For the second time, a unanimous panel of the Manhattan-based Appellate Division, First Department, has upheld the pretrial dismissal of an action for judicial dissolution of a limited liability company under Section 702 of the LLC Law where the petitioning minority member based the claim solely on allegations of “oppressive” conduct by the majority member.
The first time was about two years ago, in Doyle v Icon, LLC (103 AD3d 440), in which the First Department reversed a lower court’s denial of a motion to dismiss a § 702 petition alleging that the controlling members had “systematically excluded” the minority member from the LLC’s business operations and profits. The court held that such allegations “are insufficient to establish that it is no longer ‘reasonably practicable’ for the company to carry on its business, as required for judicial dissolution under Limited Liability Company Law § 702.”
In so ruling the Doyle court adopted the standard for dissolution formulated in the Brooklyn-based Second Department’s landmark decision in the 1545 Ocean Avenue case, requiring a showing that, in the context of its operating agreement, the LLC’s stated purpose can no longer be achieved or that it is financially unfeasible. Justice Austin’s opinion in that case carefully differentiated the grounds for dissolution under LLC Law § 702 from those under Article 11 of the Business Corporation Law including the latter’s statute authorizing dissolution for “oppressive” conduct by the controlling shareholders and directors.
The First Department did it again last week in a case called Barone v Sowers, 2015 NY Slip Op 04195 [1st Dept May 14, 2015], involving a complaint brought by a 20% member of a single-asset realty holding LLC against the 80% member, alleging a series of derivative claims alongside a claim for dissolution under § 702. The unanimous appellate panel affirmed the lower court’s decision by Justice Eileen Rakower dismissing the dissolution claim and also dismissing the derivative claims for failure to adequately allege that pre-suit demand was excused. Continue Reading
I recently had a fair value appraisal hearing at which the opposing business valuation expert’s report and testimony in support of his proposed percentage discount for lack of marketability (DLOM) relied heavily on the percentages used in a number of reported court decisions in other cases. The reported cases were selected and supplied to the expert by the retaining counsel. The expert made no effort to draw meaningful comparison between the facts and circumstances concerning the subject company and the companies involved in the other cases. Indeed, some of the decisions in the other cases shed little if any light on the factors or methodology underlying the DLOM accepted by the court.
Should business appraisers rely on case precedent in determining discounts?
Not according to the IRS, one of whose many jobs is to review and sometimes challenge the marketability (and other) discounts reflected in estate and gift tax returns valuing interests in family limited partnerships and other closely held business entities.
In 2009, the IRS issued for its own internal use a 111-page paper called Discount for Lack of Marketability Job Aid for IRS Valuation Professionals (available online here). The DLOM Job Aid subsequently went public and serves as an important resource for business appraisers and lawyers involved in business valuation matters in which the applicable standard and level of value warrant consideration of a marketability discount. As regular readers of this blog know, DLOM often can be the single most contentious issue in fair value proceedings in the New York courts resulting from dissenting and oppressed minority shareholder lawsuits.
The DLOM Job Aid’s Executive Summary describes its overall purpose thusly: Continue Reading
Viewing the arc of Delaware Chancery Court jurisprudence over the last two decades implementing that state’s Limited Liability Company Act, and witnessing the Delaware legislature’s frequent amendments to the statute in reaction to judicial developments, you can’t help but detect a pattern of maintaining the unique attributes of the Delaware LLC, as compared to other forms of business entity, by:
- rigorously promoting freedom of contract (in the form of the LLC agreement) and its corollary, “you made your bed now lie in it”;
- deciding internal governance disputes within the bounds of the interplay of the Delaware LLC Act’s default rules and the LLC agreement; and
- strongly disfavoring judicial intervention based on open-ended notions of fairness (the main exception being when managers take on fiduciary duties by agreement or by default under the statute).
Stated simply, in Delaware certainty trumps indeterminacy.
Well, not always, as seen in a first-impression ruling last week by Vice Chancellor J. Travis Laster in In re Carlisle Etcetera LLC, C.A. No. 10280-VCL (read here), in which the court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity. Continue Reading
In a post last year entitled “Squabbling Partners with Piecemeal Adjudications Need Not Apply,” I wrote about Nassau County Commercial Division Justice Stephen A. Bucaria‘s creative adaptation of the ancient common-law principle of partnership law, forbidding actions at law between partners prior to dissolution and a final accounting, to cases involving close corporations and LLCs.
Essentially, in a series of cases involving claims among co-owners of close corporations and LLCs for breach of fiduciary duty and the like, Justice Bucaria likened these cases to partnership disputes and either conditioned relief on one side bringing a dissolution claim or dismissed the complaint with leave to replead including a claim for dissolution or buy-out.
The squabbling-partners rule applicable to corporations and LLCs now has a corollary, also courtesy of Justice Bucaria: if you do bring a claim for dissolution, don’t expect you’ll be able to withdraw it later for the purpose of gaining interim injunctive relief against your adversary.
The corollary appears in a recent decision by the judge in PFT Technology LLC v Wieser, Short Form Order, Index No. 8679/12 [Sup Ct Nassau County Apr. 13, 2015]. The case, commenced in 2012, involves a four-member LLC in which the three majority members brought suit in the LLC’s name against the fourth seeking judicial dissolution of the LLC and also asserting claims for breach of fiduciary duty. The defendant member opposed dissolution, demanded a fair-value buy-out of his membership interest, and counterclaimed against the three majority members for breach of fiduciary duty. Continue Reading
Who knew Quick Draw would turn into Slo-Mo?
Regular readers of this blog may remember the Quick Draw (as I dubbed it) buy-sell agreement in the Mintz v Pazer case decided by Brooklyn Commercial Division Justice David Schmidt. The provision at issue — found in a shareholders’ agreement between two, 50/50 factions of a family owned business whose sole asset is a shopping center allegedly worth over $50 million — authorized either faction to give the other an irrevocable purchase notice within 10 days after the failure to resolve deadlock, with the purchase price to be determined by a subsequent multiple-appraiser process. Litigation erupted after each of the Mintz and Pazer factions sent the other a purchase notice within the 10-day period. Justice Schmidt eventually declared the Mintz faction the purchaser because its notice preceded the Pazer faction’s notice by several days.
The dueling purchase notices were given in September 2012. Justice Schmidt declared the Mintz faction the purchaser in December 2013. It’s now sixteen months later and still no sale has occurred while the two factions continue to battle it out in court. What went wrong? Continue Reading
A Manhattan appellate panel’s unanimous decision last week in Brummer v Red Rabbit, LLC, 2015 NY Slip Op 02912 [1st Dept April 7, 2015], affirmed the dismissal of an LLC member’s claims for fraud and fiduciary breach based on the controller’s alleged concealment of impending equity investments by a pair of venture capital firms while the member was negotiating a partial buy-out of his membership interest.
The court held that the controller’s allegedly false representations regarding the company’s value and non-disclosure of investor interest “were neither relied upon nor material to plaintiff’s decision to sell.”
It’s an interesting contrast, to put it mildly, with the PF2 Securities case that I wrote about last week, in which a trial court refused to dismiss a minority shareholder’s fiduciary breach claim also based on an allegedly under-valued buy-out and the controller’s alleged withholding of financial information. In that case, the court held that the shareholder was “entitled to receive a fair market value for his stock after fair and complete disclosure and valuation.”
The complaint in Brummer (read here) alleged that around 2005 the plaintiff invested $25,000 in consideration of a 7% membership interest in a start-up venture called Red Rabbit that delivers “healthy” meals and snacks to New York metro area schools. After a period of modest growth, in 2010, the controlling member offered to buy back 6% for $28,500 using a percentage-of-revenue formula based on 2010 annual revenue of $475,000. He subsequently raised the offer to $40,000 which the plaintiff accepted, leaving plaintiff with a 1% membership interest. Continue Reading
Do controlling shareholders of a close corporation have an affirmative duty of financial disclosure when negotiating a buy-out of a minority shareholder? If so, what’s the source of the duty? Is it part of, or appurtenant to, a common-law fiduciary duty of loyalty or care? Or might it derive from the statutory right to seek judicial dissolution for the controllers’ oppressive acts?
Those weighty questions are prompted by a decision last month in which the court denied a motion to dismiss a minority shareholder’s counterclaim against the majority shareholders for breach of fiduciary duty in connection with a disputed buy-out agreement. The court’s decision in PF2 Securities Evaluations, Inc. v Fillebeen, 2015 NY Slip Op 30436(U) [Sup Ct NY County Mar. 26, 2015], invoked in tandem the majority shareholders’ fiduciary duty and the minority shareholder’s rights to be “free of oppressive conduct” and “in the event of a consensual buy-out . . . to receive a fair market value for his stock after fair and complete disclosure and valuation.”
The case involves a financial consulting firm called PF2 that uses mathematical models to evaluate collateralized debt obligations (CDOs). The defendant co-founded the company in 2007 and held a one-third stock interest. According to PF2’s complaint (read here), the defendant was responsible for developing the mathematical models and collecting data to evaluate CDOs. The complaint alleges that in 2012, as a result of the defendant “failing to fulfill his role as a director/partner of PF2,” the company negotiated “a generous buyout and employment contract” with the defendant “through various conversations and emails.” The complaint’s gravamen is that the defendant wrongfully competed with PF2 and misappropriated its proprietary information both before the buy-out when he was still a shareholder and afterward while he was in PF2’s employ. Continue Reading
Chris Mercer (photo right) is a name familiar to regular readers of this blog. I’ve written a number of posts about major valuation cases in which Chris testified as an expert business appraiser, including AriZona Iced Tea, Chiu, and Giaimo, and about his writings on the subject of statutory fair value and in particular the marketability discount. I’ve also had the pleasure of sharing the stage with Chris at continuing education programs including one upcoming on May 18 for the New York State Society of CPAs.
Chris has distinguished himself not only in the field of business appraisal, but as a deep thinker about how business owners, and especially the current wave of retiring baby boomers, can successfully reap the benefits of their ownership through diversification and careful transition planning. To that end Chris has published a number of books on buy-sell agreements and, most recently, a terrific book called Unlocking Private Company Wealth (Peabody Publishing 2014), subtitled “Proven Strategies and Tools for Managing Wealth in Your Private Business.” The book is a wake-up call for owners of closely held businesses who, caught up in the day-to-day operation and growth of their firms, pay little or no attention to managing and extracting the personal wealth tied up in their businesses and fail to devise rational exit and succession strategies.
In his book’s introduction, Chris nicely captures the credo of the quiescent business owner: Either I own the business or I don’t and there’s no in between. I’ll just keep things as they are until I sell the business or die. An owner such as this, who typically lacks an adequate shareholders or buy-sell agreement, and has no succession plan, is destined to become a client of a business divorce lawyer like me! To that owner, Chris says: “This book is written to help you understand the importance of your illiquid wealth — or the wealth locked in your private company — and present alternatives for helping you manage and eventually realize that wealth.” Continue Reading
The road to a business divorce can be a long and litigious one, strewn with obstacles big and small, limited only by the cleverness of the business owners and their counsel as each side strives to gain superior bargaining leverage against the other in anticipation of the inevitable buyout or other separation agreement.
The jousting can be especially intense in a business divorce between family members. The cost/benefit calculus that normally moderates tactics in and out of court is often warped by the intense emotions characteristic of a litigation pitting parent against child, sibling against sibling, cousin against cousin, and so on.
There’s a case pending in the Suffolk County Commercial Division, Margiotta v Tantillo, Index No. 62839-2013, that exemplifies the extraordinary demands upon the court’s resources as it’s called upon repeatedly to grant various forms of interim relief to one side or the other in a hotly contested family business divorce. A pair of recent decisions in the case by Justice Emily Pines also highlights the limitations upon the court’s power to grant interim relief when it comes to requests for mandatory injunctive relief, that is, requiring a party to perform some positive act as opposed to restraining them from doing something.
The stakes in Margiotta include a number of auto dealerships and the real properties on which they operate. The business was founded and controlled by the family patriarch, Anthony Tantillo, who died in 2013 at the age of 82. During his lifetime Mr. Tantillo brought into the business and gave minority interests to two children from his first marriage. He also brought into the business a stepson from his third marriage. His will left most of his estate to his two natural children and appointed one of them his executor. Possibly unknown to his two natural children until after his death, he also executed documents or entered into transactions that gifted company shares or otherwise gave majority ownership of several of the operating and realty companies to his stepson. Continue Reading
It’s not that I get nostalgic about derivative lawsuits (or Oldsmobiles), it’s just that it feels like we’re in a brave new world when it comes to adapting hoary corporate doctrine to that unincorporated upstart known as the limited liability company.
The clash between old and new looms in a derivative action concerning an LLC pending before Erie County Commercial Division Presiding Justice Timothy J. Walker called Univest I Corp. v Skydeck Corp., Index No. 2014-811644. The case stems from a dispute between the 50% managing member (BDC) and 50% non-managing member (Univest) of 470 Pearl Street, LLC, which was formed in 2004 for the purpose of acquiring for future development a parking lot in Buffalo, New York. Pending the development, BDC and Univest agreed to lease the parking lot to a BDC affiliate known as Skydeck Corp. The lease granted 470 Pearl the right to terminate the lease on 60-days notice.
In 2014, Univest, acting in 470 Pearl’s name, issued a termination notice to Skydeck under authority of an unusual provision in 470 Pearl’s operating agreement that gave either member the unilateral right “to cause 470 Pearl to terminate” the Skydeck lease. Two lawsuits followed Skydeck’s refusal to vacate. In the first, Justice Walker granted Univest a declaratory judgment upholding its termination notice and ordering Skydeck, pending further order, to pay an increased monthly rent (read amended complaint here and the court’s order here).
Shortly afterward, Univest commenced a derivative summary eviction proceeding on behalf of 470 Pearl, naming both Skydeck and BDC as respondents (read petition here). Now, let me pause the story for a moment. I’m not a landlord-tenant lawyer. If you’d asked me, before I looked into the Univest case, whether a non-controlling, non-managing corporation shareholder or LLC member could bring an eviction proceeding against the corporation’s or LLC’s tenant, I’m sure I would have guessed “no” for at least two reasons. First, I would have assumed the governing statute in Article 7 of the Real Property Actions and Proceedings Law somehow limits standing to seek relief to the owner or its authorized agent. Second, evicting a third-party tenant strikes me as quintessential management action. Imagine the chaos if any minority owner of a real estate operating company could take it upon themselves to launch eviction proceedings. But I would have guessed wrong. Gorbrook Associates, Inc. v Silverstein, 40 Misc 3d 425 [Dist. Ct. Nassau County 2013], a case of apparent first impression, held that a non-controlling, minority shareholder may bring derivatively an eviction proceeding. Continue Reading