It’s not surprising that the ancient adage, “Never mix family and business,” is more honored in the breach than the observance. After all, as the late Professor Larry Ribstein observed in his terrific 2010 research paper entitled “Close Corporation Remedies and the Evolution of the Closely Held Firm” (reviewed here):
The earliest small firms were partnerships, which began as intimate, usually family, relationships. They were referred to as ‘compagnia,’ which means those sharing bread, reflecting their origins in households. Kinship ties were an important mechanism for controlling agency costs. As Kerim told James Bond in From Russia with Love, “all of my key employees are my sons. Blood is the best security in this business.”
Blood may be the best security in some family-owned businesses, but in many others the same bonds of kinship and trust that induce family members to enter into a business association in the first place, when abused or perceived to be abused, can and often do instigate conflict, entropy, and ultimately the dissolution of the firm and destruction of family ties. In other words, the emotional ties that encourage family members to dispense with diligence and formalities when starting and operating a business can also drive them apart with even greater force when things go wrong, in no small part due to those very dispensations.
For this column I’ve chosen three recent, illustrative cases presenting dissolution and related claims involving family-owned businesses. The substantive issues in each case are interesting and informative, if not novel. I wasn’t involved in any of the cases, so I can’t really say to what extent the blood relations of the parties contributed to the outbreak of hostilities or the underlying problems. But I think it’s fair to say that each case in its own way shows tell-tale signs of the dysfunctional circumstances and dissension peculiar to business divorce, family style.
The case summaries follow after the jump.
Billanti Casting Co., located in New Hyde Park, Long Island, is a family-owned business since 1955 servicing the jewelry industry. One of the two founding brothers eventually brought a son and a daughter into the business. In 1992, as co-equal partners they formed a general Partnership to invest profits from Billanti Casting as venture capital in connection with potential expansion of the casting business, which never took place. The Partnership’s assets consist of fixed income assets held with an investment firm and a loan made to Billanti Casting to cover a tax obligation. Starting around 2000, the daughter became head of the casting business while the founding brothers became less involved. The son stopped working at Billanti Casting in 2008 apparently after losing a fight for control with his sister. Their father died in 2010.
In 2011, the son brought suit for judicial dissolution of the Partnership under §63 of the Partnership Law based on his sister’s alleged conduct including her exclusive control over its books and records, for an accounting, and for other relief concerning the Partnership and Billanti Casting. The sister and the other defendants denied the complaint’s allegations of misconduct and opposed the request for dissolution of the Partnership.
In his decision earlier this month, Nassau County Commercial Division Justice Timothy S. Driscoll granted the plaintiff’s motion for summary judgment dissolving the Partnership, but not under Partnership Law §63 as requested. Because the Partnership has no agreement establishing its duration, Justice Driscoll explained, it “is a partnership at will, that may be dissolved at any time by any partner” under Partnership Law §62(1)(b). The plaintiff’s expression of his desire to dissolve the Partnership suffices without need for proof of other partner misconduct. Justice Driscoll also ordered the defendants to provide the plaintiff with an accounting of the Partnership’s assets and its affairs since commencement, and he appointed a receiver to direct the dissolution of the Partnership, the sale of its assets, the collection of all monies and the division of the proceeds.
In 2004, plaintiff Nicole Zekry and her husband, defendant Pinhas Zekry, formed David Ben Barouck Corp. to operate a hair salon, spa and cosmetology business on Columbus Avenue in Manhattan. They entered into a shareholders agreement which recited that Pinhas held a 60% stock interest in consideration of his payment of $283,680 and for his “know-how and managerial experiences, and infrastructure and availability of selling and work force and personnel, which he has invested in the corporation and in facilitating the construction of the premises.” The agreement also recited that Nicole held a 40% stock interest for her payment of $189,120.
In 2008, after Nicole sued to dissolve their marriage, Nicole filed a complaint against Pinhas (read here) for fraud, breach of fiduciary duty and to reform the shareholders agreement to enlarge her stock ownership to 71.1% based on evidence that Pinhas only contributed about $77,000 at the inception rather than $283,680 as recited in the agreement.
In her decision issued earlier this month, New York County Justice Deborah A. Kaplan denied Nicole’s motion for a summary judgment of equitable reformation of the stock percentages on the ground that the agreement by its terms did not condition Pinhas’s share allocation based only on his payment of $283,680 “but also his personal investment in the business, including, inter alia, his knowledge and managerial experiences, his work force and personnel, and his facilitation of the construction of the premises.” In other words, since the agreement did not provide for the division of share ownership based solely on the parties’ respective initial capital contribution, Nicole failed to establish as a matter of law that Pinhas “fraudulently induced unilateral mistake regarding his capital contribution” such that their agreement “does not express the intended agreement” as a basis for reformation.
Update October 31, 2012: By decision dated October 26, 2012 (read here), Justice Kaplan denied Pinha’s motion to strike Nicole’s demand for a jury trial.
The Van Depot, Inc. was formed in 1999 by brothers Jeffrey and Larry Kimelstein to operate a used car sales business in Lindenhurst, Long Island, on a lot owned by a second corporation also co-owned by the brothers.
Larry sued Jeffrey in 2008, claiming breach of an oral agreement by Jeffrey to pay Larry $350,000 in exchange for Larry’s alleged 50% ownership interests in the two companies. Jeffrey denied Larry’s ownership of shares in either company. In a February 2010 decision, Suffolk County Commercial Division Justice Emily Pines dismissed Larry’s claims for breach of oral agreement and specific performance, denied Jeffrey’s motion to dismiss the claim to impose a constructive trust, and granted Larry leave to amend his complaint to add a claim, among others, for corporate dissolution as an oppressed shareholder under §1104-a of the Business Corporation Law.
In her latest decision, Justice Pines summarized the contest as one “between brothers concerning the extent of their business relationship and what, if anything the Defendant’s brother and the two corporate Defendants, in which Plaintiff claims ownership, owe the Plaintiff for his investment in time and sweat equity, following Plaintiff’s departure from what may or may not constitute a closely held family business.” In opposition to Jeffrey’s motion to dismiss the amended complaint, Larry offered a number of checks from his brother allegedly representing partial payment for his shares, along with affidavits from non-party witnesses attesting that Jeffrey held Larry out to them as his equal partner in the family business.
Justice Pines agreed with Jeffrey to the extent of dismissing Larry’s claims for breach of fiduciary duty and a formal accounting which were asserted individually instead of derivatively as required. Justice Pines nonetheless refused to dismiss Larry’s claim for dissolution based on lack of standing because “there exists documentary evidence presented on both sides of this issue,” and she allowed Larry to proceed with his equitable claims in the alternative. Finally, she also ruled that, should the court find that Larry has standing and proves oppression, the court is empowered “to order a less drastic remedy than dissolution, such as an accounting.”