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


When a romantic affair evolves into a business relationship, the eventual falling out can be especially messy. Even more so if the former lovers try to keep the business going after the romance ends. That is a theme from a recent post-trial decision by Queens County Justice Timothy J. Dufficy in Shih v Kim, 2017 NY Slip Op 50281(U) [Sup Ct Queens County Mar. 2, 2017].

Among other interesting issues in Shih was whether a capital investment in a business can be considerd a “gift made in contemplation of marriage” under Section 80-b of the New York Civil Rights Law, a statute which requires return of an engagement or wedding gift — often a ring — to the giver if the marriage does not occur. Let’s see how Judge Dufficy ruled on that and the other legal issues in the case. Continue Reading When Love and Business Fails

crazyWhenever I contemplate New York’s unusual case law on the discount for lack of marketability (DLOM) in statutory fair value buy-out proceedings, I cast my eyes westward, to the far banks of the Hudson River, and take comfort in the fact it could be worse — I could be in New Jersey.

A “business appraiser’s nightmare” is how Chris Mercer described New Jersey’s “bad behavior discount” in his commentary on the Wisniewski v Walsh case decided a little over a year ago by a New Jersey appellate court, in which it affirmed the trial court’s application of a 25% DLOM seemingly plucked out of thin air, and notwithstanding what the trial court itself admitted were “strong indicators of liquidity,” for the stated purpose of penalizing the selling shareholder for his oppressive behavior toward the other shareholders — behavior that in no way harmed the corporation’s business or affected its marketability!

Now comes another New Jersey trial court decision in another fair value buy-out case, and guess what? The court applied the same 25% DLOM without any discussion of the factors supporting its application or quantification other than the court’s finding that the selling shareholder was guilty of oppressive conduct against the purchasing shareholder.

In Parker v Parker, 2016 N.J. Super. Unpub. LEXIS 2720 [Dec. 22, 2016], two brothers, Richard and Steven Parker, took over from their parents and for the next 25 years operated as 50/50 owners a wholesale flower business and a separately incorporated wholesale plant business which eventually became a garden center. Richard ran the flower business and Steven the garden business as separate fiefdoms with minimal overlap. Continue Reading Has New Jersey Gone Off Its DLOM Rocker?

RosenbloomAMediation continues to grow in popularity as a means of resolving legal disputes in lockstep with the rising costs and delays attendant to litigation and arbitration. Mediation allows the parties to air their grievances face-to-face in a confidential setting and, with the help of a skilled mediator and a willingness to compromise on both sides, to arrive faster and more economically at a resolution of their own design rather than having one imposed on them by a judge or arbitrator.

An argument can be made that business divorce disputes are less amenable to mediation, not only because of the high emotions and sense of betrayal experienced by the co-owners, but also due to the loosely framed legal standards in the governing statutory and common law that give courts broad discretion in the exercise of their equitable powers. In other words, the bitterness and intrinsic uncertainty of business divorce litigation outcomes can foster a zero-sum approach on both sides that favors combat over conciliation.

On the other hand, if the relationship between feuding co-owners is terminally ill but the business nonetheless remains viable, chances are one side eventually is going to buy out the other, which is where, in my opinion, mediation can be most effective in bringing about a resolution by focusing on valuation of the equity interest of the selling business owner.

Which brings me to the topic at hand, my podcast interview of Arthur Rosenbloom (pictured above) for the Business Divorce Roundtable, a link to which appears at the bottom of this post.

Art is a veteran lawyer, mediator, and arbitrator who last year was appointed by the court to mediate a case in which I represented the majority owner in litigation that followed a cash-out merger of the minority owner who was contesting the value placed on his interest. What distinguished Art from other mediators was his in-depth knowledge of business valuation, much of it gained from his many years working as an investment banker. In the course of the mediation, Art employed his valuation expertise to critique each side’s valuation reports, and by doing so was instrumental in getting the parties to bridge the gap between their respective valuation positions.

In my interview with Art, he shares his insights on a number of issues vital to the mediation of business valuation disputes, including the different pathways to mediation, the optimal timing for mediation, the utilization of appraisal reports in mediation, the retention of a neutral appraiser to assist the mediation, the mediator’s role in critiquing the parties’ valuation positions, and how the mediator deals with the  intense emotions the parties often bring with them to the mediation.

After you listen to the podcast, I recommend you also read Art’s article, Mediating Valuation Disputes in Minority Oppression Litigation, published last year in the New York Law Journal.

 


shutterstock_581026324As promised in the postscript to last week’s post about the appellate ruling in the Gould case, affirming Justice Platkin’s order granting the oppressed minority shareholder’s dissolution petition involving a pair of construction firms, we now arrive at Justice Platkin’s subsequent determination of the fair value of the minority shareholder’s equity stake.

The decision raises several important issues of interest to business appraisers and business divorce counsel, including selection of tax rates, the appropriate look-back period in determining historical earnings, adjustments for non-arm’s length inter-company transactions, and use of the market approach.

Justice Platkin’s valuation ruling last month in Matter of Digeser v Flach [Gould Erectors & Rigging, Inc.], 2017 NY Slip Op 50220(U) [Sup Ct Albany County Jan. 31, 2017], is the culmination of an oppressed minority shareholder dissolution petition filed in April 2013. In his November 2015 post-trial decision, which I wrote about here, Justice Platkin found that Digeser, a minority shareholder in the two corporations, established grounds for dissolution based on oppression, but he left open the question of remedy. Continue Reading Business Appraisers Spar Over Tax Rates, Market Approach and Other Key Issues in Fair Value Buy-Out Case

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