I’m pleased to publicize three upcoming continuing education programs of special interest to business divorce practitioners, business appraisers, and the broader universe of lawyers and other professionals interested in the myriad issues concerning limited liability companies and related unincorporated business entities.
The LLC Institute. The first one, which I’ll be attending but not presenting at as I did last year, is the 4th annual meeting of the LLC Institute, a two-day program being held on November 12 and 13, 2015, at the Le Meridien Arlington and Waterview Conference Center in Arlington, Virginia. The LLC Institute is sponsored by the LLCs, Partnerships and Unincorporated Entities Committee of the American Bar Association under the leadership of Committee Chair Thomas Rutledge who has put together an exciting program for this year’s meeting, with something for everyone who practices in the field.
The LLC Institute’s program reflects the Committee’s mission to be the pre-eminent annual gathering of academic and practicing attorneys for the exchange of ideas and information on what is now the dominant organizational form, the LLC, as well as related developments in the law of related business organizations. The gathering’s aim is to provide practical insight and guidance as to the law of LLCs as well as the place of the LLC in related fields such as securities regulation, the Uniform Commercial Code, taxation, and bankruptcy. Continue Reading
Presently fourteen states and the District of Columbia have enacted the Revised Uniform Limited Liability Company Act (2006). RULLCA legislation is pending in three other states. Regrettably, New York is not one of them.
One of RULLCA’s innovative features, carried over from the original Uniform LLC Act (1996), is its provision in Section 602(6) authorizing judicial expulsion (“dissociation”) of a member who:
(A) has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;
(B) has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under Section 409; or
(C) has engaged in, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.
New Jersey adopted RULLCA effective March 2013 for all new LLCs and made applicable to all existing New Jersey LLCs as of March 2014. However, even before adopting RULLCA, New Jersey’s previous LLC Act included a provision substantially mirroring RULLCA’s Section 602(6). Continue Reading
The Delaware Supreme Court last week refused to rehear its affirmance of Chancery Court’s post-trial decision in a case called Zutrau v Jansing. The Appellate Division of the New York Supreme Court last May affirmed a post-trial decision in a closely related case involving the same parties. The two appellate decisions effectively close out a tenaciously fought, seven-year litigation saga involving a minority shareholder’s largely unsubstantiated, multi-faceted attack on the majority shareholder’s management and financial stewardship of a small, New York-based Delaware corporation specializing in proxy servicing.
The litigation history includes an initial books-and-records proceeding in New York followed by serial suits in New York and Delaware asserting a variety of claims for unlawful termination of the minority shareholder’s employment; direct and derivative claims for breach of fiduciary duty; breach of contract; and a challenge to the validity and fairness of a reverse stock split that cashed out at fair value the minority stockholder’s shares while litigation was pending concurrently in New York and Delaware courts. [Disclosure: The defendants are clients of my firm which served as co-counsel in the New York litigation and acted as lead counsel in connection with the reverse stock split.]
The case spawned a plethora of pretrial motions, lengthy trials in New York Supreme Court and Delaware Chancery Court, and appeals in both jurisdictions. Ultimately, the courts rejected the plaintiff’s claims for unlawful termination of her employment and contract breach, rejected the bulk of her claims against the majority shareholder for breach of fiduciary duty, upheld the validity of the reverse stock split, and upheld the company’s fair value appraisal with modest adjustments. Continue Reading
Long Island’s dense population and surfeit of privately owned businesses small, medium, and large assure the Commercial Division judges of the Nassau County Supreme Court more than their fair share of disputes between business co-owners. What’s amazing is the range of business divorce cases heard by that court, from AriZona Iced Tea involving a multi-billion dollar, internationally known brand to the smallest mom-and-pop shops where you wonder how the fight can be worth the legal bills.
One thing in common between the high-stakes AriZona Iced Tea case and, on the other end of the spectrum, the pending fight between two co-owners of the Gusto Latino Bar & Restaurant, a neighborhood watering hole located in Hempstead, New York, is that both cases took about five years to resolve. There the similarity ends. And, again, you have to wonder how the Gusto Latino case, in which the invested dollar amounts cited in the court’s decision wouldn’t even qualify as a rounding error in the AriZona Iced Tea case, possibly has justified five years of litigation expense.
So why am I writing about it? Not because there’s anything particularly compelling about its facts or the parties’ claims. Essentially it’s a garden variety case where parties go into business together without a shareholders’ agreement after which there’s a falling out and one side claims the other either is not a shareholder or, at most, holds a minority interest. We’ve all seen dozens of similar cases.
Rather, the Gusto Latino case is noteworthy because of the novel remedy devised by the presiding judge. For those who read this blog regularly, you’ve already guessed correctly that when I mention a novel remedy in a Nassau County Commercial Division business divorce case, chances are I’m referring to a decision by that court’s senior member, Justice Stephen A. Bucaria, who, as I’ve noted before, is not afraid to think outside the box when it comes to creative solutions to intractable shareholder disputes. Continue Reading
It just got more dangerous to become a minority member of a New York limited liability company without a written operating agreement.
In a case of first impression decided last month, a Manhattan judge ruled that the majority members of an LLC that had no operating agreement at the time of its formation were authorized by statute to later adopt and enforce against a non-signatory minority member an operating agreement that, among other things, authorizes additional capital calls and potentially dilutes the membership interest of a member who fails to contribute.
The facts in Shapiro v Ettenson, 2015 NY Slip Op 31670(U) [Sup Ct NY County Aug. 16, 2015], are fairly simple. In January 2012, three individuals — plaintiff Shapiro and defendants Ettenson and Newman — filed articles of organization for ENS Health, LLC as a member-managed LLC with each member holding a one-third membership interest. From its formation until December 2013, ENS had no written operating agreement. Between September and December 2013, the members negotiated and exchanged draft agreements but none was executed. Continue Reading
Traditions are good. This blog has two annual traditions. First, at the end of each year I write a post listing the year’s top ten business divorce decisions. Second, each August I offer readers who are (or ought to be) on summer vacation some light reading in the form of three, relatively short case summaries.
So here we are in what’s been a particularly felicitous August weather-wise (at least here in the Northeast U.S.), with another edition of Summer Shorts. This edition’s summaries feature two out-of-state cases — one from Florida involving expulsion of an LLC member and one from Delaware involving the valuation upon redemption of an LLC member’s interest — and a New York appellate court decision involving the removal of a limited partnership’s general partner.
The Anti-Chiu: Florida Court Upholds LLC Member’s Expulsion
Froonjian v Ultimate Combatant, LLC, No. 4D14-662 [Fla. Dist. Ct. App. May 27, 2015]. The Florida intermediate appellate court’s ruling in Froonjian makes for a fascinating contrast with New York case law represented most prominently by the Second Department’s 2010 decision in Chiu v Chiu holding that, absent express authorization in the LLC’s operating agreement, a member’s involuntary expulsion is not permitted. Going 180° in the other direction, the Froonjian court upheld the majority members’ expulsion of a minority member from a Florida LLC that had no operating agreement, reasoning that the Florida default statute vesting all decision-making authority in the members acting by majority vote encompasses the authority to expel a member. Continue Reading
Thanks to a recent decision by a Manhattan Commercial Division judge, it’s “once more unto the breach, dear friends, once more” (Shakespeare, Henry V, Act 3, Scene 1) on the pesky question whether New York courts have subject matter jurisdiction over judicial dissolution proceedings involving foreign business entities.
The unreported transcript decision is by Justice Jeffrey K. Oing in a case called Matter of Activity Kuafu Hudson Yards LLC, NY County Supreme Court Index No. 650599/15, in which the judge 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.”
This is one of my favorite topics on which I’ve written several posts over the years (read here, here, here, and here). As you would expect, most of the cases involve New York-based Delaware entities, and of late the debate has shifted from Delaware corporations to the ever-more-popular Delaware limited liability company.
The Kuafu lawsuit involves a real estate project known as Hudson Rise that is part of the massive redevelopment of midtown Manhattan’s west side near the Javits convention center, to be built atop the existing railroad yards. The Hudson Rise project is being developed by a manager-managed Delaware LLC named Reedrock Kuafu Development Co., LLC. Reedrock was formed in 2013 and has three members, each of which is a New York LLC, which I’ll refer to in shorthand fashion as Kuafu (50%), Siras and Ludwick (together, 50%). Continue Reading
Pictured in happier times are Philip Shawe and Elizabeth Elting, the founding co-owners of TransPerfect Global, Inc., a hugely successful international translation and business services company formed under Delaware law and headquartered in New York City, with 2014 revenues approaching $500 million, net income of almost $80 million, and no debt.
Now picture this:
- My lawyer instructed me to say “Ouch!” Shawe enters Elting’s office to confront her about a tax distribution she took. Elting tells Shawe to leave her office. Shawe refuses. Shawe sticks his foot in the door to block Elting from closing it. Elting tries to move his foot with her foot. While his foot is in the door, Shawe calls one of his attorneys. The next day, Shawe files with the police a “Domestic Incident Report” in which he accuses Elting of kicking him in the ankle. To ensure the matter is treated as a domestic violence incident and trigger Elting’s arrest, Shawe identifies Elting as his ex-fiancée even though their engagement ended 17 years earlier. The police contact Elting and tell her she’s going to be arrested for assault and battery, but charges are dropped after Elting’s lawyers intervene. Shawe then files a tort action against Elting, in the course of which Shawe sends Elting a letter, with copies sent to company employees, telling her to make available for inspection the shoes she was wearing on the day of the incident.
- Mommy, there’s something scary under my bed! After Elting calls off their engagement, Shawe becomes very angry, goes under Elting’s bed, and stays there for a half hour. Years later, when Elting is overseas on business, Shawe shows up unannounced at Elting’s hotel room, refuses to leave, and again goes under the bed for a half hour.
- Tell that fly on the wall we don’t need him. Shawe instructs company employees to intercept and bring to him Elting’s mail, including mail from her lawyers and their retained financial advisor, and to monitor her phone calls. On a New Year’s eve when Elting is absent, Shawe uses a master key card to enter her office, where he temporarily removes and makes a mirror image of her computer’s hard drive. Over the next two months he secretly enters her office 10 more times between the hours of 11 p.m. and 2 a.m. He also remotely accesses Elting’s hard drive on at least 20 occasions. Shawe obtains 19,000 emails from Elting’s personal Gmail account, including 12,000 privileged emails with her lawyers — How does she find time to get any work done? — some of which are provided to and read by Shawe’s lawyers.
- Battle Stations, We’re at DEFCON 1. “YOU WANT TO GO NUCLEAR OVER THIS . . . JUST SEND EVERYONE HOME NOW AND STOP SERVICING THE CLIENT. MY MISSILE KEY IS TURNED,” Shawe emails to Elting after she rejects his proposal to open an office in a certain French city. Elting ultimately relents to the request, which becomes one among many episodes of expletive-laden “mutual hostaging” by both Shawe and Elting as each demands some concession from the other as condition for consenting to the other’s demand for distributions, hirings, firings, acquisitions, buy-sell agreements, etc.
Two major themes are at work in a noteworthy decision last month by Manhattan Commercial Division Justice Charles E. Ramos in Goldstein v Pikus, 2015 NY Slip Op 31455(U) [Sup Ct NY County July 20, 2015], dismissing a petition for judicial dissolution of a New York limited liability company.
First, a petition asserting hostility-infused deadlock between co-managers of a New York LLC will be dismissed summarily absent allegations that the deadlock defeats the LLC’s purposes as defined in the operating agreement, or is causing the LLC to fail financially. Deadlock, per se, doesn’t cut it.
Second, single-asset real estate holding companies present a greater challenge for the dissolution petitioner alleging a dysfunctional relationship between co-managers. No matter the level of discord between co-managers, tenants must continue paying rent and the landlord must continue providing building services, maintenance and financial upkeep. In other words, compared to the operational mayhem and business impairment often caused by warring co-owners of a sales or service business, the realty firm’s purpose and finances tend to remain intact, making it harder to satisfy the dissolution standard for LLCs.
Goldstein stems from a fight for control of Ten Sheridan Associates, LLC, which was formed in 1996 to acquire a 14-story, mixed-use rental building with 73 residential apartments located in Manhattan’s West Village. All of the apartments are rent regulated. Continue Reading
The Tulsa Shock of the WNBA, originally known as the Detroit Shock before moving to Tulsa in 2010, are on the move again, this time to the more populous Dallas-Fort Worth area, that is, unless a lawsuit brought by an “oppressed” minority owner succeeds in stopping it.
The team is owned by an Oklahoma limited liability company known as Tulsa Pro Hoops, LLC (TPH), whose majority member is Bill Cameron, a successful banker and insurance executive. Cameron publicly announced the move on July 20th. Cameron’s press release explained the team’s reasons for relocating after six unimpressive and financially unrewarding basketball seasons in Tulsa:
“This is a very difficult decision, and I know it is particularly difficult for the Tulsa investors,” he said. “From a business perspective, it was necessary to evaluate options to place the team and the organization in the best position to achieve financial success. After a thorough review, I believe the Dallas-Fort Worth area holds the greatest potential to achieve our long-term business objectives.”
In a letter addressed to Tulsa’s mayor released the same date, Cameron also acknowledged the disappointment for a number of his Tulsa co-investors: Continue Reading