Court Grants Specific Performance of LLC Members' Buy-Sell Agreement
On its surface, the case of Berle v. Buckley discussed below is about routine contract law, the question being whether an exchange of letters between two parties constituted a binding agreement or merely an unenforceable expression of intent. What makes it compelling reading is its wrenching setting -- the breakup of a family as well as a business -- and the undeniable, unpredictable human element at play as the two parties, one with a lawyer and the other without, made important decisions with known or unknown legal consequences in a tightly compressed time frame.
The Facts:
Beatrice Berle and Abdon Buckley never married, but for 13 years they lived and worked together on a 500-acre farm in upstate New York, producing organic goat cheese, straw and hay. They also produced two children. At some point, things went wrong for Berle and Buckley, very wrong. Berle accused Buckley of physical, sexual, verbal and mental abuse. In 2007, Berle petitioned the court for sole custody of the children and obtained a protective order banning Buckley from entering the farm property.
The farm business was owned through a limited liability company called Berle Farm, LLC, of which Berle held a two-thirds membership interest and Buckley held the other third. Wishing to sever her business ties with Buckley, Berle forwarded to him a letter addressed to her from her own lawyer, dated September 10, 2007 (the "September 10 Offer"), outlining how Buckley's interest could be purchased by Berle as well as the procedures for judicial dissolution of the LLC if Buckley refused to sell. The September 10 Offer proposed to purchase Buckley's interest for $268,666 based on the appraised value of the farm plus the fair market value of the LLC's assets and other equipment, net of a loan balance due Berle. It also proposed a lump sum payment subject to specified terms and conditions including a requirement that Buckley not enter into any farming operation or reside within 20 miles of the farm.
Buckley didn't have a lawyer. On September 12, 2007, Buckley and Berle's lawyer had a telephone conversation which the lawyer then confirmed in a letter sent by fax the same day to Buckley, advising him to retain counsel; confirming Buckley's agreement to the terms of the September 10 Offer except that Buckley wanted to farm and/or reside on family property in Cambridge, NY; advising Buckley that his latter proposal was acceptable if all other terms of Berle's offer were acceptable to Buckley; and informing Buckley that the purchase price needed to be adjusted to reflect Buckley's removal of "several thousand dollars of cash from the safe located at the Berle Farm property". The letter closes by requesting Buckley to "signify his consent to the foregoing terms by signing this letter in the space below" and returning it before the close of business on September 13, 2007, and that, otherwise, Berle will "commence legal proceedings for the dissolution of Berle Farm, LLC".
Continue Reading...Court Refuses to Apply Marketability and Minority Discounts in Valuing Deceased Partner's Interest
A federal appeals court once remarked that "the valuation of a closely held company is an inexact science", adding, "some might say an art" (Okerlund v. U.S., 365 F3d 1044 [Fed. Cir. 2004]). Looking at the gallery of New York valuation law, the artist must be Jackson Pollack.
By that I mean, the valuation rules seem like a hodgepodge when one compares the different settings in which interests in closely held companies are valued by the New York courts, including dissenting shareholder appraisals and oppressed minority shareholder buyouts under the Business Corporation Law, accounting proceedings under the Partnership Law, and equitable distribution proceedings under the Domestic Relations Law. This holds especially true with respect to valuation discounts, as highlighted in a recent appellate decision concerning a fractured partnership in a case called Vick v. Albert, 47 AD3d 482 [1st Dept 2008] (read decision here).
Vick involved a nasty family feud that spawned multiple litigations and arbitration lasting almost a decade. Beginning in 1975, Susan Vick and her brother, Richard Albert, co-owned a number of investment real properties in New York City. Some of the properties they owned as tenants in common, others were owned by partnerships in which Vick, Albert and others held partnership interests. Vick died in 1999, leaving her interests to her two children. About eight months after their mother's death, the children sued their uncle and others seeking, among other things, a partition of certain properties and a dissolution and accounting with respect to various partnerships. The complaint alleged that the uncle took exclusive control of the partnerships' books, records, properties and assets; that he misappropriated certain assets including rental income for his own benefit; and that he failed to wind up the partnerships' affairs after his sister died and failed to provide a final accounting for each of the partnerships. (The appellate court's decision unfortunately recites very few facts. More can be learned from the prior lower court decisions, two of which from 2001 and 2004 can be viewed here and here.)
Continue Reading...Judicial Dissolution of the Unprofitable LLC
This is a tale of two cases, decided five years apart, involving my all-time favorite business divorce topic: judicial dissolution of the limited liability company (LLC). The cases raise the interesting question whether a member may seek dissolution on the ground that the LLC is not profitable.
First, a bit of background for the uninitiated. The LLC is an unincorporated business entity that combines the limited liability benefits of the corporation with the favorable pass-through tax treatment of partnerships. Compared to the highly structured, mandatory provisions of the business corporation laws, the LLC laws offer far more flexibility and freedom of contract among the LLC members to order their ownership, economic and managerial relations as they see fit. LLCs are fast on the way to becoming the preferred form of closely held business organization. Already, in a number of states including Delaware, new LLC filings outnumber new corporation filings.
The New York LLC Law's sparsely worded provision for judicial dissolution, codified in Section 702 of the LLC Law, borrowed its language from the limited partnership law. Section 702 provides in relevant part:
Continue Reading...On application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.
50% Shareholder May Not Sue Other 50% Shareholder in Company's Name
The concept of the corporation as a separate "person", with a legal identity distinct from its shareholders and the ability to sue and be sued in its own name, is the cornerstone of the corporate form of business organization. The essential corporate attribute of limited liability and the attendant imposition of fiduciary duties of loyalty and care on those entrusted to manage the corporation's affairs, could not comfortably exist without corporate separateness.
Okay, I admit that's a highfalutin way to introduce the discussion that follows, of a trite lawsuit between shareholders of a two-bit sports memorabilia business, but that's the beautiful thing about the law, its noblest notions inform even the most mundane of disputes.
The dispute in question is the subject of a decision last month by New York County Supreme Court Justice Joan Madden in a case called Sports Legends, Inc. v. Carberry (read decision here). The case arose when one of two 50% shareholders of a sports memorabilia business caused a suit to be filed in the name of the corporation against the other shareholder, asserting claims to recover company merchandise allegedly taken by the defendant and not returned. The primary issue in the court's decision, of no interest here, was whether the action was barred by the statute of limitations (the court found that it was). Secondarily, and the reason I'm discussing the case, the court addressed the issue whether the shareholder who brought the suit in the company's name had the authority to do so.
Continue Reading...Appellate Court Enforces Stock Buyback Triggered by Dissolution Petition
One of my pet issues, on which I've written a number of times (see here, here and here), is whether the filing of a dissolution petition triggers a mandatory stock buyback under a shareholders' agreement that provides a right of first refusal (RFR). The cases raising the issue have all been deadlock dissolution petitions brought by 50% shareholders under Business Corporation Law Section 1104(a). That statute, unlike Section 1104-a governing minority shareholder oppression, does not give the respondent shareholders the right to purchase the petitioner's shares under Section 1118.
If the shareholders' agreement expressly provides that the filing of a dissolution petition triggers the RFR, unquestionably it should be enforced. The problem arises with the more typical RFR that does not contain such express language, but instead contains what most would consider boilerplate reference to stock transfers. Is enforcement by reason of such general language consistent with a shareholder's reasonable expectations, and with the statutory right to seek dissolution? The issue has very serious ramifications for the petitioner (and for petitioner's lawyer who may be unwary of the trap) because the RFR typically provides a below-market price for the buyback with a long-term payout.
A 2006 appellate decision in a case called Matter of Johnsen (ACP Distribution, Inc.) ruled that a dissolution petition triggered an RFR containing the operative terms, "donate, hypothecate, pledge, transfer or otherwise dispose of his Stock in any manner whatsoever." A September 2007 trial court decision in Matter of Schneck (R&J Components Corp.) (previously blogged here) went the other way where the operative terms were "sell, assign, mortgage, hypothecate, transfer, pledge, create a security interest or lien, encumber, give or otherwise dispose of any of the shares."
Continue Reading...High Court Restricts Remedies of Limited Partner Alleging Fraud by General Partner in Merger Transaction
On March 18, 2008, the New York Court of Appeals, which is New York's highest court, decided Appleton Acquisition, LLC v. National Housing Partnership (read decision here). The decision holds that a limited partner may not bring an action seeking damages or rescission based on allegations of fraud by the general partner in connection with a merger transaction, and that the statutory appraisal proceeding is the exclusive remedy for such claims. As a result, the plaintiff in Appleton, which acquired partnership interests post-merger from limited partners who did not exercise appraisal rights, was out of court and out of luck.
The limited partnership known as Beautiful Village ("BV") owned and managed a New York City apartment complex which received federal financing under HUD's Section 8 affordable housing program. By 2002, BV owed over $1.5 million to the corporate General Partner's parent company. Rather than foreclosing, the General Partner proposed that BV merge into a new limited partnership owned by the parent company, with each limited partner receiving $100 or 2.5 common units of the parent company for their BV shares. The limited partners received proxy statements disclosing the conflict of interest between the General Partner and its parent company, and advising that rejection of the merger would likely lead to foreclosure resulting in adverse tax consequences for the limited partners. The proxy also notified the limited partners of their alternative right to institute a judicial appraisal proceeding to receive the fair value of their partnership interests. None of the limited partners exercised their appraisal rights. In September 2002, the merger was approved and the limited partners' interests in BV were extinguished.
Three years later, plaintiff Appleton Acquisitions, LLC ("Appleton"), which had no prior involvement with BV, purchased from the former BV limited partners their equitable or partnership shares together with any legal claims they had against BV, the General Partner and its parent company. Appleton then filed a lawsuit against the latter entities asserting three causes of action for rescission of the merger and ancillary money damages on the grounds of fraud, breach of fiduciary duty and negligent misrepresentation. Appleton alleged that the proxy statement contained false and misleading statements and that the General Partner had depressed the value of the BV partnership interests by failing to enroll in a certain HUD program that would have provided BV with additional Section 8 rent subsidies. These allegations were also used to support two additional claims seeking monetary damages for breach of contract and aiding and abetting breach of fiduciary duty.
Continue Reading...Court Upholds Authority of 50% Shareholder/President to Sign Lease Without Co-Owner's Approval
Internal shareholder disputes involving closely held corporations can take several different forms when they land in court. The type of litigation addressed primarily by this blog is the dissolution proceeding, in which the ultimate objective is the company's liquidation or, as usually happens, a buyout. Sometimes, as a prelude to dissolution proceedings or negotiated buyout, one shareholder files suit accusing another shareholder of engaging in unauthorized company transactions. Such tactical lawsuits can be particularly effective with companies with 50/50 shareholders where the complainant believes with some justification the court is more likely to enforce the rights of a co-equal owner to an equal say in the company's business affairs.
Along these lines comes the fascinating case of Hellman v. Hellman (read decision here) involving a fight between two brothers each owning 50% of the shares in a lighting business founded by their father in the 1950s, called Maynards Electric Supply. The decision, written by Justice Kenneth R. Fisher of the Commercial Division in Rochester, is a scholarly and highly instructive exegesis on the interplay between officer and board authority in the closed corporation setting where, typically, no one pays attention to corporate formalities until it's too late.
Brothers Glenn and Bruce Hellman are Maynards' sole shareholders and directors. Both are actively employed in the business. Bruce is President and Treasurer. Glenn is Vice-President and Secretary. The business operated since 1985 in a building owned jointly by the two brothers and two other siblings. The lease was scheduled to expire at the end of June 2005. In 2004, Bruce began lease negotiations with the owner of another building ("Stockwood"). Bruce informed Glenn of the negotiations. Glenn disagreed with the proposed relocation. Lawyers for the two exchanged letters in which Glenn warned that Bruce lacked authority on his own to make commitments on the company's behalf. Bruce's lawyer sent Glenn the proposed form of lease. Glenn objected anew to Bruce's authority to enter into the lease. In May 2005, Bruce announced that the company would not be renewing the existing lease upon termination. Two days before the termination date, Bruce as President executed in the company's name a five-year lease with Stockwood. Shortly thereafter he informed Glenn of the new lease and advised of a planned move the coming Fall. Glenn's lawyer wrote to Stockwood maintaining that Maynards had not approved the lease.
Continue Reading...Anatomy of a Dissolution Slugfest: Part V
This is the last in a series of five postings about a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.
Part I of the series (read it here) reviewed the basic facts of the case as laid out in the court's September 2006 decision and discussed the court's denial of defendants' pre-discovery dismissal motion in which defendants argued that Marciano lacked standing to seek dissolution because allegedly he concealed from tax authorities and federal prosecutors his claimed stock ownership interest. Part II (read it here) covered some additional issues raised in the court’s initial decision including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment. Part III (read it here) highlighted portions of the court’s June 2007 decision in which it denied Marciano’s motion to compel payment to him of distributions pending the litigation and granted his motion for leave to amend his complaint. Part IV (read it here) addressed the court's September 2007 decision in which it denied defendants' motion for summary judgment contesting Marciano's share ownership and arguing that Marciano's March 2007 guilty plea to unrelated stock fraud charges justified their excluding him from the business operations.
This Part V examines the court's final decision dated December 7, 2007, concerning a new twist in the proceedings triggered by the defendants' assignment of a valuable dealership lease held by a company co-owned by Marciano to another company owned solely by the defendants. A postscript follows for readers interested in the outcome of the case and some reflections on its greater meaning.
Continue Reading...Anatomy of a Dissolution Slugfest: Part IV
This is the fourth in a series of postings on a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.
Part I of the series (read it here) reviewed the basic facts of the case and discussed the defendants’ initial, unsuccessful challenge to Marciano’s standing to seek dissolution based on allegations that he deliberately sought to conceal from tax authorities and federal prosecutors his stock ownership interest in Champion. Part II (read it here) covered some additional issues raised in the court’s initial decision in the case, including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment. Part III (read it here) highlighted portions of the court’s second decision in the case in which it denied Marciano’s motion to compel payment to him of distributions pending the litigation and granted his motion for leave to amend his complaint.
In this Part IV, we look at Justice Warshawsky's third decision in the case dated September 19, 2007, occasioned by the defendants' renewed assertions that Marciano lacked standing to seek dissolution and that their exclusion of him from the business was reasonably required to protect the business in response to the unrelated stock fraud charges brought against him by federal prosecutors.
Continue Reading...Anatomy of a Dissolution Slugfest: Part III
This is the third in a series of postings on a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.
Part I of the series (read it here) reviewed the basic facts of the case and discussed the defendants’ initial, unsuccessful challenge to Marciano’s standing to seek dissolution based on allegations that he deliberately sought to conceal from tax authorities and federal prosecutors his stock ownership interest. Part II (read it here) reviewed a number of additional issues addressed in the court’s September 2006 initial decision in the case, including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment; Marciano’s request to dissolve the related LLC’s; and Marciano’s application for various forms of interim relief and for extensive discovery.
In this Part III, we turn to the second of Justice Warshawsky’s four written opinions in the case, dated June 15, 2007, in which he considers Marciano’s motions to compel payment to him of distributions pending the litigation and for leave to amend his complaint to add claims based on defendants' alleged financial abuses in the year following commencement of the litigation.
1. Marciano’s motion to compel interim distributions.
A minority shareholder who is frozen out of the business and subsequently files for judicial dissolution is hardly surprised when the controlling shareholders cut off distributions while the litigation rages. The Appellate Division, First Department's decision in Matter of HGK Asset Management, Inc. (Greenhouse), 238 AD2d 291 [1997], authorizes a court to order payment of salary and benefits to the excluded shareholder pending the dissolution proceeding. The Second Department's decision in Deborah Int’l Beauty Ltd. v. Quality King Distributors, Inc., 175 AD2d 791 [1991], also gives courts authority to enforce provisions in shareholder agreements mandating distribution of net income pending dissolution proceedings.
Continue Reading...