Post-Tzolis Rulings Address Demand and Contemporaneous Ownership Requirements for LLC Derivative Actions
Last February, in Tzolis v. Wolff, 10 NY3d 100 (2008), the New York Court of Appeals ruled that members of limited liability companies may bring derivative actions on behalf of LLCs notwithstanding the legislature's deliberate omission of statutory authorization for derivative actions when it enacted the LLC Law in 1994. (Read my post on Tzolis here).
The dissenting judges in Tzolis objected that the majority had created a common law right of derivative action "unfettered by the prudential safeguards against abuse that the Legislature has adopted when opting to authorize this remedy in other contexts," namely, the statutory provisions imposing demand, contemporaneous ownership, security, attorney fees and settlement restrictions on derivative suits brought on behalf of business corporations and limited partnerships.
The majority responded to this charge, stating that "the right to sue derivatively has never been 'unfettered'"; that "the limitations on it are not all of legislative origin"; and most importantly:
What limitations on the right of LLC members to sue derivatively may exist is a question not before us today. We do not, however, hold or suggest that there are none.
In Tzolis's aftermath, lower courts have taken their cue from the majority's response by imposing prior demand and contemporaneous ownership requirements on putative LLC derivative plaintiffs.
Continue Reading...Spouses Holding Shares as Joint Tenants Must Jointly Petition for Corporate Dissolution
When husband and wife hold shares as joint tenants with right of survivorship, can one of them seek corporate dissolution without joining the other?
The answer is "no," according to a recent decision by Queens County Supreme Court Justice Patricia P. Satterfield in Matter of Mouzakitis (Pearl Nightlife, Inc.) (read decision here).
Petitioner Marianthi Mouzakitis and her husband, Leonidas, own 15% of the common shares of Pearl Nightlife, Inc. as tenants by the entirety. The corporation operates a restaurant in Bayside, New York, that opened in March 2008. The Mouzakitises contributed $125,000 for their interest. Ms. Mouzakitis alleged that the controlling shareholders failed to make required contributions, failed to pay salaries and dividends, withheld access to corporate books and records, and diverted corporate funds and assets including liquor and food allegedly diverted to other restaurants separately owned by the corporation's president. In May 2008, the other shareholders allegedly had the petitioner arrested at the restaurant.
Continue Reading...A Case of Mutual Frustration: Minority Member of LLC Can't Compel Dissolution, Majority Can't Compel Buyout
It's the perfect LLC storm: Accusations by the minority member of overreaching and breach of fiduciary duty by the controlling members, no operating agreement, and an LLC statute that affords neither party a judicial means of achieving the separation they each want.
The case, Matter of Koutelos (Mouhlas Realty, LLC), was decided last month by Queens County Supreme Court Justice Patricia P. Satterfield (read decision here). The petitioner, Mary Koutelos, holds approximately 15% membership interest in Mouhlas Realty, LLC which was formed in 2000 as a member-managed LLC. The decision doesn't describe the LLC's business or tell us if Koutelos is actively involved in running it. All we can glean is that Koutelos filed a petition under LLC Law Section 702 for judicial dissolution of the LLC based on allegations of overreaching and breach of fiduciary duty by two of the other three members, apparently involving a capital call and/or loan to be used for compensation of one or more member-managers; the members have no operating agreement; and the other members refused Koutelos's request to adjourn a meeting.
The decision also tells us that the "respondent" -- we don't find out if this refers to the LLC or one of the other members individually -- filed an answer with a counterclaim for an "equitable buyout" conditioned on the court applying a 30% discount for lack of marketability in valuing the petitioner's interest.
Continue Reading...Further Thoughts on Youngwall and Judicial Dissolution of the Unprofitable LLC
Matter of Youngwall debuted on this blog last April (read here) when I wrote about a March 2008 decision (read here) by Nassau County Commercial Division Justice Stephen A. Bucaria, dissolving and appointing a receiver for a manager-managed LLC owned by two brothers. The court premised dissolution primarily on its finding that the LLC was not currently profitable.
Perry Youngwall, who opposed the dissolution petition brought by his brother, Nils, subsequently moved for reconsideration and to vacate the decision on various grounds. The headline grabber from Justice Bucaria's July 2008 decision denying the motion, which I wrote about last week (read here), was his ruling that the operating agreement's waiver of a member's right to seek judicial dissolution was unenforceable as against public policy.
This week, I want to re-examine the court's justification for dissolving the LLC, this time with the benefit of some additional facts brought out in the July 2008 decision.
Continue Reading...WWDD (What Would Delaware Do) With an In Terrorem LLC Dissolution Waiver Clause?
I can't resist asking the above question in the wake of two recent decisions, one from Delaware Chancery Court invoking freedom of contract to enforce an LLC operating agreement's waiver of a member's right to seek judicial dissolution, and the other from New York's Commercial Division refusing on public policy grounds to enforce an operating agreement's in terrorem provision forfeiting the interest of any member who files for judicial dissolution.
The names if not the issues in both cases may sound familiar to regular readers of this blog.
The Delaware case is R&R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del. Ch. Aug. 19, 2008) (read decision here). The factions in R&R have been waging a multi-front battle for years, with simultaneous lawsuits in Pennsylvania state and federal courts, New York state court, and most recently Delaware Chancery Court. At issue is control of nine Delaware LLCs that own and operate a number of horse farms. The Russet brothers put up most of the almost $10 million capital but gave 50% member Linda Merritt sole management authority under the operating agreements.
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