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


An earlier post on this blog, examining a post-trial decision in Matter of Digeser v Flach, 2015 NY Slip Op 51609(U) [Sup Ct Albany County Nov. 5, 2015], described the minority shareholder’s dissolution claim under Section 1104-a of the Business Corporation Law as a “classic case of minority shareholder oppression.” The Albany-based Appellate Division, Third Department, recently agreed with that assessment in affirming the lower court’s order finding sufficient grounds for dissolution.

The appellate panel’s unanimous decision in Matter of Gould Erectors & Rigging, Inc., 146 AD3d 1128, 2017 NY Slip Op 00228 [3d Dept Jan. 12, 2017], affirmed in every respect Albany County Commercial Division Justice Richard M. Platkin’s post-trial decision to dissolve two affiliated construction businesses. Here’s a quick recap of the case as it unfolded at the trial level.

Background

The story begins with two father-son pairs. The petitioner, Henry A. Digeser, is a 25% shareholder of two New York corporations, Gould Erectors & Rigging, Inc. (“Gould”) and Flach Crane & Rigging Co., Inc. (“Flach Crane”). The respondent, John C. Flach, owns the remaining 75%. Digeser’s father was a close friend and business colleague of Flach’s father, who founded the companies, and served on the businesses’ boards. Eventually, the younger Digeser got involved in the businesses and became an owner. Continue Reading An Oppression How-To: Revoke Employment, Profit Sharing and Control

exitDoes a shareholder have a fiduciary duty not to exercise a contractual right under the shareholders’ agreement to resign and demand a buy-out of his shares by the financially distressed corporation, particularly when the corporation’s default would trigger the other shareholders’ personal guarantees?

That’s the intriguing question posed in an unpublished decision last month by Nassau County Commercial Division Justice Vito M. DeStefano in Mondschein v Badillo, Decision and Order, Index No. 600307/14 [Sup Ct Nassau County Jan. 12, 2017], where a physician resigned from his struggling medical professional corporation amidst ultimately unsuccessful efforts to merge with another practice, and who then brought suit against the P.C., his fellow shareholders, and a related realty company that owned the practice’s medical office, to enforce his buy-out and retirement rights under the various agreements governing the two entities.

The agreements essentially gave senior physician-shareholders the right to retire with an obligatory buy-out by the entities of their equity interests in the practice and the realty, as well as payment of specified retirement benefits. In addition, each shareholder gave a joint-and-several personal guarantee of each other shareholder’s rights to payment. Continue Reading Race to the Exit as Professional Practice Falters

Lady Justice

Welcome to another edition of Winter Case Notes in which I clear out my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

And speaking of digging deeper, if you don’t already know, New York’s e-filing system has revolutionized public access to court filings in most parts of the state. The online e-filing portal (click here) allows searches by case index number or party name. Once you find the case you’re looking for, you’ll see a chronological listing with links allowing you to read and download each pleading, affidavit, exhibit, brief, decision, or other filing. No more trips to the courthouse basement to requisition paper files!

This year’s synopses feature matters that run the gamut, from a claimed de facto partnership, to several disputes pitting minority against majority shareholders, to an LLC case in which the court resolved competing interpretations of a somewhat murky operating agreement. Continue Reading Winter Case Notes: De Facto Partnership and Other Recent Decisions of Interest

powerlessAn appellate decision last week sounds alarm bells for minority members of New York LLCs that have no operating agreement and for anyone considering becoming a minority member of an LLC without first having in place an operating agreement.

By the same token, the decision provides opportunities for majority members of existing LLCs without operating agreements to cement and expand their control powers.

Last week’s unanimous decision by the Manhattan-based Appellate Division, First Department in Shapiro v Ettenson, 2017 NY Slip Op 00442 [1st Dept Jan. 24, 2017], affirmed the lower court’s order enforcing an operating agreement signed by two of the LLC’s three co-founding, co-equal members, adopted two years after the LLC’s formation without the signature or consent of the LLC’s third member. Among other features, the operating agreement departed from the statutory default rule by authorizing the reduction of the percentage interest of a member who fails to satisfy a capital call approved by the majority, which is exactly what the two majority members did following their adoption of the agreement, along with eliminating the minority member’s salary. Continue Reading Thinking About Becoming a Minority Member of a New York LLC Without an Operating Agreement? Think Again

Martini2Franklin C. McRoberts, counsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group, prepared this article.


Oh, the things that can happen when the LLC members identified in the company’s operating agreement differ from those identified in official documents submitted to government agencies.

Recently, this blog reported on one case in which the court found in favor of two individuals on their claimed LLC membership interests as evidenced by an application for a food service permit filed by the LLC with the New York City Health Department naming them and the defendant as members, notwithstanding an operating agreement that identified the defendant as the LLC’s sole member. That case involved ownership of a hot dog franchise.

From hot dogs we move to martinis. On an interesting set of facts, Brooklyn Commercial Division Justice Lawrence S. Knipel recently ruled the other way. In the whimsically captioned Cupcake & Boomboom, LLC v Aslani, 2016 NY Slip Op 32310(U) [Sup Ct Kings County Nov. 22, 2016], the outcome was anything but whimsical for the defendant. Justice Knipel discredited documents the LLC submitted to the New York State Liquor Authority (“SLA”) as part of an application to obtain a liquor license, including an operating agreement intentionally misidentifying the members. Instead, the court credited an earlier, inconsistent operating agreement as determinative of the members’ ownership status, thereby reducing the defendant’s claimed interest from 50% to 10%. Continue Reading Operating Agreement Trumps Falsified Liquor License Application In Dispute Over LLC Membership

NewYorkCourtofAppealsIn a controversial ruling last year in Congel v Malfitano, the Appellate Division, Second Department, affirmed and modified in part a post-trial judgment against a former 3.08% partner in a general partnership that owns an interest in a large shopping mall, and who unilaterally gave notice of dissolution, finding that

  • the partnership had a definite term and was not at-will for purposes of voluntary dissolution under Partnership Law § 62 (1) (b) based on the partnership agreement’s provisions authorizing dissolution by majority vote, notwithstanding a 2013 ruling by the Court of Appeals (New York’s highest court) in Gelman v Buehler holding that “definite term” as used in the statute is durational and “refers to an identifiable terminate date” requiring “a specific or even a reasonably certain termination date”;
  • the former partner’s unilateral notice of dissolution therefore was wrongful; and
  • having wrongfully dissolved the partnership and upon the continuation of its business by the other partners, under Partnership Law § 69 (2) (c) (II) the amount to be paid to the former partner for the value of his interest properly reflected a 15% reduction for the partnership’s goodwill value, a 35% marketability discount, a whopping 66% minority discount, and a further deduction for damages consisting of the other partners’ litigation expenses over $1.8 million including statutory interest.

The Appellate Division’s decision, which I wrote about here, and the former partner’s subsequent application for leave to appeal to the Court of Appeals, which you can read here, reveal, to say the least, a remarkable result: the former partner, whose partnership interest had a stipulated topline value over $4.8 million, ended up with a judgment against him and in favor of the other partners for over $900,000.

But the story’s not over. Last week, the Court of Appeals issued an order granting the former’s partner’s motion for leave to appeal. Sometime later this year, the Court of Appeals will hear argument in its magnificent courtroom pictured above and issue a decision in the Congel case which likely will have important ramifications for partnership law whatever the outcome. Continue Reading Court of Appeals to Decide Controversial Partnership Dissolution Case

Litigating

There’s little doubt in my mind that “business divorce” has achieved name recognition as a distinct subgenre of commercial litigation whose regular practitioners, by dint of experience dealing in and out of court with the many and varied legal and practical issues arising from dysfunctional family and non-family owned closely-held businesses, offer clients a level of expertise not shared by civil litigation generalists.

I like to think that my blog, in its tenth year and still chugging along, has contributed to the enhanced recognition along with the efforts of a small but growing cadre of fellow bloggers, contributors of articles in legal publications, and speakers at bar association programs and business valuation seminars.

Now, with the publication of a smartly constructed and well-written treatise called Litigating the Business Divorce (Bloomberg BNA 2016), the law practice of business divorce truly has come of age.

LBD, as I’ll call it, is the fruit of a two-year project led by contributing editors Kurt Heyman and Melissa Donimirski in collaboration with an all-star cast of contributing authors. Kurt is a partner and Melissa a senior associate at the firm of Heyman Enerio Gattuso & Hirzel LLP in Wilmington, Delaware. Kurt, a seasoned business divorce litigator whom I’ve known for about ten years and whom I interviewed last year for my podcast, is a founding Co-Chair of the Business Divorce Subcommittee of the ABA Business Law Section, Business and Corporate Litigation Committee. Continue Reading Announcing Must-Have Treatise on Business Divorce Litigation

limited partnershipNotwithstanding the ascendency of the limited liability company, the Delaware limited partnership continues to serve as an important, tax-advantaged vehicle for certain capital-intensive ventures — especially in the energy sector — featuring centralized management and limited liability for large numbers of passive investors.

Late last month, the Delaware Supreme Court handed down two noteworthy decisions springing from suits by limited partners challenging the fairness of conflicted transactions by general partners that were approved by conflicts committees. In one, the high court affirmed Chancery Court’s order rejecting a claim based on the implied duty of good faith and fair dealing where the transaction’s approval by the conflicts committee complied with the agreement’s safe harbor provision and thus contractually precluded judicial review. Employees Retirement System v TC Pipelines GP, Inc., No. 291, 2016 [Del. Sup. Ct. Dec. 19, 2016].

In the other, Supreme Court reversed Chancery Court’s post-trial decision holding the general partner liable in damages owed directly to limited partners for a conflicted, over-priced  “dropdown” transaction by the general partner. The high court disagreed with Chancery Court’s application of the Tooley standard, instead finding that the claims were exclusively derivative and that the post-trial, pre-judgment acquisition by merger of the partnership extinguished the plaintiff limited partner’s standing to seek relief. El Paso Pipeline GP Company, LLC v Brinckerhoff, No. 103, 2016 [Del. Sup. Ct. Dec. 20, 2016].

Together, the two decisions re-affirm the primacy of contract in the realm of alternative entities including limited liability companies, limited partnerships, and master limited partnerships. Continue Reading Limited Partners Take a Licking in Two Delaware Supreme Court Decisions

Top 10BI’m pleased to present my 9th annual list of this past year’s ten most significant business divorce cases. The list includes important appellate rulings by the First and Second Departments on dissolution of foreign business entities, shareholder rights to inspect book and records, and valuation of partnership interests, along with an interesting mix of trial court rulings on issues affecting LLC members and fair value appraisals. I’ve also included a likely bellwether New Jersey Supreme Court ruling concerning grounds for LLC member expulsion. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Matter of Raharney Capital, LLC v Capital Stack LLC, 138 AD3d 83, 2016 NY Slip Op 01425 [1st Dept Feb. 25, 2016], which brought to an end a longstanding departmental split over the question whether New York courts have jurisdiction over dissolution suits involving foreign business entities, with the First Department in Raharney agreeing there is no jurisdiction.
  2. Matter of Pokoik v 575 Realties, Inc., 143 AD3d 487, 2016 NY Slip Op 06648 [1st Dept Oct. 11, 2016], an appellate ruling of apparent first impression in New York in which the court upheld shareholder inspection rights concerning the books and records of the corporation’s wholly-owned subsidiary.
  3. Huang v Northern Star Management LLC, 2016 NY Slip Op 32194(U) [Sup Ct NY County Oct. 24, 2016], one of only a handful of New York cases involving challenges to cash-out LLC mergers in which Justice Charles E. Ramos of the Manhattan Commercial Division denied a preliminary injunction sought by a minority shareholder who alleged that the merger violated the LLC’s operating agreement.
  4. IE Test, LLC v Carroll, 2016 WL 4086260 [NJ Sup Ct Aug. 2, 2016], an important ruling by the New Jersey Supreme Court in which it reversed the lower court’s judicial expulsion of an LLC member under a narrowed construction of that state’s enabling statute mirroring the Revised Uniform LLC Act’s expulsion provision.
  5. La Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016], a highly detailed and thorough fair-value appraisal opinion by Westchester County Commercial Division Justice Alan D. Scheinkman involving a chain of fitness clubs in which the court confronted dueling expert appraisals whose methodology and conclusions of value were light years apart and ultimately fashioned its own appraisal that, among other important findings, rejected a discount for lack of marketability.
  6. Congel v Malfitano, 141 AD3d 64, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], a controversial ruling currently before the New York Court of Appeals on a pending application for leave to appeal, in which the Second Department upheld a wrongful dissolution judgment against a minority partner and further imposed a 66% discount for lack of control on the value of the partner’s interest.
  7. Gilbert v Weintraub, Short Form Order, Index No. 602290/15 [Sup Ct Nassau County Jan. 29, 2016], presenting the novel issue whether a co-manager of an LLC with no operating agreement can resign as manager while retaining his member status and engage in competitive business activity, where Nassau County Commercial Division Justice Timothy S. Driscoll held that further factual development was needed to determine whether it was reasonable for the resigned manager’s fiduciary duty to extend beyond his resignation and, if so, for how long.
  8. Matter of Hudson (Pure Lime USA, Inc.), Short Form Order, Index No. 600127/16 [Sup Ct Nassau County June 16, 2016], in which Nassau County Commercial Division Justice Stephen A. Bucaria dismissed a 50% shareholders’ dissolution petition alleging director deadlock where the governing shareholders’ agreement authorized one of the respondent’s designees on the four-member board to cast the deciding vote in case of a tie vote.
  9. MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which Manhattan Commercial Division Justice Saliann Scarpulla dismissed derivative claims by a purported LLC member for lack of standing based on the plaintiff’s failure to obtain the required super-majority consent to its admission as a full-fledged member of the LLC notwithstanding it having obtained such consent to the initial assignment of the interest.
  10. Fakiris v Gusmar Enterprises LLC, 53 Misc 3d 1215(A), 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016], where Queens County Commercial Division Justice Martin E. Ritholtz denied a motion to dismiss claims for breach of fiduciary duty brought against a non-member designated as tie-breaker under the LLC’s operating agreement, finding factual issues whether the tie-breaker engaged in any misconduct.

shareholderWhat makes a shareholder a shareholder? What makes an LLC member a member?

The simplicity of the questions belies the difficulties and endlessly unique fact patterns encountered in case after case involving close corporations and LLCs in which one faction claims the other has no ownership interest in the entity and therefore lacks standing to seek judicial dissolution or other remedies predicated on violation of owner rights.

That’s not to say there aren’t common characteristics of such ownership contests. Usually they spring from one or more of the following circumstances: lack of shareholder or operating agreement; lack of certificated interests or other formal ownership documents; lack of transparency of tax returns and other business documents requiring owner identification; prior, inconsistent representations in tax returns or court proceedings; and, sometimes, intentional concealment of ownership interests to avoid creditors, tax authorities, ex-spouses, etc.

Last month, in a pair of noteworthy decisions, Nassau County Commercial Division Justice Stephen A. Bucaria rejected challenges to claimed ownership interests in two very different cases, one involving a close corporation and the other an LLC, in both of which one party unsuccessfully claimed to be the sole owner. In the corporation case, Justice Bucaria granted summary judgment upholding the contested 4% stock ownership as evidenced by a stock purchase agreement and stock certificate notwithstanding the shareholder’s sworn testimony in a prior, unrelated case denying that he was a shareholder. In the LLC case, Justice Bucaria granted preliminary injunctive relief in favor of two individuals claiming one-third membership interest each as evidenced by documents provided to a franchisor and municipal agency, notwithstanding an operating agreement naming the adverse party as sole member. Continue Reading Sole Owners of Close Corporation and LLC Discover They’re Not So Sole