deadlock1“Finally, while this court is the only court with jurisdiction to dissolve the Company, the parties are advised that further attempts to collaterally evade the lawful orders of the New Jersey court may result in sanctions.”

Strong words, indeed, at the conclusion of a Decision and Order earlier this month by Manhattan Commercial Division Justice Shirley Werner Kornreich in a multi-jurisdictional fight for control of a data marketing company organized as a New York LLC owned by two deeply divided, 50-50 members.

Justice Kornreich’s ruling in Matter of Belardi-Ostroy, Ltd. v American List Counsel, Inc., 2016 NY Slip Op 30727(U) [Sup Ct NY County Apr. 14, 2016], denied injunctive relief and dismissed a dissolution petition which asked her effectively to override an order issued last December by a New Jersey judge appointing a fifth Board member to fill a vacancy on the LLC’s otherwise deadlocked five-member Board of Directors. Continue Reading Court Dismisses Dissolution Petition Amidst Multi-Jurisdictional Battle for Control of LLC


SSTMy late grandfather, Samuel S. Tripp, had a remarkable career in the law spanning almost 70 years. He was admitted to the bar in 1928 after graduating from NYU School of Law. As a second year lawyer in private practice he argued his first appeal in the New York Court of Appeals when Benjamin Cardozo was its Chief Judge. In 1937 he became Chief Law Assistant of the Queens County Supreme Court, a position he held until retirement in 1973 after which he joined Farrell Fritz where he served as counsel to the firm and mentor to many for more than 20 years. He was President of the Queens County Bar Association, Vice President of the New York State Bar Association, and author of a leading treatise on New York practice. He was fastidious about everything he did. He had an amazing memory. He was the ultimate lawyer’s lawyer.

During his years at Farrell Fritz, from time to time Sam served as court-appointed Referee to hear and report in litigated matters. In 1982, he was appointed Referee in a corporate dissolution case involving a family-owned insurance agency to hear and report on the “fair value” of the petitioner’s 25% stock interest following the majority owner’s election to purchase in lieu of dissolution. The buy-out statute, § 1118 of the Business Corporation Law, had been enacted only three years before and there was virtually no case precedent construing the statute’s undefined “fair value” standard. Continue Reading The Birthing of New York’s Marketability Discount in Fair Value Cases: A Family Affair

bananasAs Thomas Hoey, Jr., the formerly wealthy, self-proclaimed “Banana King,” sits in his prison cell serving lengthy sentences for beating up his mistress and for what the New York Post describes as “his callous attempt to cover up a wild coke orgy in a Manhattan hotel room that ended with one woman dead of an overdose,” and as he awaits sentencing for his subsequent conviction for stealing from the employee pension fund of his bankrupt, wholesale banana company, I suppose the least of his concerns is a civil court ruling last month throwing out his lawsuit seeking to enforce his assignment to his estranged wife of his membership interest in two real estate holding LLCs.

His loss is our gain, at least to those interested in the law governing transfer of LLC interests.

New York LLC Law § 603 sets forth the basic default rules governing assignment of LLC membership interests. Except as provided in the operating agreement:

  • membership interests are assignable in whole or in part;
  • assignment does not entitle the assignee to become a member or to exercise any membership voting or management rights; and
  • the assignment’s only effect is to entitle the assignee to receive distributions and allocations of profits and losses to which the assignor would be entitled.

Under LLC Law § 604 (a), except as provided in the operating agreement, an assignee can become a member only upon the consent of at least a majority in interest of the members excluding the assignor. Continue Reading How Good is Your Operating Agreement’s Anti-Assignment Clause?


Access1It’s been over 21 years since New York enacted its LLC Law, during which we’ve only seen a handful of court decisions concerning a member’s right to inspect company books and records under LLC Law § 1102. A first impression decision last month addressed not the scope of inspection, but whether inspection can be conditioned on an undertaking not to disseminate the information obtained or to contact other members whose identities are disclosed by the inspection.

Let’s begin with a few basics. Managing members of a limited liability company normally require unrestricted access to, and control over, company books and records, which is right and proper given their supervisory and fiduciary roles in regard to company operations and finances. Non-managing members generally have a narrower but nonetheless vital interest in gaining access to company books and records, centered on monitoring the activities of, and potential abuses by, the managers as agents of the LLC, and keeping themselves apprised of the company’s financial condition and the value of their investment.

Section 1102 of New York’s LLC Law, which in large part was patterned after Section 121-106 of the state’s Revised Limited Partnership Law, contains both mandatory and default rules governing the maintenance of, and member access to, books and records. Sections 1102 (a) and (b) mandate that “any member” has the right to inspect “for any purpose reasonably related to the member’s interest as a member” certain minimal records that must be maintained by the LLC including the names and addresses of all managers and members, the LLC’s articles of organization and operating agreement, and tax returns for the three most recent fiscal years, plus such “other information regarding the affairs of the [LLC] as is just and reasonable.”

At the same time the statute recognizes management’s competing interest to control and even limit both the logistics and scope of inspection. Under Section 1102 (b), the manner and circumstances of inspection are subject to “reasonable standards as may be set forth in, or pursuant to, the operating agreement.” For instance, it’s typical to find in operating agreements provisions requiring a written demand for inspection, regulating the time and place of inspection, and specifying the requesting member’s obligation to pay the costs of inspection. Continue Reading Conditional Inspection of LLC Books and Records: When Is It Permitted?


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Stratospheric real estate values in New York City have bestowed great wealth on those lucky or wise enough to have invested before or in the early stages of the city’s demographic, cultural, and commercial renaissance over the last 25 or so years.

The dramatic rise in property values also has spawned more than its fair share of business divorce litigation by exacerbating the divergence of interests among co-owners, between those who desire to sell and take their profit and those who prefer to hold and/or develop the property. This phenomenon is especially observable in family-owned real estate holding companies where the potential for intra- and inter-generational conflict is more pronounced.

Take the case of the Kassab brothers, who co-own through two holding companies a nondescript, outdoor parking lot also home to a flea market near downtown Jamaica, Queens. The property consists of three contiguous parcels with a footprint of about 42,000 square feet. Under existing zoning the properties are buildable as of right to about 380,000 square feet. Recent valuation estimates for the undeveloped properties, which were acquired by the Kassabs between 1992 and 2001 at a small fraction of current value, start over $14 million.

In 2013, the younger brother owning 25% sued to dissolve the holding companies — one organized as a corporation, the other as a limited liability company — claiming oppression and freeze-out by his elder brother owning the other 75%. The younger brother claims the freeze-out tactics are designed to force him to sell his interest to his elder brother for a pittance. The elder brother counters that he has no desire to deprive his younger brother of his ownership rights and that his younger brother is attempting to force him to sell the properties due to the younger brother’s supposedly dire financial straits.

Last week, the case produced not one, not two, but three separate appellate decisions addressing a potpourri of rulings on issues of vital interest to business divorce counsel. Summaries follow after the jump. Continue Reading One Parking Lot, Two Brothers, Three Decisions

Pay UpIn 2005, Luciano Bonanni sued his business partners in a profitable limited liability company that provides MRI scanners to hospitals and management services to an affiliated radiology practice. The thrust of Bonanni’s multiple-count complaint was that the majority members had squeezed him out of the business, discontinued his profit share, and canceled his 20% membership interest.

In one of the earliest rulings in the case, which I featured in the very first post I published on this blog in 2007, the presiding judge, Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson, dismissed Bonanni’s claim for judicial dissolution of the LLC. Justice Emerson’s decision, which pre-figured by several years the Second Department’s landmark opinion in 1545 Ocean Avenue, held that Bonanni’s reliance on the grounds for dissolution available to oppressed minority shareholders under Business Corporation Law § 1104-a did not state a valid claim for relief under LLC Law § 702 governing judicial dissolution of LLCs.

As it turned out, the dismissal of the dissolution claim probably was a blessing in disguise for Bonanni. The company continued to generate healthy profits for many years while the litigation dragged on, culminating with a lengthy bench trial on Bonanni’s assorted direct and derivative claims. Earlier this month, Justice Emerson’s post-trial decision in Bonanni v Horizons Investors Corp., 2016 NY Slip Op 50281(U) [Sup Ct Suffolk County Mar. 9, 2016], found in Bonanni’s favor on most of his claims, including a determination that the defendants unlawfully converted his 20% membership interest by pretending he had withdrawn from the LLC.

The price tag? When all is said and done, including damages on Bonanni’s direct claims, his share of derivative damages, an upcoming accounting, and hefty interest charges at the 9% statutory rate, the recovery likely will exceed $1 million. Continue Reading A Decade Later, LLC’s Majority Members Pay The Price For Converting Minority Member’s Interest

PlanetOne of my favorite quotes from the realm of business valuation is found in a Delaware Chancery Court decision about 20 years ago in which, commenting on the vast disparity between the appraisals offered by two opposing experts — that for the seller making wildly optimistic assumptions about the subject firm’s business prospects while that for the buyer predicting doom and gloom — the court quipped, “In sum, one report is submitted by Dr. Pangloss, and the other by Mr. Scrooge.”

Dr. Pangloss and Mr. Scrooge were at it again in a decision handed down last week by Westchester Commercial Division Justice Alan D. Scheinkman, determining the fair value of a minority interest in two limited liability companies that, as franchisees, own and operate almost three dozen Planet Fitness health clubs in the New York City metro area and also own exclusive rights to develop additional clubs in New York and parts of Southern California.

The case is Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016]. The opening paragraph of Justice Scheinkman’s 33-page post-trial decision aptly sets the stage for the fair-value drama that follows, starring dueling appraisals over two thousand percent apart:

This Court is called upon to determine the value of two corporate entities for purposes of permitting the buy-out of a minority shareholder. It is not surprising, and rather in the nature of things, that the parties have a significant disagreement as to the value of the enterprise. The would-be seller relies on a valuation report that places the value of both corporations at over $162 million and the seller’s share at over $53 million. The would-be buyers rely on a valuation report that values one entity at $6.2 million, the other at $208,000, for a total for the two of approximately $6.4 million, and with the buyer’s share of the total being approximately $2.2 million. The Court must resolve the difference.

Continue Reading Threading the Fair-Value Needle: Court Finds Major Flaws in Both Sides’ Appraisals in Arriving at Its Own Value


ChhoseThe Revised Uniform Limited Liability Company Act (2006) or “RULLCA” continues to gain momentum as it spreads across the United States. Currently, fourteen states plus the District of Columbia have adopted RULLCA including California, Florida, and two of New York’s neighbors — New Jersey and Vermont. If and when adopted by Pennsylvania and Connecticut, where RULLCA legislation already has been introduced, New York will be surrounded by RULLCA jurisdictions with the exception of Massachusetts. RULLCA legislation also is pending in Illinois and South Carolina.

Of greatest interest to business divorce lawyers are (1) RULLCA’s relatively expansive grounds for judicial (involuntary) dissolution of LLCs including oppressive conduct by managers and authorizing remedies other than dissolution, i.e, buy-out, and (2) RULLCA’s provision, completely foreign to LLC laws in New York and elsewhere, authorizing judicial dissociation (expulsion) of a member under certain circumstances.

The two provisions have a lot in common. Indeed, there’s substantial overlap between the statutory grounds for dissolution and dissociation under RULLCA. A recent appellate ruling out of the District of Columbia provokes examination of the strategic choice to be made when initiating a business divorce litigation whether to pursue dissolution, dissociation, or both. Continue Reading Choose Carefully: Dissolution vs. Dissociation Under RULLCA

Rosalyn H. Richter - Assocaite Justice, Appellate Division, First Department 042809

For more than 20 years, there’s been a split among New York’s several intermediate appellate courts on the question whether the state’s courts have subject matter jurisdiction in proceedings seeking judicial dissolution of foreign business entities.

No more. Last week, in a signed opinion by Associate Justice Rosalyn H. Richter (photo right), writing for a unanimous panel of the Manhattan-based Appellate Division, First Department, in Matter of Raharney Capital, LLC v Capital Stack LLC, 2016 NY Slip Op 01425 [1st Dept Feb. 25, 2016], the court abandoned its contrary 1994 ruling in Matter of Hospital Diagnostic Equipment Corp. and, realigning itself with decisions by the Brooklyn-based Second Department and Albany-based Third Department, held that New York courts lack subject matter jurisdiction over foreign company dissolution proceedings.

The Raharney case involves a petition filed in October 2014 in Manhattan Supreme Court by a 50% member of a two-member Delaware LLC with no written operating agreement, seeking judicial dissolution under § 18-802 of the Delaware LLC Act based on intractable deadlock (read petition here). The petition alleges that both members are New York residents, that the Delaware LLC’s place of business is New York, and that the LLC’s only connection to Delaware is its state of formation. The petitioner’s supporting memorandum of law predicated the court’s subject matter jurisdiction on Hospital Diagnostic in which the First Department found “without merit” the State Attorney General’s argument that the courts of New York lack subject matter jurisdiction to dissolve a foreign corporation. Continue Reading A Split No More: First Department Agrees, No Subject Matter Jurisdiction to Dissolve Foreign Business Entities

Lady JusticeWe’re two-thirds of the way through the official winter season, which thus far has dumped a lot of snow on the Northeast making it a good one for skiers. It’s also been a good season for business divorce aficionados with plenty of interesting decisions in judicial dissolution cases and contested buy-outs.

Each August for the last five years, I’ve published a Summer Shorts edition offering several bite-sized case synopses highlighting decisions that, while not meriting extended analysis, nonetheless offer valuable insights for business owners, transactional lawyers involved in business formation and, of course, business divorce lawyers. I figured it’s time to start the hibernal version, so welcome to the inaugural edition of Winter Case Notes.

First up is a decision by Justice Richard Platkin in which the validity under the operating agreement of an LLC manager’s removal hinged on the parties’ relative capital contributions. Next is Justice Stephen Bucaria’s latest of many rulings in a decade-long litigation saga, dissolving a holding company with an indirect ownership interest in a Massachusetts operating company. Last is a decision by Justice Cynthia Kern in which she denied dismissal of a claim for the belated sale of a LLC membership interest. Continue Reading Winter Case Notes: LLC Manager Removal and Other Recent Decisions of Interest