A trio of recent decisions by Nassau County Commercial Division Justice Stephen A. Bucaria (photo right) in Abatemarco v Abatemarco, Index No. 6455/13, presents a smorgasbord of noteworthy issues in a dispute between two brothers over a buy-out gone wrong involving their 50/50 interests in an advertising firm and the separate realty company that owns the building housing the advertising firm’s office.
No single issue in the case is a headline grabber, but all together they present a compelling illustration of the serial problems that can arise when the buy-out agreement doesn’t spell out with adequate precision the valuation parameters, and also doesn’t adequately address the buy-out’s effect on the landlord-tenant relationship between the two companies.
The Companies. Brothers Robert and Andrew Abatemarco were 50/50 shareholders in Robelan Displays, Inc., which produces indoor advertising displays, and 50/50 partners in Anthony Realty which owns the building in Hempstead, New York, rented by Robelan under an oral lease at $16,000 per month. Continue Reading
One of three, equal shareholders in a family-owned business licensed by the state liquor authority was convicted of a felony. Under state law the felony conviction of an owner jeopardizes the company’s license and with it, the entire business. The other two shareholders therefore adopted a resolution terminating his employment and simultaneously exercised the company’s option, set forth in their shareholders’ agreement, to redeem his stock at a value to be determined by appraisal.
Problem solved? Not quite. For one thing, the termination of employment was made retroactive about three months, arguably contrary to a provision in the shareholders’ agreement requiring that the purchase option be exercised within 30 days of termination. For another, the company did not obtain the required appraisal or propose a closing until about a year after the termination, whereas the agreement required that the company close on its option to redeem the shares within 90 days of the termination.
The ousted shareholder refused to tender his shares, contending that the company forfeited its purchase option by failing to exercise it in a timely fashion. The company, under pressure of a threatened de-licensing, sued to enforce the buy-out.
Probably you won’t be surprised to learn that, last week, an appellate panel in A. Cappione, Inc. v Cappione, 2014 NY Slip Op 05230 [3d Dept July 10, 2014], affirmed the trial court’s decision in favor of the company, ordering the ousted shareholder to convey his shares but also allowing him to contest the appraised value offered for his shares. The court’s ruling is particularly important in that it ordered the conveyance even assuming the option to purchase was not timely exercised, based on the manifest intent of the shareholders’ agreement to retain managerial control within the family, and the risk to the company of losing its critical license. Continue Reading
Last week, in Matter of Gould Erectors & Rigging, Inc., 2014 NY Slip Op 05004 [3d Dept July 3, 2014], an upstate appellate panel affirmed in part and reversed in part a lower court’s decision that highlights the special rules governing the filing and service of petitions seeking judicial dissolution of close corporations under Article 11 of the Business Corporation Law.
In an “ordinary” lawsuit, due process as embodied in the rules of civil procedure requires service of the summons and complaint on named defendants to confer personal jurisdiction over them. If service is not effected, or if service is not effected properly, the non-served defendant can appear and move to dismiss, which can have especially drastic consequences if the statute of limitations has expired in the interim. A non-served defendant who doesn’t appear in the case, i.e., who defaults, and against whom a judgment is entered, can later apply to have the judgment vacated.
The rules for corporate dissolution proceedings are different. The first important difference is that each of the statutory grounds for dissolution, including deadlock under BCL § 1104 and shareholder oppression under BCL § 1104-a, authorizes the filing of a “petition” – not a complaint – in what New York practice refers to as a “special proceeding” governed by Article 4 of the Civil Practice Law and Rules. In general, the rules for special proceedings provide for expedited judicial review in statutorily delimited categories of disputes. One of the other, more frequent uses of special proceedings is for challenges to decisions made by administrative and other quasi-judicial governmental bodies under CLPR Article 78. Continue Reading
Shifting alliances. Pacts made and broken. Territorial disputes. Sounds like nations at war, but it also describes an unusual, three-way battle over a real estate partnership being waged in Brooklyn Supreme Court in which Commercial Division Presiding Justice Carolyn E. Demarest (pictured) recently dealt with the fundamental question: Can someone become a partner absent compliance with the partnership agreement’s transfer restrictions?
Justice Demarest answered “yes” in a decision earlier this month, in Camuso v Brooklyn Portfolio LLC, 2014 NY Slip Op 50940(U) [Sup Ct, Kings County June 9, 2014]. Essentially, she found that each of the two 50% partners separately had validated the transfer of a 25% interest by one of them to his ex-wife, by means of stipulations in prior legal proceedings and in partnership tax returns identifying the ex-wife as a partner, resulting in a three-way, 50/25/25 partnership.
The ultimate issue in the case is the validity of a $5.9 million contract, executed on the partnership’s behalf solely by the remaining 50% partner, for the sale of the partnership’s realty to a third-party buyer. The court’s ruling didn’t resolve the contract’s enforceability, instead finding an issue of fact whether other provisions in the partnership agreement and the Partnership Law require unanimous partner approval for the sale.
Last week I had the privilege of presenting a panel discussion with Justice Elizabeth H. Emerson and my Farrell Fritz colleague, Matthew Donovan, at the Annual Conference of the Greater New York Chapter of the Association for Conflict Resolution, held at The Cardozo School of Law. The title of our presentation: Every Unhappy Family Business Is Unhappy In Its Own Way.
Aficionados of 19th century Russian literature will no doubt recognize our title as being not-so-subtly cribbed from the famous first line of Tolstoy’s Anna Karenina. Literary irreverence aside, the title unfortunately is fitting, at least with respect to the unique characteristics and problems associated with the family businesses that I deal with in my business-divorce practice.
The distinctiveness of family businesses, as well as the distinctiveness of the disputes that arise within them, derive in large part from a fundamental, inherent conflict that lies within each family business owner – namely, the conflict of whether to allow one’s obligations to the family or to the business to take priority (and under what circumstances). This inherent conflict, for example, can cause family-business owners to bring their family-related “baggage” to work and disrupt the corporate structure; to neglect critical corporate formalities and fail to make for themselves a sufficient record of ownership and key corporate transactions; and to discount the importance of arm’s-length negotiation and fail to procure for themselves essential contractual protections.
Our audience included an interesting mix of lawyers and non-lawyers who work primarily in the field of alternative dispute resolution, hence our discussion focused less on the mechanics and legal framework of business divorce litigation and more on how the professionals involved at various stages – lawyers, mediators, accountants, judges — can guide family business owners toward amicable resolution of family conflict or avoid such conflict before it happens. Many in our audience offered their own insights based on their mediation experiences both in commercial and non-commercial family dispute resolution.
Our panel discussion echoed many of these themes and offered experiential insights into this fascinating field during Thursday’s program. Some of the highlights included:
- Justice Emerson’s observations that family business disputes often have less to do with the legal issues being litigated before her than with the familial hang-ups that plague the parties’ history, and that getting to the true source or sources of the dispute goes a long way toward resolving it;
- Matt’s historical anecdotes and statistical data on the prominence of the family-owned business in our economy and the failure rate of family-owned businesses over successive generations;
- My observations that mediation lends itself better than litigation to a more inclusive approach to issue identification and resolution, such as when inheritance issues cloud the immediate dispute between sibling co-owners of the family business.
For those who’d like to learn more, Matt prepared an informative outline for the program, available here.
Husband and wife start a business. They work hard, sacrifice, grow the business, turn it into a success. When their two children are old enough, they bring them into the business, giving them equal non-voting stock and equal compensation for their different job responsibilities. The parents naturally hope that, as they approach retirement and plan their estate, all will be in place for a smooth transition of full, co-equal ownership and control to the next generation.
But there’s a problem. After years working together, the siblings no longer get along or even talk with each other. The parents realize that their succession plan for joint ownership and management by their two children is destined to fail. What are they to do?
A similar scenario set the stage for a decision of great interest last week by Suffolk County Commercial Division Presiding Justice Elizabeth H. Emerson (pictured above) in a case called Federico v Brancato, 2014 NY Slip Op 50902(U) [Sup Ct, Suffolk County June 9, 2014]. In a nutshell, the parents in this case tried to resolve the dilemma by offering a buyout to one of the two children, who refused the offer, after which the parents terminated her employment, after which she sued her parents and brother asserting various claims including shareholder oppression. In her post-trial decision, Justice Emerson ruled in the daughter’s favor on her claim seeking damages for violation of her “guaranteed” employment under the Shareholders Agreement, but dismissed her remaining claims including a request for reinstatement to her position at the company.
The decision is noteworthy not only for its analysis of the legal issues, but also for its heightened sensitivity to the family setting within which the legal claims were presented. I’m also honored that Justice Emerson saw fit to cite in her decision this blog’s online interview last year with Professor Benjamin Means on conflict in family-owned businesses. Continue Reading
Nassau County Commercial Division Justice Vito M. DeStefano (pictured) last month handed down an important ruling in Schlossberg v Schwartz, 43 Misc 3d 1224(A), 2014 NY Slip Op 50760(U) [Sup Ct, Nassau County May 14, 2014], addressing rights of indemnity and advancement when a company brings claims against its own officer or director for alleged misconduct undertaken in a corporate capacity. The scholarly decision, which traces the convoluted history of the governing Business Corporation Law (BCL), rejects the company’s position that its bylaws and the BCL preclude advancement and indemnification for intra-company claims, i.e., claims brought directly by the company against an officer/director, as opposed to extra-company claims, i.e., claims brought by outside, third parties.
Schlossberg also is noteworthy:
- for upholding the right to seek advancement and indemnity for expenses incurred in the defense of the company’s counterclaims, on an apportioned basis, in a suit initiated by a minority shareholder, director and former officer asserting direct and derivative claims against the controlling shareholder, inter alia, for breach of fiduciary duty, breach of contract and common law dissolution; and
- for its numerous citations to decisions of the Delaware Chancery Court, which rightfully boasts an advanced jurisprudence in the area of indemnification and advancement. Continue Reading
Hardcore students of business divorce will remember Pappas v. Tzolis as a roller coaster ride through the trial and appellate courts in which, ultimately, New York’s highest court dismissed claims against a 40% LLC member who bought out his 60% co-members for $1.5 million, allegedly while concealing from them that he already had lined up a buyer for the LLC’s sole asset — a 49-year lease on a Manhattan commercial property – for $17.5 million. The court held that a provision in the buy-out agreement, stating that the buying member “has no fiduciary duty to the . . . sellers in connection with [the sales of their interests],” was a complete defense to the sellers’ claims that the buyer breached a duty to disclose the alleged $17.5 million offer. (Read here my post about the Court of Appeals’ November 2012 ruling.)
Pappas was decided on a pre-answer, pre-discovery motion to dismiss the complaint. The procedural posture required the court to assume the truthfulness of the complaint’s factual allegations. The defendant 40% member, Steve Tzolis, did not have to admit or deny that, in fact, he secretly had negotiated a $17.5 million sale of the LLC’s lease to a major real estate developer, Extell, before buying out his partners for $1.5 million. All we outside observers knew for certain was that the $17.5 million sale occurred about seven months after the buy-out of the member interests.
At least some of the mystery has now been revealed, courtesy of a subsequent lawsuit brought by one of the two disappointed sellers, Steve Pappas, against a law firm that, according to Pappas, represented him and/or the LLC in connection with the buy-out agreement while simultaneously assisting Tzolis’ secret negotiations to sell the lease to Extell. Our informational gain is of little comfort to Pappas, whose case against the law firm recently was thrown out as an impermissible end-run around the preclusive effective of the Court of Appeals’ ruling in the prior case. Pappas v Schatz, 2014 NY Slip Op 30946(U) [Sup Ct NY County Apr. 9, 2014]. Continue Reading
A disproportionate number of court decisions applying New York’s Partnership Law involve law firm partnerships. That’s because, while use of general partnerships in the business world at large has been eclipsed almost entirely by other closely-held business forms offering both limited liability and partnership taxation, those same features are available to law firms and certain other professional practices by organizing as limited liability partnerships under New York’s LLP statute enacted in 1994.
Other than its organizational and limited liability attributes, New York LLPs are governed by the same, arcane Partnership Law provisions applicable to all general partnerships. One of the most existentially critical of these provisions is found in Partnership Law § 62  stating that dissolution of the partnership is caused “[b]y the death of any partner.” Courts in New York and elsewhere construe this provision, modeled on § 31  of the 1914 Uniform Partnership Act, as a default rule, that is, subject to override in the partnership agreement.
The tragic, accidental death in 2008 of one of two partners in a Manhattan law firm called Donovan & Yee, LLP, triggered a lawsuit in which the estate of the deceased partner is contesting the surviving partner’s continuation of the firm. Earlier this month, in Le Bel v Donovan, 2014 NY Slip Op 03608 [App. Div. 1st Dept, May 20, 2014], a panel of appellate judges unanimously construed contested provisions in the partnership agreement as overriding Partnership Law § 62 ‘s dissolution default rule, by authorizing continuation of the partnership if a new partner is admitted within 90 days after the death. At the same time, however, the panel remanded the case for trial to determine whether the newly admitted partner was actually an equity partner or, as the estate contended, was part of an alleged “sham transaction” making her a partner in name only to avoid paying the estate one-half of the law firm’s assets upon dissolution.
You have to admit, as dissolution lawsuits go, it doesn’t get much more interesting than that.
For the past ten years, a chain of walk-in airport spas called XpresSpa has offered soothing massage and a range of other personal care services to stressed-out air travelers. Now it’s the company’s principals who could use some stress relief following a court decision earlier this month holding that a restructuring involving a capital infusion by a private equity firm unintentionally triggered dissolution of XpresSpa’s parent company under a provision in its operating agreement. The parent company must now prepare for a painful unwinding and liquidation at the direction of a court-appointed receiver.
The decision by Manhattan Commercial Division Justice Melvin L. Schweitzer in JPS Partners v Binn, 2014 NY Slip Op 31204(U) [Sup Ct, NY County May 6, 2014], came at the behest of a 1.93% investor in the parent company, a New York limited liability company known as Binn and Partners, LLC, controlled by its sole managing member, Moreton Binn. The dissident member, apparently alone among the company’s investors, refused to consent to the proposed restructuring. Mr. Binn nonetheless proceeded with the transaction after amending the LLC’s operating agreement in a manner designed to blunt the dissenting member’s objection. Justice Schweitzer found that the amendment exceeded Mr. Binn’s authority and that the restructuring constituted a transfer of the LLC’s assets within the meaning of the operating agreement’s provision requiring dissolution upon ”the Transfer of substantially all of the assets of the Company.”
Assuming the decision stands — Mr. Binn and the LLC have filed a notice of appeal — the court’s ruling offers an important lesson about drafting dissolution provisions in LLC operating agreements so as not to empower passive minority investors in start-up companies from interfering with growth opportunities requiring new sources of capital. Continue Reading