corporation’s Charter for Nonpayment of Taxes

Pay attention to your K-1s or they may come back to bite you, is the lesson of Bruder v Hillman, Docket No. A-5055-15T1 [N.J. Super. Ct. App. Div. June 27, 2017], decided last week by a New Jersey appellate panel which rebuffed a limited partner’s attack on the validity of the partnership’s conversion to a limited liability company.

The court’s opinion describes the plaintiffs as “sophisticated real estate investors”  who in 1984 formed a New Jersey limited partnership to own and operate a large apartment complex in Virginia which some years later filed for bankruptcy.

The bankruptcy case settled in 1992 with a restructure agreement and an amended partnership agreement under which the defendants invested almost $12 million and took control of the partnership as general partner, with the plaintiffs retaining limited partner interests. Continue Reading In Dispute Over Partnership’s Conversion to LLC, Court Finds No Duty to “Spoon-Feed” Sophisticated Investor

Gun4HireThe title of this post notwithstanding, the judge’s decision in the recent, high-stakes stock valuation case I’m about to describe, featuring a clash of business appraiser titans whose conclusions of value differed by almost 400%, did not refer to them as “hired guns.”

But the judge did not mince her words in expressing the view that, while “unquestionably qualified to testify on the issue of valuation,” the two experts, whose “zealous advocacy” for their respective clients “compromised their reliability,” offered “wildly disparate” values that were “tailored to suit the party who is paying for them.” Ouch!

The 54-page decision by a Minnesota state court judge in Lund v Lund, Decision, Order & Judgment, No. 27-CV-14-20058 [Minn. Dist. Ct. Hennepin Cnty. June 2, 2017], rejected both experts’ values — $80 million according to the expert for the selling shareholder and $21 million according to the expert for the purchasing company — in arriving at the court’s own value of $45 million for a 25% interest in a chain of 26 upscale grocery stores in the Twin Cities area known as Lunds & Byerlys together with affiliated management and real estate holding companies. Continue Reading Appraisers’ Valuations Are Light-Years Apart, But Does That Make Them Hired Guns?

Wanted: Business Divorce Stories

Are you a business owner who’s been through a contentious break-up with your business partners and would like to share your experience with others? Are you a lawyer with a great war story to share about a business divorce case you handled? If so, and if you’re interested in telling your story for my Business Divorce Roundtable podcast, call me at 212-687-1230 or email me at pmahler@farrellfritz.com.


2of3A company has four founding shareholders each of whom is a director-employee. Their agreement provides that the votes of three out of four founders are required to terminate the employment of any founder or to approve a series of other major decisions such as making distributions, issuing or redeeming shares, amending the certificate of incorporation or bylaws, etc.

When one of the founders no longer is employed and thereby automatically loses his seat on the Board, under the same provision the number of votes required to approve termination of another founder or the other enumerated major decisions drops to two out of three.

Sounds simple so far, right?

Now let’s complicate things. Under another provision, any amendment of the agreement requires the approval of the company and of the founders holding at least 75% of the voting shares, which raises the following questions:

  • What happens when only three founders remain, two of them vote to terminate the third, and the remaining two hold less than 75% of the voting shares?
  • Can the business be managed with less than three founders who lack the voting power to amend the agreement to allow the them to make the enumerated major decisions?
  • Is the vote to terminate the third founder invalid absent a concurrent amendment of the agreement authorizing management of the company by only two founders?
  • If so, does that render the two-out-of-three voting authorization meaningless? Continue Reading Then There Were Two: Court Rejects Minority Shareholder’s Claim of Wrongful Termination Under Founders Agreement

Franklin C. McRoberts, counsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group, prepared this article.


abstentionCivil litigation in federal court can be a luxury experience. The quality of the judiciary is superb. Federal judges often give their cases substantial individualized attention. Lawsuits progress relatively quickly. The procedural rules in federal court have been litigated nationwide, so lawyers can easily find case law on almost every procedural nuance. Yet, business divorce cases are almost never litigated in federal court. Why?

The Friedman Decision

In 1994, the United States Court of Appeals for the Second Circuit all but sealed the courthouse door to business dissolution cases in federal court, at least in the territorial jurisdiction of the Second Circuit, which includes New York. Continue Reading Federal Court No Mecca for Business Divorce Litigants

Therapy1At first glance, you might think the plaintiff minority shareholder in Sardis v Sardis, 2017 NY Slip Op 27163 [Sup Ct Suffolk County May 11, 2017], achieved her derivative lawsuit’s goal when the defendant controlling shareholder, about a month after suit was filed, suddenly reversed course by revoking the corporation’s allegedly wrongful voluntary dissolution that seemingly was the lawsuit’s raison d’être.

You might also think, having apparently forced defendant’s capitulation, the minority shareholder would be entitled to recover her legal fees in the action as authorized by Section 626 (e) of the Business Corporation Law whenever a shareholder derivative action “was successful, in whole or in part, or if anything was received by the plaintiff . . . as a result of the judgment, compromise, or settlement of an action or claim.”

But, as often is the case in shareholder lawsuits, first impressions can be deceptive.

The Sardis case, in which Suffolk County Commercial Division Justice Elizabeth H. Emerson denied the plaintiff’s fee application seeking $650,000, is noteworthy for a couple of reasons. First, the facts and circumstances leading up to the decision — starting with the settlement of a complex matrimonial divorce in which the ex-spouses continued to co-own interests in a valuable operating company, followed by legal proceedings in Delaware, followed by legal proceedings in New York — tell a fascinating story of a high-stakes, three-dimensional legal chess game.

Second, and more importantly for practitioners, Justice Emerson’s opinion is one of the very few New York state court decisions that takes a probing look at the prevailing “substantial benefit” standard for an award of legal fees under Section 626 (e). Continue Reading Finding No “Therapeutic” Benefit to Corporation, Court Denies Fee Award in Discontinued Shareholder Derivative Action

Food-Fight1A little over three years ago I reported on the first round of a fascinating “food fight” among four siblings, each of whom is a 25% shareholder of a Brooklyn-based, second-generation food distributor known as Jersey Lynne Farms, Inc. (the “Corporation”), and each of whom also is a 25% member of Catarina Realty, LLC (the “LLC”) which leases its sole realty asset to the Corporation.

The occasion back then was the court’s decision in Borriello v Loconte denying a dismissal motion in a derivative suit brought by Dorine Borriello on the LLC’s behalf in which she alleged that her three siblings breached fiduciary duty by leasing its realty to the Corporation at a drastically below-market rent and by imposing on the LLC certain expenses that ought to be borne by the Corporation as tenant.

In 2011 — the same year her siblings entered into the challenged lease — they ousted Dorine as a director, officer, and employee of the Corporation. In 2012 Dorine and her siblings negotiated a Separation Agreement and General Release setting forth terms for payment of compensation and benefits along with non-compete and non-disclosure provisions. The agreement left intact Dorine’s 25% stock interest in the Corporation.

Dorine’s derivative suit filed in 2013 claimed that the 2011 below-market lease rendered the LLC unprofitable while increasing the Corporation’s income used to pay salaries and other benefits to her siblings. The first round went to Dorine when the court ruled that her General Release did not encompass her derivative claim and enjoined her siblings from advancing their legal expenses from LLC funds.

In the end, however, and subject to any appeals Dorine may bring, it appears that the siblings have won the food fight’s final rounds. Continue Reading “Food Fight” Sequel Ends Badly for Ousted Sibling

NY

DelawareThe common perception among practitioners familiar with the business entity laws of New York and Delaware is that Delaware law generally is friendlier to, and more protective of, majority ownership and management interests.

Two recent cases — one from each state — highlight at least one important area where the common perception does not apply: majority rights under the statutory default rules to adopt or amend an LLC operating agreement without the consent of all the members.

The difference between the two states can have critical consequences for both majority and minority members of the many LLCs that, for better or worse, are formed without a written operating agreement.

The New York case is one I previously wrote about on this blog. Last January, in Shapiro v Ettenson, the Appellate Division, First Department, in a case involving a three-member LLC that was formed without a written operating agreement, affirmed a lower court’s decision construing Section 402 (c) (3) of the New York LLC Law (“except as provided in the operating agreement . . . the vote of a majority in interest of the members entitled to vote thereon shall be required to . . . adopt, amend, restate or revoke the articles of organization or operating agreement”) to permit the two-member majority to adopt a written operating agreement almost two years after the LLC was formed and began operating, without the third member’s consent and notwithstanding certain provisions in the agreement that modified the statutory default rules adversely to the third member. Continue Reading Delaware Ruling Highlights Difference With New York Over Amending LLC Agreements

StandingThis article was co-authored by Franklin C. McRobertscounsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group.


The rules of “standing” in business divorce litigation generally require that the plaintiff have an ownership interest in the business entity at the time of the alleged wrongful conduct and, for derivative claims brought on the entity’s behalf, throughout the litigation.

In Lewis v Alcobi, 2017 NY Slip Op 30664(U) [Sup Ct NY County Apr. 6, 2017], Manhattan Commercial Division Justice Anil C. Singh considered whether a parent’s assignment of her young daughter’s membership interest in a limited liability company as security for the other parent’s unpaid debt deprived the daughter of standing to sue, despite the daughter’s claim to have received no consideration for the assignment.

The case provides useful lessons for litigating disputes of this sort and, perhaps more importantly, for transactional attorneys considering the use of LLC membership interests to secure payment obligations. Continue Reading Assignment of LLC Interest Defeats Standing Despite Alleged Lack of Consideration