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NY Business Divorce

Information on Dissolution and Other Disputes Among Owners of New York Corporations, LLCs and Partnerships

Death of a Shareholder

Posted in Access to Books and Records, Corporate Governance, Derivative Actions, Expulsion and Removal, Family-Owned Businesses, Interim Remedies

deathThe death of a shareholder amidst a court battle for control of a closely held business can have a dramatic effect on the direction and outcome of the case.

We saw it happen in my post a few weeks ago about the Catalina Beach Club case which started as a deadlock dissolution case between feuding 50/50 factions, but was discontinued abruptly after the petitioning faction gained voting and board control by acquiring an additional 25% interest from the estate of one of the respondent shareholders who died a few months after the suit began, much to the chagrin of the surviving 25% respondent now downgraded to non-controlling, minority shareholder.

Not one but two deaths in another, fractious family-owned business resulted in shifts in control with game-changing consequences for the positions and leverage of the litigants. The resulting travails of two generations of the Lewis family are laid bare in a recent decision by Albany Commercial Division Justice Richard M. Platkin in Heller v Lewis, 2015 NY Slip Op 51867(U) [Albany County Dec. 21, 2015], in which he denied preliminary injunctive relief sought by the majority-turned-minority faction. Continue Reading

Court Applies 25% Marketability Discount Despite “Strong Indicators of Liquidity”

Posted in Accountants/Experts, Buyout, Compulsory Buyout, Family-Owned Businesses, Valuation, Valuation Discounts

DiscountOn the heels of last week’s post titled The DLOM Debate Heats Up, a timely new ruling by a New Jersey intermediate appellate court adds yet another interesting twist to the application of the discount for lack of marketability in fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

New Jersey courts have a more restrictive approach to DLOM in fair value contests than New York courts, generally reserving it for “extraordinary circumstances” involving inequitable or coercive conduct by the seller. This latest New Jersey ruling doesn’t make new law but, to this observer at least, its application and quantification of DLOM seem equally if not more reliant on legal doctrine and, in particular, free-floating equity considerations than on empirically-based appraisal theory and methodology.

The New Jersey Appellate Division’s unpublished decision in Wisniewski v Walsh, 2015 N.J. Super. Unpub. LEXIS 3001 [App. Div. Dec. 24, 2015], caps an astonishing 20-year litigation saga involving a family-owned trucking business taken over from the founding father by three siblings, one of whom sued the other two under New Jersey’s oppressed shareholder statute. In 2000 the trial judge ruled that the petitioner himself was the oppressor and ordered him to sell his one-third interest to the company or his siblings for fair value to be determined by the court. Continue Reading

The DLOM Debate Heats Up

Posted in Valuation, Valuation Discounts

fair valueThe discount for lack of marketability (DLOM) is one of the most hotly debated and heavily litigated issues in New York fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

A new note in the DLOM debate is sounded in an article by Gilbert E. Matthews, CFA, Senior Managing Director and Chairman of Sutter Securities, published in this month’s Business Valuation Update with the provocative title, “NY’s Unfair Application of Shareholder-Level Marketability Discounts.” The article’s thrust is that New York law is singularly out of step with predominant fair value jurisprudence excluding DLOM in statutory fair value proceedings. (BV Update subscribers can access the article here; non-subscribers can obtain a copy by email request to Mr. Matthews at gil@suttersf.com.)

For those not familiar with valuation discounts, the International Glossary of Business Valuation Terms defines DLOM as “an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability” where marketability in turn is defined as “the ability to quickly convert property to cash at minimal cost.” It is not to be confused with the minority discount a/k/a discount for lack of control (DLOC) defined as “an amount or percentage deducted from the pro rata share of value of 100% of an equity interest in a business to reflect the absence of some or all of the powers of control.” Continue Reading

A Doozy of a Discontinuance in Deadlock Dissolution Case

Posted in Deadlock, Dissolution Procedure, Family-Owned Businesses, Grounds for Dissolution

Catalina

An “anomalous situation” is how Nassau County Commercial Division Justice Vito M. DeStefano described what happened in a deadlock dissolution case involving the owners of the Catalina Beach Club in Atlantic Beach, New York (pictured).

As summed up by the judge in his decision last month in Carasso v Pauline J. Perahia Revocable Trust, Decision and Order, Index No. 606702/14 [Sup Ct Nassau County Dec. 28, 2015], the anomaly boiled down to this:

Petitioners and Respondents have changed their initial positions regarding dissolution in that the Petitioners, who initially sought dissolution, now move to discontinue the dissolution proceeding; and, the Respondents, who  initially opposed dissolution by filing objections in law, now oppose discontinuance of the dissolution proceeding and, in fact, seek dissolution.

Continue Reading

Court Dissolves LLC Due to Managing Member’s “Self-Dealing and Dishonest Conduct”

Posted in Buyout, Family-Owned Businesses, Grounds for Dissolution, Liquidation, LLCs

gas pumpA gas station in Poughkeepsie, New York, is the prosaic setting for a noteworthy decision last month by Dutchess County Supreme Court Justice Christine A. Sproat judicially dissolving a limited liability company owned equally by two brothers.

The court’s unpublished decision in Matter of Zafar (M&D of Dutchess, LLC), Index No. 3123/15 [Sup Ct Dutchess County Dec. 4, 2015], is one of the few LLC dissolution cases I’ve seen centered on allegations of looting and diversion. While looting and diversion are expressly made grounds for dissolution under the statute governing close corporations, they are not mentioned in the LLC dissolution statute. Nonetheless, the court in Zafar found that the nature and extent of the managing member’s “persistent self-dealing and dishonest conduct” — I’m quoting from the court’s decision — made it, in the language of LLC Law § 702, “not reasonably practicable to carry on the business . . . in conformity with the articles of organization.”

The case pits petitioner Mobashar Zafar against his younger brother Dawood Ahmed as 50/50 members of M&D of Dutchess, LLC. According to Zafar’s petition (read here), the brothers owned the gas station as tenants in common from 1986 until they conveyed it to their newly formed LLC in 1999 at which time the station was under lease to a third-party operator. The brothers never had a written operating agreement but in practice agreed that the younger brother, Ahmed, who lived in the area, would alone manage the LLC’s business affairs. Continue Reading

Court Chides Parties in Family Partnership Dispute for “Needless” Litigation with “Obvious Outcome”

Posted in Access to Books and Records, Grounds for Dissolution, Partnerships

KornreichManhattan Commercial Division Justice Shirley Werner Kornreich (pictured) is not known to mince words, so one has to sit up and take notice when she describes a partnership dissolution case as “yet another unfortunate example of a family business dispute that has developed into needless litigation” whose “outcome here is obvious.”

The judge’s admonition in Redel v Redel, 2015 NY Slip Op 31941(U) [Sup Ct NY County Oct. 16, 2015], springs from a suit against the plaintiff’s father and two sisters concerning a general partnership formed by the four of them over 30 years ago to acquire and hold a 10% interest in a limited partnership known as 225 Broadway Co. which owns an office building in lower Manhattan. The amended complaint (read here) identifies Leder Enterprises as an at-will family partnership with no written partnership agreement in which the father holds a 40% interest as managing partner and the sisters hold 20% apiece.

The complaint alleges that, in violation of various provisions of the Partnership Law, the father sold a 4% partnership interest to the plaintiff’s ex-boyfriend without her knowledge or consent; failed to provide plaintiff with reasonable access to partnership books and records; failed to provide a reasonable explanation for a $50,000 “shortfall” in plaintiff’s capital account; and failed to comply with the plaintiff’s demand for the immediate dissolution and winding up of Leder Enterprises. The complaint seeks declaratory judgments of dissolution and that the ex-boyfriend is not a partner, a formal accounting, and damages against the father for breach of fiduciary duty. Continue Reading

LLC Agreement’s All-Purpose Purpose Clause Defeats Dissolution Petition

Posted in Arbitration and Mediation, Family-Owned Businesses, Grounds for Dissolution, LLCs, Operating Agreement

got purposeUnder the LLC Law’s provision authorizing judicial dissolution and its interpretive case law, determining an LLC’s purpose can be essential to adjudicating whether it no longer is reasonably practicable to carry on its business in conformity with the operating agreement — in other words, whether its purpose has failed.

Failed purpose cases generally fall into one of two categories: those with written operating agreements containing express purpose clauses, and those without. In the latter category, where the LLC either has no written operating agreement or has one lacking a purpose clause, the member seeking dissolution may succeed through testimony and circumstantial evidence showing the failure of the LLC’s intended purpose. The Natanel case, which I litigated and wrote about here, was such a case resulting in judicial dissolution of a single asset, realty-owning LLC purchased to house the co-owners’ separate moving and storage business which eventually went out of business leaving the building largely vacant.

In the former category, the petitioner may face a more daunting if not impossible path to dissolution when an otherwise financially viable LLC’s written agreement contains a typical, broad purpose clause permitting any lawful business activity, such that the termination of the LLC’s initial business, e.g., owning a certain property or holding a certain investment portfolio, may transmute into something entirely different without running afoul of the dissolution statute. Continue Reading

Top 10 Business Divorce Cases of 2015

Posted in Annual Top 10 Cases

Top 10aI’m pleased to present my eighth annual list of the past year’s ten most significant business divorce cases. In previous years my lists rarely included cases outside New York, but this year’s batch includes three important decisions by the Delaware Court of Chancery. Also, reflecting the growing predominance of limited liability companies over close corporations, this year’s selections include seven LLC cases and only three involving corporations. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Chiu v Chiu, 125 AD3d 824 [2d Dept 2015], in which the appellate court affirmed without comment a 0% discount for lack of marketability in fixing the fair value of a membership interest in a single asset realty company pursuant to LLC Law § 509, but disagreed with the lower court’s assignment of a 10% interest to the withdrawn member — rather than 25% as reflected in the LLC’s initial tax returns — based on additional capital contributions made by the other member that, according to the appellate court, should have been characterized as loans.
  2. In re Carlisle Etcetera LLC, 2015 WL 1947027 [Del. Ch. Apr. 30, 2015], in which the Delaware Chancery Court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity.
  3. Barone v Sowers, 128 AD3d 484 [1st Dept 2015], an LLC dissolution case in which the appellate court found inadequate at the pleading stage a non-controlling member’s allegations of “oppression” involving a functioning, financially viable realty-owning LLC, and also dismissed the petitioner’s derivative claims for failure to plead facts showing demand futility.
  4. Meyer Natural Foods LLC v Duff, 2015 WL 3746283 [Del. Ch. June 4, 2015], another novel ruling by Chancery Court where, in granting dissolution of an LLC based on the termination of a supply agreement between its two members, the court looked beyond the LLC’s stated purpose in its operating agreement and instead adopted the petitioner’s “contextual interpretation” of the purpose clause.
  5. Sansum v Fioratti, 128 AD3d 420 [1st Dept 2015], a highly unusual case involving a 6% shareholder’s claim for common-law dissolution of close corporation that operated an art gallery, in which the appellate court ordered the claim’s dismissal without a hearing based on the petitioner’s “unclean hands” stemming from his guilty plea to criminal charges of embezzlement from the company, and invoked the in pari delicto doctrine in rejecting the plaintiff’s argument that the defendants used unlawful means to obtain the money he took.
  6. Goldstein v Pikus, 2015 NY Slip Op 31455(U) [Sup Ct NY County July 20, 2015], in which the court granted summary judgment dismissing an LLC dissolution petition involving a realty-holding company where the petitioner’s allegations of deadlock and misconduct by the managing member failed to establish that the LLC was financially infeasible or was unable to function in accordance with its purpose as stated in its operating agreement.
  7. Shapiro v Ettenson, 2015 NY Slip Op 31670(U) [Sup Ct NY County Aug. 16, 2015], a case of apparent first impression in which the court held enforceable under LLC Law § 402(c)(3) an operating agreement executed by the majority members over a year after the LLC’s formation, which included provisions for additional capital contributions and adjustment of member percentage interests for failure to make a requested contribution.
  8. Matter of Digeser v Flach, 49 Misc 3d 1213(A) [Sup Ct Albany County 2015]  , which I referred to as a “classic case” of minority shareholder oppression, where the court’s post-trial decision found that the petitioner established grounds for dissolution under BCL § 1104-a after the majority shareholder terminated his employment, cut off all salary and benefits, and removed him from the board of directors.
  9. Matter of Activity Kuafu Hudson Yards LLC, Index No. 650599/15 [Sup Ct NY County Apr. 14, 2015], in which the court dismissed for lack of subject matter jurisdiction a petition to dissolve an allegedly deadlocked Delaware LLC, notwithstanding a provision in its operating agreement waiving the members’ right to bring an action relating to the agreement in any court outside New York County, New York.
  10. Shawe v Elting, C.A. No. 9661-CB [Del. Ch. Aug. 13, 2015], a case in which the two 50/50 owners of an immensely successful business found themselves “locked in corporate hell” due to their personal animosity, leading the Delaware Chancery Court to grant an application under DGCL § 226 to appoint a custodian to sell the company either to one of the two owners or to an outside buyer.

Can LLC Members Walk Away From Fiduciary Duties?

Posted in LLCs

ExitI wish I could tell you this post will answer the question posed by its title, but it won’t. Let’s start with a few basic, non-controversial propositions concerning the default duties of LLC members and managers under the laws of New York and, I would hazard a guess, most if not all other states:

  • Managers of a manager-managed LLC owe fiduciary duties of care and loyalty to the LLC and its members.
  • Non-managing members of a manager-managed LLC do not owe fiduciary duties of care and loyalty to the LLC and its members.
  • Members of a member-managed LLC owe fiduciary duties of care and loyalty to the LLC and its members.

Now let’s tamper with the last of the above default rules. Assume the Acme company is a two-member, 50/50, New York LLC whose articles of organization do not designate it as manager-managed hence its management is “vested” in its members subject to provision otherwise in its operating agreement as authorized by LLC Law § 401 (a). Further assume Acme’s operating agreement expressly vests sole management authority in one of the two members. Does Acme’s other, non-managing member owe fiduciary duties? About two years ago, in Kalikow v Shalik which I wrote about here, Nassau County Commercial Division Justice Vito M. DeStefano answered that question in the negative, reasoning that § 401 (a)’s vesting of management powers in the members is made subject to the operating agreement, and that LLC Law § 409 (a) imposes duties on LLC “managers” with no mention of non-managing members. So far so good. Now let’s try another, stickier variation. Assume Acme has no operating agreement, that from inception its two 50/50 members jointly managed it, but there came a time when one member announces to the other that he “withdraws” from all management responsibility — but still maintaining his membership interest and entitlement to his pro rata share of Acme’s profits — following which he forms and operates a competing business. Has the “withdrawn” member taken on the status of a non-managing member and successfully shed his fiduciary duties, thereby permitting him to compete freely against his own company? Continue Reading

Less Drastic Measures: Maryland Case Highlights Non-Dissolution Remedies for Oppressed Minority Shareholders

Posted in Dissolution Basics, Grounds for Dissolution

Guillotine

Capital punishment for the corporation.” That’s how the Maryland Court of Appeals — that state’s highest court — in Bontempo v Lares, 444 Md. 344 [2015], recently referred to the remedy of judicial dissolution made available by statute in most states, including New York, to oppressed minority shareholders of closely held corporations.

I would not go so far as to suggest that our corporate jurisprudence is experiencing something akin to the growing anti-death penalty movement in our criminal jurisprudence, but the thoughtful majority opinion for the Maryland high court in Bontempo marks a heightened regard for the diverse interests at stake when considering an appropriate remedy for oppressive conduct by those in control of the corporation, and highlights the breadth of less drastic, alternative remedies available to trial courts.

Bontempo also merits attention at a more granular level for its discussion of the interplay and distinction between remedies available to an oppressed minority shareholder qua shareholder versus qua fired employee. Continue Reading