66discountTalk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

The defendant partner’s fateful decision took place in 2006, when he sent his fellow partners a written notice unilaterally electing to dissolve the partnership due to what he described as a “fundamental breakdown in the relationship between and among us as partners.” The other partners quickly responded with a damages lawsuit claiming that he had wrongfully dissolved in violation of the partnership agreement in an effort to force the partnership to buy out his interest at a steep premium. The defendant, arguing that the partnership was at-will and of indefinite duration, denied wrongful dissolution and counterclaimed for his full, pro rata share of the partnership’s value upon dissolution. Continue Reading Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount

BreakupIt seems that every time I comment on the dearth of business divorce cases involving partnerships in an era increasingly dominated by limited liability companies, up pops a new and interesting decision in a dispute among partners in a general or limited partnership. In this instance, I’m proven wrong by not one but by three recent decisions involving partnership disputes although, I have to point out in my own defense, two of the three spring from what I call legacy partnerships formed in the 1980’s, i.e., before the advent of LLCs in New York.

Camuso

The first is Camuso v Brooklyn Portfolio, LLC, 50 Misc 3d 1226(A), 2016 NY Slip Op 50273(U) [Sup Ct Kings County Mar. 8, 2016], which is making its second appearance on this blog.

My previous post examined a decision almost two years ago by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in which she determined that a real estate partnership agreement’s transfer restrictions gave way to a marital divorce settlement conveying half of one partner’s 50% interest to his ex-wife where the other 50% partner, who never formally consented to the conveyance as required by the partnership agreement, nonetheless subsequently ratified the transfer in the partnership tax returns and by prior judicial admissions. Continue Reading A Potpourri of Partnership Breakups

cash registerAppellate case law in New York generally prohibits use of company funds to pay for legal defense costs in judicial dissolution proceedings.

The theory supporting the prohibition, as articulated over 50 years ago in Matter of Clemente Brothers, 19 AD2d 568 [3d Dept], aff’d, 13 NY2d 963 [1963], is that the statute authorizing dissolution proceedings “grants to the corporation as a separate entity no authority to determine whether a proceeding shall be initiated to dissolve itself,” thus making the corporation a proper jural party “for the limited and passive purpose of rendering it amenable to the orders of the court” and barring it from assuming a “militant alignment on the side of one of two equal, discordant stockholders.”

The principles animating Clemente and its progeny such as Matter of Rappaport, 110 AD2d 639 [2d Dept 1985], and Matter of Boucher, 105 AD3d 951 [2d Dept 2013], involving deadlock dissolution proceedings between 50-50 shareholders, have been extended to cases brought under the separate statute enacted in 1979 providing a dissolution remedy for oppressed minority shareholders. Continue Reading The Prohibition Against Using Company Funds for Legal Fees in Dissolution Proceedings

LLCIf there’s a common theme to the trio of LLC cases highlighted in this post, it’s that having a well-crafted written operating agreement is no guarantee there won’t be a litigation dust-up, while not having a written operating agreement greatly enhances the odds of a legal dispute among members at some point down the road.

Let’s start with the well-crafted operating agreement in Estate of Calderwood v Ace Group International LLC, 2016 NY Slip Op 30591(U) [Sup Ct NY County Feb. 29, 2016], in which Manhattan Commercial Division Justice Shirley Werner Kornreich ruled that upon the death of the subject Delaware LLC’s majority member, under the express terms of Sections 9.7 and 7.1 of the LLC Agreement (read here), his estate was deemed a “Withdrawing Member” with no management rights and retaining solely the right to receive distributions. Continue Reading LLC Case Notes: Member Expulsion, Withdrawal, and LLC Purpose

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