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
First a books and records proceeding. Then a declaratory judgment action. Then dissolution proceedings. Six years of litigation including two appellate rulings, just to establish who’s a shareholder and who’s not, all because the owners of two closely held corporations formed decades ago never bothered to issue stock certificates or otherwise attend to corporate formalities.
It didn’t help that the two corporations, formed in the 1960’s, never elected pass-through taxation as subchapter S corporations, hence the companies never issued form K-1’s identifying the shareholders and their stock percentages.
In last week’s appellate ruling in Zwarycz v Marnia Construction, Inc., 2015 NY Slip Op 06239 [2d Dept July 22, 2015], which affirmed a June 2014 post-trial decision by Westchester County Supreme Court Justice Robert DiBella, the plaintiff Michael Zwarycz overcame the absence of a stock certificate or any other direct evidence of share ownership to establish his 50% interest in two corporations that own residential apartment buildings in Yonkers, New York.
Zwarycz’s victory last year before Justice DiBella turned bittersweet, however, when his follow-up petitions to dissolve the two corporations based on deadlock and internal dissension were dismissed by a different judge. Those November 2014 rulings are the subject of Zwarycz’s pending appeals. Continue Reading
If you’ve got an owner-operated, closely held business entity that pays no dividends, and it features controlling and non-controlling ownership interests, generally it’s a good idea to include in the owners’ agreement provisions for the compulsory buyback of the non-controlling owner’s interest upon termination of employment.
The reasons are fairly obvious. The last thing anyone needs is an outside owner with trapped-in capital, possibly having to go out-of-pocket for taxes on phantom income, who may feel compelled to challenge the controller’s financial and management decision-making, possibly through a books-and-records demand and/or a lawsuit asserting derivative claims or seeking judicial dissolution, as the only means available to pressure the controller into a reasonable buyout.
While I’m a fan of such forced buybacks, I’m less wild about buyback provisions that reduce the amount to be paid for the equity interest of a non-controlling owner whose termination is for cause. I get the idea — to incentivize an owner/employee to keep to the straight and narrow — but too many times I’ve seen trumped-up terminations for cause by a financially incentivized controller followed by litigation brought by the financially penalized, expelled owner who contests cause, especially when the alleged misconduct is claimed to fall within a broad, catch-all category such as violation of company policy or failure to perform duty.
Case in point: last week’s appellate ruling in Matter of Bonamie, 2015 NY Slip Op 06191 [3d Dept July 16, 2015]. Bonamie involves a company called Ongweoweh Corp. which, according to its website, was founded in 1978 by Frank Bonamie in upstate New York and is “a Native American-owned, pallet management company providing pallet & packaging procurement, recycling services and supply chain optimization programs.” According to this trade publication, in 2010 Frank’s son Daniel became the company’s CEO and president. Continue Reading
Not surprisingly, the vast majority of business divorce cases involve firms with valuable assets and/or profitable operations. After all, outside of creditor claims in bankruptcy court, who wants to invest time and money fighting over the corpse of a business with little or no equity value?
Still, it happens once in a while. Take, for example, a case recently decided by Manhattan Commercial Division Justice Shirley Werner Kornreich involving a limited liability company that was up and running for a couple of years before it went insolvent and shut down. Almost five years after a minority member brought suit against the controlling majority member, and after the court’s denial of summary judgment on the plaintiff’s primary claim for recovery, the majority member settled the case for $30,000 which, I imagine, is a small fraction of the legal fees spent by both sides.
Justice Kornreich’s decision in Mazel Capital, LLC v Laifer, 2015 NY Slip Op 30295(U) [Sup Ct NY County Mar. 3, 2015], tells the story of a short-lived business called Heartwatch that unsuccessfully marketed a heart monitoring device in tandem with a live 24-hour call center staffed by cardiologists and other medical professionals. In 2006, the business was organized as an LLC by its founder and sole managing member, Dr. Franklyn Laifer, a retired cardiologist and the defendant in the case. The plaintiff, Mazel Capital, LLC, initially invested $250,000 cash and contributed other assets in consideration of a 9% membership interest in Heartwatch. A year later Mazel invested another $300,000 cash, raising its stake to 12%. Dr. Laifer’s son and others invested another $100,000 in exchange for an 8% membership interest, leaving Dr. Laifer with the remaining 80% for his “sweat equity.”
The LLC’s operating agreement gave Dr. Laifer exclusive management authority but also provided that he was “not entitled to any compensation for serving as Manager.” A contemporaneous side agreement placed limits on monthly expenditures during the first six months absent Mazel’s consent. Continue Reading
Judicial dissolution of a business entity, whether pursuant to statute or common law, is an equitable remedy subject to equitable defenses, including the doctrine of “unclean hands.”
As described a few years ago by Justice Emily Pines in the Kimelstein dissolution case, the unclean hands doctrine “bars the grant of equitable relief to a party who is guilty of immoral, unconscionable conduct when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct.”
The doctrine has been employed in dissolution cases in two ways. First, it can defeat a petitioner’s standing to seek dissolution, as in Kimelstein where Justice Pines held that the petitioner’s admitted concealment from his ex-wives, creditors and federal government of his alleged, undocumented 50% equity interest in two corporations owned by his brother barred him from asserting the requisite stock holdings to seek statutory dissolution. Second, even when the petitioner’s stock ownership is conceded, the doctrine can bar the petitioner’s dissolution claim on the merits.
The doctrine’s latter use rarely has been successful. A recent exception is Sansum v Fioratti, 128 AD3d 420 [1st Dept 2015], in which the Appellate Division, First Department, ordered the dismissal of a common-law dissolution claim brought by a 6% shareholder in an art gallery based on the plaintiff’s “embezzlement” of company funds for which he pled guilty to larceny and related charges. The decision packs an even more powerful punch by virtue of the court’s summary disposition of the claim, disagreeing with the lower court that a hearing was required and invoking the doctrine of in pari delicto (Latin for “in equal fault”) to reject the plaintiff’s counter-argument, that the defendant stockholders themselves conducted illegal business operations. Continue Reading
Partnership dissolution cases have an especial poignancy, more so than cases involving other forms of business entities.
I think it’s because general partnerships are a dying breed of business association, supplanted in our litigious society by limited liability entities such as S corporations and LLCs.
The occasional partnership dissolution cases that land in court these days tend to involve family or multi-family real estate partnerships formed decades ago, in which one or more of the original partners have passed away or are approaching retirement and looking either to exit or to transfer their partnership interest and/or management role to their children. Fittingly, along with elderly parties the statutes governing the disputes are found in the superannuated New York Partnership Law, essentially unchanged since its adoption in 1919.
Such was the case in Breidbart v Olshan, Decision and Order, Index No. 003610/12 [Sup Ct Nassau County May 27, 2015], involving a realty partnership formed in 1977 to acquire and develop under a long-term lease a commercial office building in Lake Success on Long Island. The partnership, known as Boundary Realty Associates, consisted of three partners: Olshan (50%), Rosenberg (25%), and Breidbart (25%). The written partnership agreement provided that the partnership would employ as managing agent for the first three years a firm owned and operated by Olshan at a fixed commission of 4% of gross rental income. The agreement also provided for termination of the partnership in 2020 or sooner upon the consent of a majority in interest of the partners. Continue Reading