According to its website, Brooklyn-based wholesale food distributor Jersey Lynne Farms traces its roots to the 1940′s when Vito Loconte began a door-to-door business selling loose eggs in mushroom baskets. Seventy years later, Jersey Lynne Farms is a major, full line food distributor selling to supermarkets, institutions, convenience and bagel stores, delicatessens, diners and restaurants throughout the metropolitan New York area.
In the 1990′s, a few years before he died, Loconte transferred stock ownership and management of Jersey Lynne Farms to his son Michael and daughters Dorine, Diane and Maria, some of whose spouses also took jobs in the family business. In 1999, the four siblings transferred ownership of the building that houses the distribution business to a newly formed limited liability company, named Caterina Realty, LLC, of which each sibling is a 25% member-manager. Since then Caterina Realty leases the property to Jersey Lynne Farms as sole tenant.
The Falling Out
Family unity fractured in 2011 when Michael, Diane and Maria banded together to oust Dorine as an officer, director and employee of Jersey Lynne Farms. They also fired Dorine’s husband from his position in charge of purchasing. That same year, a dispute erupted over the terms of a new lease between Jersey Lynne Farms and Caterina Realty. Relying on widely disparate appraisals, Dorine argued for an annual base rent of $600,000 compared with the $342,000 annual base rent adopted in the lease ultimately approved by her three siblings in late 2011. Continue Reading
The statutory scheme governing judicial dissolution of closely held New York business corporations resides in Article 11 of the Business Corporation Law. Article 11 includes several provisions empowering the courts to preserve corporate assets while the case is being litigated. The best known and most frequently invoked provisions are BCL § 1113, authorizing a court-appointed receiver, and BCL § 1115, granting the court broad authority to issue injunctions restraining the corporation’s shareholders, directors, officers and creditors from imperiling the corporation’s assets.
Wedged between those two provisions is a lesser known and rarely used statute, BCL § 1114, that gives the courts powers akin to those exercised by bankruptcy judges, to void any post-filing sale, transfer or encumbrance of corporate property made without the court’s prior approval. Here’s the full text of the statute:
A sale, mortgage, conveyance or other transfer of, or the creation of a security interest in, any property of a corporation made, without prior approval of the court, after service upon the corporation of a summons in an action, or of an order to show cause in a special proceeding, under this article in payment of or as security for an existing or prior debt or for any other or for no consideration, or a judgment thereafter rendered against the corporation by confession or upon the acceptance of any offer, shall be void as against such persons and to such extent, if any, as the court shall determine. Continue Reading
Courts determine the value of equity interests in closely held firms in a variety of settings, including (among others) dissenting shareholder proceedings triggered by mergers; elective stock buy-outs triggered by minority shareholder dissolution petitions; partnership buy-outs triggered by death or dissolution; disputes over contractual buy-outs contained in agreements among the co-owners; and damages claims arising from buy-outs tainted by fraud or wrongful nondisclosure.
The central feature of a valuation contest is the battle of the opposing appraisal experts. Nothing is more critical to the success of a litigant’s valuation case than putting on the testimony of a qualified, independent, experienced, credible, well-prepared, articulate appraiser who, using his or her written appraisal report as a springboard, can both educate and persuade the judge (or jury in certain types of cases) who has ultimate responsibility for determining the value of the equity interest under the applicable standard of value.
In most valuation proceedings, the parties either are required to, or voluntarily agree to, disclose certain information concerning their intended expert witnesses in advance of the valuation hearing. I say in most cases because the governing rules can vary depending whether the case is brought in court or as an arbitration and, if in court, as a plenary action versus a special proceeding, or in the court’s Commercial Division versus in a general civil part. Disclosure practices also can vary from judge to judge. Continue Reading
Over the years I’ve seen a boatload of crudely prepared operating agreements for New York limited liability companies. These agreements often derive from generic forms grabbed off the internet, including forms offered by paid services such as LegalZoom, or from recycled, one-size-fits-all forms used by attorneys without paying meaningful attention to the special considerations and needs attendant to the particular business being formed. Once signed, these agreements are locked away and ignored until the outbreak of hostilities among the co-members, at which point they resurface to the great dismay of one or another faction upon realizing that what they signed only provides more fodder for litigation.
The common thread for these newborn LLCs is the inability or unwillingness of the business owners to invest upfront the financial resources needed to secure a customized, well-considered and well-drafted LLC agreement that anticipates and resolves through contractual means the kinds of potential disagreements — over management, finance, compensation, distributions, sale of equity stakes, etc. — that can arise in the life cycle of a multi-member LLC.
That is not to say I haven’t seen excellent, carefully prepared, thorough LLC agreements for New York LLCs. Certainly I have, usually involving more highly capitalized ventures and particularly those structured with both managing and non-managing members. My guess, however, is that such agreements are relatively infrequent given the great preponderance of small, member managed, minimally capitalized companies formed each year in New York as LLCs. Continue Reading
In Laurel Hill Advisory Group, LLC v American Stock Transfer & Trust Co., 2013 NY Slip Op 08351 [1st Dept Dec. 12, 2013], a Manhattan appellate panel recently reinstated a claim to enforce an alleged oral LLC agreement, among other provisions, granting the appellant a 10% membership interest. The decision turned on the lower court’s conclusion, with which the appellate panel disagreed, that the appellant had conceded the existence of a written operating agreement both that pre-dated the alleged oral LLC agreement and excluded him as a member.
The court’s brief decision aroused my curiosity, mostly because it didn’t mention the LLC’s state of formation which matters greatly because in some states, including New York, the LLC statutes mandate a written operating agreement. Nor did the opinion cite any case law on the point, from New York or elsewhere, that might have given it away.
Sure enough, when I checked the lower court’s decision (read here), I saw that the LLC in question, a New York based corporate governance/proxy solicitation firm known as Laurel Hill Advisory Group, is a Delaware LLC. Section 18-101(7) of the Delaware LLC Act defines an LLC agreement as “any agreement . . . written, oral or implied, of the member or members as to the affairs of a limited liability company and the conduct of its business.” Indeed, Delaware recently strengthened its policy protective of oral LLC agreements by amending § 18-101(7) to specify that such agreements are not subject to any statute of frauds, thereby legislatively overruling the Delaware Supreme Court’s 2009 ruling in Olson v Halvorsen. Continue Reading
The title of this post should come as no surprise to those who follow Delaware corporate law. Unlike New York and the vast majority of other states, Delaware has no statute authorizing an oppressed minority shareholder to petition for judicial dissolution or to compel a buy-out. In its 1993 ruling in Nixon v Blackwell, the Delaware Supreme Court broadly rejected the notion that “there should be any special, judicially-created rules to ‘protect’ minority stockholders of closely-held Delaware corporations” (626 A.2d 1366, 1379). As the court explained, any right to be bought out is a matter of contract, not common law:
The tools of good corporate practice are designed to give a purchasing minority stockholder the opportunity to bargain for protection before parting with consideration. It would do violence to normal corporate practice and our corporation law to fashion an ad hoc ruling which would result in a court-imposed stockholder buy-out for which the parties had not contracted.
Trapped-in minority shareholders in Delaware close corporations who fail to perfect contractual buy-out rights in their shareholder agreements have been forced to pursue alternative theories of relief — and none too successfully. The Delaware Supreme Court, in a decision issued last week in Blaustein v Lord Baltimore Capital Corp., No. 272 [Del. Sup. Ct. Jan. 21, 2014], threw cold water on two alternative theories used by a frustrated minority shareholder whose shareholder agreement permitted but did not require the company to repurchase shares subject to specified levels of board or shareholder consent. Continue Reading
Kensington Publishing Corporation, founded in 1974 by the late Walter Zacharius, is the largest independent publisher of mass-market books in the United States. When Zacharius died in 2011 at the age of 87, his obituary in the New York Times described Kensington as ”a leading purveyor of bodice-rippers and other romance genres.”
Zacharius left behind his second wife, Suzanne, and two children from his first marriage, Steven and Judith. The three of them are now locked in a legal battle for control of Kensington, with Suzanne, who inherited 59% of the voting shares, pitted against her two stepchildren who own most of the remaining voting shares.
Why the battle for control when Suzanne owns a clear majority of the voting equity? The answer lies in a 2005 voting agreement made by Walter and his two children which effectively gave Steven and Judith the power, following Walter’s death, to vote his shares in any election of Kensington’s directors. The children subsequently have used their board control to frustrate Suzanne’s stated goal, to sell her majority interest in Kensington to a “major publishing house,” and allegedly to withhold distributions as part of a squeeze-out plan. Continue Reading
The prosecution or defense of a business divorce case, like any other civil litigation, is subject to a mind boggling set of procedural rules which, in the event of noncompliance, can deal either side a significant setback or even dismissal. Adding to the complexity are the rules specific to business divorce cases, which are contained in the statutes governing judicial dissolution cases.
Besides the potential jeopardy to a client’s position on the merits, failure to comply can cost the client time and money. The client’s confidence in his or her attorney also can be compromised by needless errors that detract from achievement of the client’s litigation goals.
Recently, I was asked about the most common mistakes attorneys make when filing or defending dissolution cases. I figured others might benefit from the answer, so compiled below is a list of 10 snafus highlighted in cases that I’ve previously featured on this blog. Follow the links to read more about each one.
- File a bare-bones dissolution petition. Judicial dissolution of a corporation must be brought by way of petition in a special proceeding, that is, not by ordinary summons and complaint where the rules essentially permit a bare-bones pleading that alleges the elements of a claim in conclusory fashion. The petition is different. It must provide detailed and, if necessary, documented facts establishing entitlement to dissolution. Failure to do so likely will result in a painful dismissal. Read more here. Continue Reading
Last month, in Huatuco v. Satellite Healthcare, C.A. No. 8465-VCG (Del. Ch. Dec. 9, 2013), the Delaware Court of Chancery invoked that state’s “contractarian” approach to limited liability companies in dismissing a 50% member’s complaint seeking judicial dissolution of a deadlocked Delaware LLC.
The court did so based on Section 2.2 of the LLC agreement (read here), entitled “Other Member Rights,” which addressed rights to distributions of assets upon liquidation and preemptive rights, and which also included the following sentence:
“Except as otherwise required by applicable law, the Members shall only have the power to exercise any and all rights expressly granted to the Members pursuant to the terms of this Agreement.”
The court construed Section 2.2 as “reject[ing] all default rights under the [Delaware LLC] Act unless explicitly provided for in the LLC Agreement or ‘otherwise required’ by law.” While the LLC agreement included provisions for voluntary dissolution triggered by defined events, it did not include any reference to involuntary (judicial) dissolution under § 18-802 of the Delaware LLC Act. ”Since the LLC Agreement does not expressly contain a right to judicial dissolution,” the court concluded, “the members effectively opted out of the statutory default contained in 6 Del. C. § 18-802.”
Huatuco builds on Chancery Court’s 2008 ruling in R&R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del. Ch. Aug. 19, 2008), in which the court classified § 18-802 as permissive rather than mandatory and, citing Delaware’s strong freedom-of-contract policy codified in § 18-1101(b) of the LLC Act, enforced an LLC agreement’s provision explicitly and unambiguously waiving the right to seek judicial dissolution of the LLC. (Read here my post on R&R Capital.)
The question is, does Huatuco take contractarianism too far by finding a dissolution waiver, not based on an explicit waiver as in R&R Capital, but on a provision that generally limits member “rights” to those expressly granted in the LLC agreement? Continue Reading
I’m pleased to present my sixth annual list of picks for the past year’s ten most significant business divorce cases. This year’s selections, featuring seven appellate decisions, include significant rulings on a variety of issues in dissolution and appraisal cases involving closely held corporations, partnerships and limited liability companies. All ten were featured in this blog previously; click on the case name to read the full treatment. And the winners are:
- Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), in which Manhattan Supreme Court Justice Anil C. Singh followed a 1994 First Department precedent in rejecting the argument that a New York court lacks subject matter jurisdiction to dissolve a foreign entity, in that case a Delaware limited partnership.
- Doyle v. Icon, LLC, 103 AD3d 440, 2013 NY Slip Op 00797 (1st Dept Feb. 7, 2013), where the First Department dismissed a complaint seeking judicial dissolution of an LLC, holding that allegations by a minority member of systematic exclusion by the controlling members, without more, fail to state adequate grounds for relief under LLC Law § 702.
- Sullivan v. Troser Management, Inc., 104 AD3d 1127, 2013 NY Slip Op 01634 (4th Dept Mar. 15, 2013), a 10-year litigation over a stock buy-out where the parties never updated the called-for Certificate of Value, in which the Fourth Department rejected the purchasing shareholder’s contention that the buy-out price should be based on book value.
- Gelman v. Buehler, 20 NY3d 534, 2013 NY Slip Op 01991 (Ct App Mar. 26, 2013), in which the Court of Appeals construed the phrases ”definite term” and ”particular undertaking is specified” as used in Section 62 of the Partnership Law in dismissing a complaint for wrongful termination of an oral partnership agreement.
- Mizrahi v. Cohen, 104 AD3d 917, 2013 NY Slip Op 02056 (2d Dept Mar. 27, 2013), where the Second Department ordered a buy-out of the defendant 50% member by the plaintiff 50% member as an equitable remedy in an LLC dissolution case.
- Born to Build LLC v. 1141 Realty LLC, 105 AD3d 425, 2013 NY Slip Op 02193 (1st Dept Apr. 2, 2013), in which the First Department ordered dismissal of a complaint for judicial dissolution of an LLC, brought by a party who purportedly acquired an undocumented membership interest at a judgment execution sale, where the LLC agreement negated the existence of the membership interest at issue.
- Matter of Sunburst Associates, Inc., 106 AD3d 1224, 2013 NY Slip Op 03368 (3d Dept May 9, 2013), an unusual case in which the Third Department dismissed a deadlock dissolution petition brought by a putative 50% shareholder on the ground that he had transferred his stock to the other 50% shareholder, notwithstanding evidence that, even after the transfer, the respondent shareholder had signed corporate tax returns reflecting the two of them as 50/50 shareholders.
- Breidbart v. Wiesenthal, 108 AD3d 492, 2013 NY Slip Op 05040 (2d Dept July 3, 2013), where the Second Department held that a retired partner, or the estate of a deceased partner, who elects to receive post-withdrawal profits in lieu of interest under Section 73 of the Partnership Law is not entitled to recover appreciation on the value of the partnership assets.
- Ruggiero v. Ruggiero, 2013 NY Slip Op 31955(U) (Sup Ct Suffolk County July 29, 2013), in which Suffolk County Justice Emily Pines opted for one appraiser’s income approach over the other appraiser’s market approach in a stock valuation contest involving a family-owned kosher deli.
- Feinberg v. Silverberg, Decision and Order, Index No. 3120-11 (Sup Ct Nassau County Sept. 6, 2013), a decision by Nassau County Justice Vito DeStefano in which the court ruled that the petitioner’s alleged bad faith and creation of feigned deadlock is a cognizable defense in a proceeding for judicial dissolution under Business Corporation Law § 1104.