Lawsuits among partners in closely held businesses present infinite variations on claims for breach of contractual, statutory and common law duties. Depending on many factors — the size of the business and number of partners; their individual roles in the business and relative voting power; the degree of personal animosity; whether the firm is family-owned; the nature, profitability and prospects of the business, etc. — the partners and their lawyers usually know early on if the severe rupture in relations symbolized by the outbreak of litigation is reconcilable or not. This is true even when no one in the lawsuit is asking the court to dissolve the entity and end the partnership.
Experienced judges know it too. They’ve seen these intensely personal and bitterly fought cases linger for years, generating one pre-trial motion after another along with appeals, as the sides jostle for position and superior leverage for what all concerned know is most likely to happen in the end anyway: a settlement involving either a buy-out of one side by the other or, if the business assets lend themselves to it, a division of assets.
But judges don’t have the power to order dissolution of the business and thereby hasten the inevitable buy-out or division of assets unless someone asks for it by way of petition brought under the applicable dissolution statute, which, for various reasons beyond the scope of this post, they may never do.
So how can a judge prod the parties toward a business divorce when no one has petitioned for dissolution? One of our most experienced judges in this field, Nassau County Commercial Division Justice Stephen A. Bucaria, recently devised a novel solution in Digirolomo v. Sugar LI, LLC, Short Form Order, Index No. 008756 (Sup Ct Nassau County Nov. 20, 2013), by granting a preliminary injunction in favor of an LLC’s minority members, preventing the controlling member from enforcing capital call provisions in the operating agreement, conditioned on the plaintiffs’ filing within 30 days an amended complaint seeking judicial dissolution of the LLC. Continue Reading
At the time of Rajesh Banani’s death in 2007, he managed and co-owned with his parents, Kishin and Pushpa Banani, a pawn brokerage business in Astoria, Queens, called New Millenium Pawnbrokers, Inc. Rajesh and his parents respectively held 25% and 75% of the company’s shares.
Some months after his son’s death, Kishin sold all of New Millenium’s assets to another pawn brokerage for $1,063,218. Kishin claimed to have made the sale to the highest bidder in an arms-length transaction.
In 2010, Rajesh’s wife, Nicole, who also administered her late husband’s estate, sued for judicial dissolution of New Millenium as an oppressed minority shareholder under § 1104-a of the Business Corporation Law (BCL). She alleged that her in-laws failed to give her prior notice of the asset sale and never held a shareholders meeting to approve the sale. She also claimed that her in-laws failed to pay or account for the estate’s share of the sale proceeds and the business profits, and that they had wasted and looted corporate assets. Continue Reading
The limited partnership is the dinosaur of business forms in New York, on its way to virtual extinction (outside of estate planning*) due to the availability since 1994 of the vastly superior LLC form and the inherent shortcomings of New York’s limited partnership statutes.
When New York finally enacted a Revised Uniform Limited Partnership Law in 1991 (NYRULPA), it exempted from its application all pre-existing limited partnerships which, unless the partnership later files an amended certificate, continue to be governed by the Uniform Limited Partnership Act of 1916 adopted by New York in 1922 (NYULPA). Meanwhile, there appears to be no interest or effort underway to modernize New York’s limited partnership laws, as almost 20 other states have done, by adopting the re-Revised Uniform Limited Partnership Law of 2001.
In its pre-LLC heyday, the limited partnership was a popular form of business association for real estate investments, and there remain some number of legacy limited partnerships that never filed a certificate of amendment and therefore remain subject to NYULPA’s antiquated provisions. One of the ways we know these dinosaurs are still roaming about is the occasional court decision, which invariably involves some of the messiest and most prolonged litigation you’re ever likely to come across.
Take, for example, Alizio v. Perpignano, pending in Nassau County Supreme Court for over ten years, involving multiple litigations over multiple real estate limited partnerships, in the course of which two of the five general partners died. By my count the case has generated at least 50 motions and 27 written decisions by the lower court, and another 17 appellate decisions on motions and appeals, which by any standard represents an extraordinary expenditure of judicial resources on one case. Continue Reading
It’s a common drafting technique in all sorts of agreements to use the phrase, “Notwithstanding anything to the contrary in this Agreement,” to establish precedence of the appurtenant contract term with all other terms in the agreement. Ken Adams, the blogger and author of A Manual of Style for Contract Drafting, recommends against use of the phrase, even though it saves the effort of having to review the rest of the document for possible inconsistencies. As Adams explains, “[t]o reduce the chance of a drafting error, and to make life easier for the reader, it would be best to determine whether the provision in question in fact needs to trump another provision and, if it does, to specify which provision.”
Had they heeded that advice, the parties in Schepisi v. Roberts, 2013 NY Slip Op 07577 (1st Dept Nov. 14, 2013), decided last week by the Manhattan-based Appellate Division, First Department, could have saved themselves a lot of trouble and expense litigating their dispute over a pair of LLC agreements containing dueling notwithstanding clauses concerning the level of management authority required to enter into related-party contracts with LLC members. Continue Reading
The derivative lawsuit is commonly defined as a lawsuit brought by a shareholder of a corporation against the directors, management, or controlling shareholders of the corporation seeking recovery on the corporation’s behalf for breach of duty involving self-dealing, looting, waste or other wrongful conduct causing injury to the corporation. Derivative lawsuits also can be brought on behalf of alternative entities, including limited partnerships (LP) and limited liability companies (LLC).
Since the claims belong to the corporation (or LP or LLC) the governing statutes and decisional law, applicable to public and private companies alike, impose standing criteria for would-be derivative plaintiffs, including the contemporaneous and continuous ownership requirements. In addition, the claim’s proponent must plead and prove either (a) the making of a pre-suit demand upon the corporation’s directors to bring the suit directly in the corporation’s name and right or (b) that such demand would have been futile and therefore is excused. Litigation over the plaintiff’s satisfaction of the demand requirement more often than not centers on demand futility.
Because many New York-based businesses are formed in Delaware, and because the ability to seek judicial dissolution of a Delaware entity in a New York court is virtually non-existent, when litigation among co-owners of privately-owned Delaware entities takes place in New York, such cases typically feature derivative claims, the standing requirements for which are governed by Delaware law including a large and well-developed body of Delaware case law concerning demand futility.
In the last two months, the Manhattan-based Appellate Division, First Department, handed down three decisions in derivative lawsuits examining challenges to satisfaction of the demand futility requirement: one involving a Delaware corporation, another involving Delaware LPs and LLCs, and the third involving a New York LLC. While none of them addresses claims seeking judicial dissolution, it is the exceptional dissolution petition that doesn’t include a derivative claim against the other owner alleging misappropriation of company assets or business opportunity. It’s therefore important for business divorce practitioners to stay current on the state of the law concerning the standing requirements for derivative claims. Continue Reading
Few, fewer, and almost non-existent, is how I would quantify the number of reported court decisions, respectively, in cases brought by minority shareholders for common-law dissolution decided (1) on pre-answer motions to dismiss the pleadings, (2) on pre-trial summary judgment motions, and (3) after trial.
Which I why I feel compelled to write about a decision last month by a Manhattan appellate panel affirming in part and modifying in part a post-trial judgment for the plaintiff 15% shareholder in a common-law dissolution case, even though the decision reveals few details of the allegations and claims involved in the dispute.
The case is Gjuraj v. Uplift Elevator Corp., 2013 NY Slip Op 06811 (1st Dept Oct. 22, 2013), in which the Appellate Division, First Department, affirmed a judgment entered after a bench trial before Bronx Supreme Court Justice Sharon A.M. Aarons insofar as it determined that the plaintiff had a right to common-law dissolution, but modified the trial court’s remedy by limiting it to a fair value buy-out, as opposed to both a buy-out and dissolution. Continue Reading
I recently came across a fascinating article in which the authors, two prominent professors of law and economics, rely on experimental evidence to argue that courts should utilize the “shotgun” mechanism to resolve business divorce cases involving deadlock between two, 50/50 owners. The shotgun basically involves one owner setting a buyout price and the other owner opting to buy or sell at that same price, the theory being that the one setting the price, uncertain whether he or she will end up buyer or seller, effectively will be forced to offer a reasonable price for a business whose “true” market value otherwise may be very difficult to ascertain.
I’ll be posting more about this important and thought provoking article in the near future. (For those who can’t wait, here’s a link to the article by Professors Claudia Landeo and Kathryn Spier available on SSRN.) The topic for today is inspired by one particular court decision cited in the article, in which the judge not only ordered the sale of a deadlocked service business as a going concern using a shotgun mechanism, but also imposed a limited duration non-solicitation injunction upon whichever of the two shareholders ended up the seller.
The case, decided over 10 years ago by then-Vice Chancellor Jack B. Jacobs of the Delaware Court of Chancery (currently serving as a Justice of the Delaware Supreme Court), is Fulk v. Washington Service Associates, Inc., 2002 WL 1402273 (Del. Ch. June 21, 2002) (read here). It’s a case that deserves more attention than evidenced by the paucity of citations to it in subsequent case law. It’s a case that puts to the forefront questions about the appropriate reach of the judicial power in dissolution cases, to maximize shareholder value for both sides in winding up a 50/50 company with substantial good will that one of the two owners is threatening to walk off with. Continue Reading
It’s hard enough to explain to clients in business divorce cases the complicated statutory and judge-made law governing the substantive rights of the parties, for example, what constitutes shareholder oppression, or what kind of deadlock between 50/50 owners warrants dissolution, or how a stock interest gets valued in a buy-out proceeding.
But try explaining to clients the confoundingly intricate rules of civil procedure that dictate how a lawsuit must be prosecuted and defended, and, well, let’s just say you tend to get a lot of blank stares in return.
Whatever clients do or don’t comprehend, lawyers know that the rules of civil procedure present pitfalls and opportunities that can make or break a case, regardless of the more meaningful questions about who did what to whom, and which side should win or lose on the merits.
So primarily for all you lawyers reading this, I present below a series of short summaries of recent court decisions addressing a potpourri of procedural issues in dissolution cases, including service of the petition, time to answer, consolidation and intervention, and seeking unpleaded relief. Continue Reading
Two years ago, I blogged about a decision in a case called Stulman v. John Dory LLC which, as far as I knew at the time, was the sole decision by a New York court in which a dissenting member of a limited liability company (LLC) sought to block an allegedly unlawful freeze-out merger. The court gave the merger a green light after finding that the ousted minority member in a restaurant business failed to establish that the merger was procedurally improper or “tainted with fraud, illegality, or self dealing.”
Since Stulman, there was one other reported New York case that I blogged about last year involving an LLC freeze-out merger, Alf Naman Real Estate Advisors, LLC v. Capsag Harbor Management, LLC, but that case focused almost entirely on the minority member’s challenge to the offered price for his membership interest and only peripherally on the merger’s technical compliance with the operating agreement, i.e., there was no claim of underlying fraud or misconduct.
Recently I came across a third, new decision in an LLC merger case more akin to Stulman, in which Manhattan Commercial Division Justice Melvin L. Schweitzer examined a disputed LLC freeze-out merger involving a realty management company. Unlike in Stulman, Justice Schweitzer’s decision in SBE Wall, LLC v. New 44 Wall Street, LLC, 2013 NY Slip Op 32104(U) (Sup Ct NY County Aug. 29, 2013), found that the dissenting plaintiffs’ allegations of misconduct by the controlling member, including misrepresentation, concealment, and use of a pretextual capital call in furtherance of a “sham” merger to deprive plaintiffs of their equity stake, fell within an exception to the LLC Law’s provision mandating appraisal as the dissenting members’ exclusive remedy, and enabled them to proceed with their claims seeking to invalidate and set aside the merger.
The combination of Stulman and SBE Wall raise an interesting question about the interplay of the LLC Law’s two, separate provisions that address the dissenting member’s exclusive appraisal remedy. But first let’s look at what happened in SBE Wall.
The litigation in Manhattan Supreme Court between a privately-held company known as FaceCake Marketing Technologies, Inc. and minority stockholders Beryl Zyskind and Joel Gold has been plodding along for over three years, still with no resolution in sight thanks to two appellate decisions — including one handed down last week – reversing lower court orders.
Painful as it might be for the parties, there are some useful lessons for the rest of us concerning the drafting of investor agreements contemplating serial funding over a period of time in exchange for a combination of stock and company notes.
In September 2004, Zyskind and Gold each entered into an agreement with FaceCake to acquire an aggregate of $625,000 principal amount of 8% senior notes plus common stock. Each agreement called for an initial investment of $125,000 in exchange for notes and 337,500 shares, with ten subsequent, monthly investments of $50,000 each in exchange for additional notes and shares at a fixed ratio that, assuming full funding, would have given Zyskind and Gold an aggregate holding of 20% of the company’s common shares plus notes totaling $1.25 million. Continue Reading