Register Now for the LLC Institute!

I’ve said it before, I’ll say it again: for professionals who dwell in the world of LLCs, whether as transactional, tax, or litigation counsel, attending the annual, two-day LLC Institute, sponsored by the LLCs, Partnerships and Unincorporated Entities Committee of the ABA’s Business Law Section, is the best way to stay abreast of developments in the law of alternative entities and to mix with leading scholars and practitioners from across the country. The Institute will be held this year on November 2-3 in Washington D.C. at Le Meridien Arlington and Waterview Conference Center where, if you book early, you can also reserve hotel accommodations at the group rate. This year’s agenda features LLC case law updates along with a variety of programs on veil piercing, tax-related issues, good faith, fiduciary duties, and lots more. For more information and to register, click here. Hope to see you there!


I’ve seen LLC operating agreements ranging from one page to over 100. Usually there’s a direct relationship between the length of the agreement and the complexity of the LLC’s capital and management structure.

But if there’s one thing I’ve learned about LLC agreements, it’s that no matter how comprehensive and tome-like their design, there’s no guarantee that a future, unanticipated dispute won’t expose the inevitable cracks in the design prompting the need for court intervention. Indeed, depending on the drafter’s skill, one can argue the more complex the LLC agreement, the greater the risk of a court contest over its interpretation.

Take the recent case of Tungsten Partners LLC v Ace Group International LLC, 2017 NY Slip Op 32025(U) [Sup Ct NY County Sept. 20, 2017], in which Manhattan Commercial Division Justice Shirley Werner Kornreich was called upon to decide whether the plaintiff holder of a 4% non-voting profits interest, identified as a “Management Member” in a 65-page operating agreement (plus another 170 pages of schedules and exhibits), was a member of the subject Delaware LLC for purposes of demanding access to books and records under § 18-305 of the Delaware LLC Act. Continue Reading A Member By Any Other Name . . . May Have Access to LLC Books and Records

Minority shareholder oppression and deadlock are the twin pillars of most business divorce litigation. Both are codified in the vast majority of statutes authorizing proceedings for judicial dissolution of closely held corporations and, to a lesser extent, limited liability companies. Both encompass infinite permutations of  behaviors — of both the well and ill-intended variety — among business co-owners that make any working definition of the two doctrines only marginally more useful than Justice Potter Stewart’s famous “I know it when I see it” definition of obscenity.

From my casual observations over the years, I’d say the courts probably have devoted far more attention to formulating and refining the standard for minority shareholder oppression, which is of more recent vintage than deadlock as ground for judicial dissolution and typically is not defined in the statutes. Oppressive conduct is evaluated in most states under one of three judicially-created formulations: majority conduct that defeats the reasonable expectations of the minority shareholder; breach of the fiduciary duty of good faith and fair dealing majority shareholders owe minority shareholders; and burdensome, harsh, and wrongful conduct constituting a visible departure from the standards of fair dealing majority shareholders owe minority shareholders in close corporations.

I’ve not encountered comparable attempts to formulate a deadlock standard, although one might think the term deadlock needs no judicial interpretation à la oppression. After all, the dictionaries tell us that deadlock is a state of impasse or inability to progress when two opposing factions with equal control can’t come to agreement on something. But the dictionary definition doesn’t get us very far in the context of judicial dissolution proceedings. For example, 50/50 owners in an otherwise well-functioning company could be deadlocked over what shape table to buy for their conference room; no one would suggest that deadlock of this sort would warrant a judicial death verdict for the company. And what about a feigned deadlock created by one faction in pursuit of a break-up, buy-out, or other strategic objective?

In my case-law travels I’ve come across decisions that catalog prior cases granting dissolution as illustrative categories of disagreement warranting dissolution, e.g., impasse over distributions or the hiring or firing of key personnel, but I’ve seen no attempt to fashion an overall framework for evaluating claims of deadlock, that is, until last month’s opinion in Koshy v Sachdev (read here) in which the Supreme Judicial Court of Massachusetts, in its first-ever effort to construe that state’s deadlock-dissolution statute, devised a four-factor test to determine whether a “true deadlock” exists. Continue Reading Court Defines “True Deadlock”

New York’s LLC judicial dissolution statute, Section 702 of the Limited Liability Company Law, provides far more limited grounds to dissolve a business than the Business Corporation Law – a harsh reality for allegedly mistreated minority members highlighted by a recent decision by Manhattan Supreme Court Justice David B. Cohen.

In Matter of Felzen v PEI Mussel Kitchen, LLC, 2017 NY Slip Op 31831(U) [Sup Ct, NY County Sept. 1, 2017], Felzen sued to dissolve the company that operates a pair of Manhattan seafood restaurants named Flex Mussels, based upon allegations of breach of fiduciary duty, looting and oppression – frequent grounds for dissolution under Section 1104-a of the Business Corporation Law.  In Matter of Zafar, an earlier decision written about on this blog, comparable allegations – i.e., “persistent self-dealing and dishonest conduct” – sufficed to dissolve an LLC.  Let’s see how things turned out here. Continue Reading LLC’s Purpose Being Achieved? Business Doing Fine? Good Luck Getting Judicial Dissolution

Having read thousands of court opinions during my 30+ years as a litigator, I’ve learned to assume that there are things going on beyond what can be gleaned from the court’s written decision, and that these hidden factors may explain positions and outcomes that otherwise seem untenable.

I’m nonetheless having difficulty giving the benefit of the doubt to most of what happened in Verkhoglyad v Benimovich, 2017 NY Slip Op 51133(U) [Sup Ct Kings County Sept. 12, 2017], a case recently decided by the Brooklyn Supreme Court in which it denied enforcement of a mandatory forum selection clause, disregarded the operating agreement’s New Jersey choice-of-law provision by applying New York law to various claims, refused to enforce the agreement’s pre-suit mediation clause, and let proceed a claim for judicial dissolution of a New Jersey limited liability company despite governing appellate law stripping New York courts of jurisdiction over the dissolution of foreign business entities.

Verkhoglyad involves a short-lived, ill-fated enterprise between two individuals who were boyhood friends. In 2014, the plaintiff Verkhoglyad became a 50% co-managing member of defendant Benimovich’s existing HVAC business organized as a New Jersey LLC. They entered into a written operating agreement designating the LLC’s principal office in New Jersey and dictating application of New Jersey law to the operating agreement and its interpretation. It also includes the following provision captioned “Settlement of Disputes and Jurisdiction”: Continue Reading Read This Case. Slap Your Head. Not Too Hard.

The practical lesson for entrepreneurs of the case I’m about to describe is, never sign complex business agreements without your lawyer, and never ever sign such agreements in the last week of August when your vacationing lawyer is unreachable.

Deals to forge new business enterprises have a pace and momentum all their own. Business considerations, financial considerations, ownership considerations, legal considerations, tax considerations, personality considerations, and more — all have to coalesce and achieve critical mass in support of a meeting of the minds on the deal’s material terms to be memorialized in a binding, enforceable, written agreement.

The dynamics of the negotiations and externalities sometimes create a seize-the-moment mentality that induces one or both sides to push to sign an agreement that’s not fully baked, either to prevent a change of mind or with the expectation that remaining open issues can be cleaned up later. In even more extreme situations, the parties commit time and capital to the new venture while the negotiations are ongoing, that is, acting and treating each other as business partners before the deal is consummated.

Eagle Force Holdings, LLC v Campbell, Mem. Opinion, C.A. No. 10803-VCMR [Del Ch Sept. 1, 2017], decided earlier this month by Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery, is one of those extreme cases. Perhaps the most remarkable feature of the case, in which the court found unenforceable the transaction documents for a new venture, including signed operating and contribution agreements, is the heavy involvement of sophisticated legal counsel on both sides throughout the process — except for the critical moment when the two principals met alone and signed what was labeled a “draft” agreement just before the start of the Labor Day holiday weekend when their respective lawyers were unreachable. Continue Reading Don’t Let the Deal Get Ahead of the Documents

If you haven’t yet listened to prior episodes of the Business Divorce Roundtable (a) it’s time you did and (b) absolutely you won’t want to miss the latest episode (click on the link at the bottom of this post) featuring first-hand, real-life, business divorce stories told by business appraiser Tony Cotrupe of Melioria Advisors (photo left) and attorney Jeffrey Eilender of Schlam Stone & Dolan (photo right).

Tony’s and Jeff’s stories have a common element: both involve the contentious break-up of a poisonous business relationship between two brothers. The similarity ends there. In my interview of Tony, he puts us inside a fast-paced and ultimately successful effort by the feuding second-generation owners of a propane distributorship, guided by their respective lawyers working in collaboration, to avoid litigation by engineering a buy-out of one brother by the other based on Tony’s business appraisal as the jointly retained, independent evaluator. It’s a happy ending to what otherwIse could have turned into a drawn-out courtroom slugfest.

Courtroom slugfest aptly sums up Jeff’s story as counsel for the brother owning the minority interest in Kassab v. Kasab, a case I’ve featured on this blog several times including last month’s post-trial decision giving the other brother the opportunity to buy out the minority interest upon pain of dissolution if he doesn’t (read here, here, and here). Jeff’s insider analysis of the case provides unique insights into a multi-faceted, roller-coaster-ride of a case involving novel issues under the statutes and case law governing business corporations and limited liability companies.

If you’re a lawyer, business appraiser or business owner with a business divorce story you’d like to share for a future podcast, drop me a line at pmahler@farrellfritz.com.

 

As many judges and lawyers know, Superstorm Sandy has been used in litigation over the years as an excuse for things ranging from the seriously bad, like destroyed evidence, to the more mundane, like blown court deadlines. In Cardino v Peek-A-Boo, Inc., 2017 NY Slip Op 31657(U) [Sup Ct, Suffolk County July 28, 2017], a litigant did his best to try to persuade Suffolk County Supreme Court Justice James Hudson that Sandy made it “impossible” for him to comply with a post-dissolution order to turn over all merchandise of an adult bookstore, appropriately named “Peek-A-Boo, Inc.,” to a court-appointed receiver. Cardino provides some guidance on a rarely litigated issue – the potential consequences of violating a post-dissolution receivership order.

The Dissolution Decision

As recounted in an earlier decision, Peek-A-Boo was a New York corporation formed by a father and son, the Lombardos, to own and operate an adult shop. The petitioner, Cardino, sued the Lombardos to dissolve Peek-A-Boo under Section 1104-a of the Business Corporation Law, claiming he was “shut out” of the business. Suffolk County Supreme Court Justice Jeffrey Arlen Spinner held that the Lombardos oppressed Cardino and dissolved the corporation. Continue Reading Superstorm Sandy Unable to Wash Away Sin of Contempt

Regular readers of this blog know it’s been anything but summer doldrums in the world of business divorce, what with case law developments such as the Appellate Division’s potentially far-reaching ruling on the purposeless purpose clause and LLC dissolution in Mace v Tunick reported in last week’s post, and the astonishing story of minority shareholder oppression in the Twin Bay Village case also reported earlier this month.

This year’s edition of Summer Shorts picks up the summer pace with short summaries of three must-read decisions by New York and Delaware courts on three very different business divorce topics: use of a Special Litigation Committee to evaluate derivative claims brought by LLC members (New York); grounds for dissolution and the court’s remedial powers in shareholder oppression cases (New York); and LLC deadlock dissolution (Delaware).

Appellate Ruling Rejects Appointment of Special Litigation Committee in LLC Derivative Suit Where Not Authorized By Operating Agreement

LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 2017 NY Slip Op 06147 [1st Dept Aug. 15, 2017].  In Tzolis v Wolff, New York’s highest court recognized a common-law right of LLC members to sue derivatively on behalf of the LLC. Subsequent lower court decisions have clarified other aspects of the right by analogy to corporation law, such as requiring the plaintiff LLC member to allege pre-suit demand or demand futility. In shareholder derivative suits involving corporations, the board’s inherent authority to appoint a Special Litigation Committee composed of independent and disinterested directors to assess derivative claims is well established and, when properly implemented, can result in the court’s dismissal of derivative claims based on the SLC’s conclusion that the claims do not merit prosecution by the corporation. Continue Reading Summer Shorts: Three Must-Read Decisions

WARNING: Contractarians may find the following post disturbing. Reader discretion is advised.

Now that I’ve got your attention, consider this:

  • Under the standard for judicial dissolution of a New York LLC prescribed in the landmark 1545 Ocean Avenue case, the primary, contract-based inquiry is whether the LLC’s managers are unable or unwilling to permit or promote the stated purpose of the entity, as found in the LLC’s operating agreement or articles of formation, to be realized or achieved.
  • The typical, broad purpose clause found in untold thousands of standardized and customized LLC agreements provides that the LLC’s purpose is “any lawful business,” mirroring Section 201 of the LLC Law (“A limited liability company may be formed under this chapter for any lawful business purpose or purposes”).
  • When a fully integrated operating agreement states that the LLC’s purpose is “any lawful business,” may a minority member of an LLC nonetheless seek judicial dissolution based on extrinsic (parol) evidence that those in control of the LLC are operating it for a lawful business purpose that departs from the LLC’s alleged original lawful business purpose?

Until last week’s decision by the Brooklyn-based Appellate Division, Second Department — the same court that gave us 1545 Ocean Avenue — in Mace v Tunick, 2017 NY Slip Op 06170 [2d Dept Aug. 16, 2017], I would have answered that question “no” with support from a number of case precedents in New York and other jurisdictions including that hotbed of contractarian jurisprudence known as Delaware. After Mace, it appears that the “any lawful business” purpose clause may be as good as no purpose clause. Continue Reading Does Your LLC Agreement Have a Purposeless Purpose Clause?

Over the years I’ve litigated and observed countless cases of alleged oppression of minority shareholders by the majority. Oppression can take endlessly different forms, some more crude than others in their execution, some more draconian than others in their effect.

If there was an award for the crudest and most draconian case of shareholder oppression, Matter of Twin Bay Village, Inc., 2017 NY Slip Op 06024 [3d Dept Aug. 3, 2017], decided earlier this month by an upstate appellate panel, would be a serious contender.

The case involves a bitter dispute between two branches of the Chomiak family over a lakefront resort called Twin Bay Village located on beautiful Lake George in upstate New York. In 1957, the husband-and-wife founders, Stephan and Eleonora Chomiak, opened the summer resort on land they owned. They and their two sons, Leo and Vladimir, together ran the business until 1970 when they transferred ownership of the land and business to newly-formed Twin Bay Village, Inc. owned 26% by each parent and 24% by each son. Continue Reading And the Award For Most Oppressive Conduct By a Majority Shareholder Goes to . . .