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NY Business Divorce Information on Dissolution and Other Disputes Among Owners of New York Corporations, LLCs and Partnerships

The Judicial Perspective on Business Divorce Litigation: Interview with Hon. Ira B. Warshawsky

Posted in Interviews

Few attorneys can boast a career spanning over four decades dedicated to public service like that of the Honorable Ira B. Warshawsky. Legal Aid attorney. Assistant District Attorney. Law secretary. Judge of the Nassau County District Court. Justice of the Nassau County Supreme Court. His list of extracurricular accomplishments is no less impressive, including former Director of the Nassau County Bar Association; former Dean of the Nassau Academy of Law; frequent lecturer for the National Institute of Trial Advocacy; contributing editor of the Benchbook for New York Trial Judges; past-President and charter member of the American College of Business Court Judges; and member of the Advisory Board of the Sedona Conference.

Justice Warshawsky, who retired from the bench last December, presided over countless cases during his 25 years as a judge, including the last ten years as one of three judges of the Nassau County Commercial Division where he adjudicated important commercial law disputes. The New York Official Reports website includes almost 350 of his written decisions since 2003.

Regular readers of this blog recognize Justice Warshawsky’s name as author of many interesting, lively decisions concerning business partnership breakups. By my count, over the last four years I’ve posted 27 articles about business divorce cases decided by Justice Warshawsky. That’s over 10% of the cases I’ve covered!

Last month, Justice Warshawsky became Of Counsel to Meyer, Suozzi, English & Klein, P.C. as a member of its Litigation & Dispute Resolution law practice located in Garden City. I asked Justice Warshawsky if he would share with my readers some of his experience handling business divorce litigation, and after he graciously agreed we spent some time talking about various dissolution and valuation issues. I hope you enjoy as much as I did the transcribed interview that follows.

Mahler: Over the years I’ve noticed a disproportionately large number of judicial decisions in business divorce cases by the Commercial Division judges in Nassau County. Is there something in Nassau County’s water that makes business partners dislike each other?

Warshawsky: I’d say two factors are at work, and neither one is the water which happens to be quite good. The first is, Long Island is a heavily populated bedroom community with loads of small businesses started by families, close friends and neighbors. They open up a shop or service business of some sort, maybe one partner contributes cash, another contributes sweat equity, and over time for one reason or another their interests diverge. Or maybe one feels he or she does more work and should get more of the profits. So they find themselves at odds, with no written agreement that deals with the situation or provides an exit, so they end up in court. The second factor is, unlike the judges in Manhattan and other urban courthouses, the Nassau County judges don’t issue so-called “gray sheet” orders, which are often one-page handwritten, unpublished decisions on motions — which I have nothing against and perhaps I should have used myself — and they rarely or infrequently dictate decisions on the record. In the great majority of cases the Nassau judges issue written, reasoned decisions which I gather tend to get picked up for publication or are otherwise available on the court’s website.

Mahler: Did you find that shareholder disputes demand more of the court’s time and attention than other categories of cases?

Warshawsky: Absolutely. It’s called “business divorce” for a reason. I had a matrimonial caseload for two years, the parties and attorneys were constantly battling over highly emotional issues requiring frequent judicial intervention. You see the same phenomenon in shareholder disputes, and even more so with family-owned businesses where you have father versus son or brother versus sister. Generally I was willing to take conference calls to resolve urgent situations—not all judges do that—and I enjoyed being able to calm the waters, but it can’t be done in every case because you’d be on the phone all day every day.

Mahler: Many lawyers believe that most litigation over corporate dissolution is tactical, in the sense that if it’s a viable business, in the end there won’t be a dissolution because someone is going to buy out someone else. Do you share that view and how if at all did it influence your handling of these cases as a judge?

Warshawsky:There’s some truth to that. As a judge it’s frustrating to see tactical litigation designed only to bring about a buy-out. Sometimes I would urge a buy-out even when the respondent shareholder didn’t exercise the statutory buy-out election. I would tell both sides, “Everyone loses if I dissolve the business.” Romper Nursery is a good example of a dissolution case brought solely to force a buy-out between two owners who, despite the fact that they literally had not spoken to one another for 13 years, had a very profitable business, a proverbial goose laying golden eggs. When the petitioner, who had brought one dissolution petition, withdrew it, then started a second dissolution proceeding, asked me to let her discontinue the second case without prejudice to her bringing yet a third one, I drew the line and told her, either go to trial in this case or withdraw it with prejudice, meaning she couldn’t come back a third time.

Mahler: What happened?

Warshawsky: Not surprisingly, they settled fairly soon after the decision.

Mahler: Do you believe that judges ought to talk about a buy-out at the earliest stages of the case, even if the parties aren’t?

Warshawsky:It depends. If I had a case where the business owners were not getting along and clearly could not remain in business together, I would say, one of you should think about buying out the other and I would ask, have you had an appraisal done? To the petitioner, I might say, from what I see in your petition, you contend you’re not being treated fairly, but you may have to go through a lengthy period of discovery, motion practice and a hearing, at the end of which I may deny dissolution and you and your partner will be stuck with one another. To the respondent who hasn’t elected to purchase the petitioner’s shares, I might say, you’re also taking a big risk if in the end I decide that the petitioner’s allegations of unfair treatment are substantiated. To both of them, I’d say, be careful what you wish for, because everyone loses whether I order the dissolution of a viable, going concern or I deny dissolution and leave two, miserable partners in business together. A fair buy-out, or a division of the business assets if that’s possible, is the logical solution in the vast majority of these cases.

Mahler: The Commercial Division rules permit judges to order the parties to participate in mediation. Did you find that useful in dissolution cases?

Warshawsky: Often the attorneys, who know better the value of mediation, are hamstrung from asking for mediation by their clients who for emotional reasons are more interested in swinging a litigation club. So the rule worked quite well, because I could tell the attorneys to blame me for ordering mediation.

Mahler: How in general do you see the role of alternative dispute resolution in business divorce cases?

Warshawsky: It’s becoming more and more essential, for very practical reasons having to do with the growing strain on judicial resources. Case volume continues to increase in the courts and in the Commercial Division in particular, all the while court budgets and support staff are decreasing. Mediation or arbitration must be given serious consideration as an alternative to slipping under the rising tide of cases in the courts, which tide is not going out.

Mahler: LLCs started in New York in 1994. In the last 10 years or so I’ve seen a big shift in my own case work away from close corporations to LLCs. I assume from the bench you saw the same phenomenon. In general did you find LLC cases any more or less difficult to resolve than corporate dissolutions?

Warshawsky: Generally I did not treat LLC cases any differently, unless someone made a motion that forced me to focus on the differences in the LLC Law and the Business Corporation Law as concerns dissolution. I never saw it mattered to the business owners, in the way they conducted themselves with one another, whether they had a corporation or an LLC, and I can’t say that I viewed the two as different in any meaningful way, or that the LLC cases were any more or less difficult to resolve.

Mahler: The Second Department’s 2010 decision in the 1545 Ocean Avenue case was a watershed in terms of differentiating the standards for dissolution under the LLC Law and the Business Corporation Law. Do you feel that the contract-focused approach for LLC dissolution taken in 1545 Ocean has had an impact?

Warshawsky: I think so, though I can’t think of a case I had after 1545 Ocean in which the result would have been different had it preceded 1545 Ocean. One case that comes to mind is Mehraban v. McIntosh, in which I wrote a decision granting dissolution of an LLC based on the standard defined in 1545 Ocean. I did rely on the parties’ agreement, which I would have looked at anyway, in deciding that the business was no longer financially feasible given its stated purpose. But I do think that the more refined standard for LLC dissolution set out in 1545 Ocean was long overdue given the lack of any real guidance in the dissolution statute itself.

Mahler: You certainly made a mark in valuation contests involving close corporations and LLCs. Here I’m thinking of cases likeMurphy, Jamaica Acquisition and Sassower. Many judges stay away from the topic and routinely refer valuation matters to court referees. What is it about valuation of interests in close business entities that interested you?

Warshawsky: I was a math major in college for two years, which probably is why I enjoyed learning the nuances of valuation. Judges can’t be expected to come to the job knowing the ins and outs of business valuation, but we’re very willing to learn and, the better the attorneys in teaching us about valuation issues, the better the judges will become in understanding what by any measure is a difficult and complex subject. I also found it challenging to cut through the masses of figures and studies being thrown at me by the experts, some of which defied logic in terms of the company being valued. If the data and other support offered by the expert could not logically be connected to the company-specific facts, it had little weight in my determination of value.

Mahler: What kinds of problems have you encountered with valuation experts?

Warshawsky: The court relies heavily on valuation experts. None of us has the personal expertise to put ourselves in their place. But it’s highly questionable when you see during discovery or at trial the appraiser changing his or her opinion based on what the attorney wants rather than based on logic and the actual knowledge of the expert. Also, an expert should not intentionally or unintentionally confuse the court with obscure appraisal terminology. At times I’ve had to ask the expert what they’re talking about, not only to clarify the record for appellate purposes, but because I simply did not understand what they’re talking about. If the appraiser uses technical terms, they have to be defined or, better yet, provide the court with a list of defined terms used in the testimony.

Mahler: Was it your practice to permit pre-trial depositions of valuation experts?

Warshawsky: When parties agreed to expert depositions, I did not stand in the way. In fact, last year the Nassau County Bar Association spearheaded a pilot program, which was approved by the statewide Office of Court Administration, authorizing expert depositions when both sides consent. But when there’s no agreement, unlike in federal practice the CPLR [Civil Practice Law and Rules] does not authorize expert depositions, although when a party submitted an untimely expert report on the eve of trial, I could order a deposition as a condition of allowing it in. The general unavailability of expert depositions in valuation contests is, I think, unfortunate both in terms of trial preparation and also for settlement purposes because depositions of the appraisal experts are very effective tools for gauging the strengths and weaknesses of the parties’ positions.

Mahler: In the Jamaica Acquisition and Murphy cases you ruled that the discount for lack of marketability is not limited to the corporation’s good will. At least on the surface, your rulings appeared to buck Second Department precedent starting with the Whalen and Cinque cases which seemed to take a categorical position that the discount applies to good will only. The Second Department then affirmed your ruling on appeal in Murphy, without really acknowledging that it was taking a new position. At the time of your decisions did you feel you were bucking the Second Department?

Warshawsky: Not at all. I carefully read the Second Department decisions, none of which affirmatively said that the marketability discount can only be applied to good will, and none of which offered any reasons for applying or not applying the discount only to good will. I believe in logic in the law. I didn’t think it logical to apply the discount only to good will. It didn’t make sense to me, the Second Department never said it made sense, and the Second Department I’m pleased to say agreed with me in Murphy.

Mahler: In those two cases you also tackled the discount for built-in capital gains or “BIG” which had almost no precedent in New York fair value case law. The Second Department’s Murphy decision also upheld your decision to apply a BIG discount based on the present value of future gains assuming a certain holding period, as opposed to the 100%, dollar-for-dollar discount allowed in fair market value appraisals in the federal gift and estate tax cases. What influenced your approach?

Warshawsky: That’s simple: the relevant facts. I took into account the facts in the record indicating what the company’s post-valuation date plans were, that were known as of the valuation date, for disposing or not disposing of the company’s appreciated assets. I think that’s what the governing statutes required me to do. Besides, the federal case law such as Jelke, mandating a 100% BIG discount, made no sense in the context of a fair value proceeding when the evidence told me that the assets were not going to be sold any time soon. By the way, I understand there’s a pending motion in Murphy before the Court of Appeals, presumably for leave to appeal, so the case may not be over.

Mahler: How’s the transition been from the bench to private practice?

Warshawsky: It’s very different but I’m liking it very much. I have not had a chance to be bored. There’s a world out there for a retired judge to be useful to the court system and the business community.

Mahler: What kind of work do you look forward to doing at your new firm?

Warshawsky: I’m involved in commercial litigation and alternative dispute resolution as an advocate on behalf of clients. I also plan to serve in a neutral capacity as arbitrator, mediator, private judge or referee. I also foresee taking on assignments as special master in complex discovery disputes, especially those involving e-discovery where I had a great deal of experience on the bench.

Mahler: Judge, it’s been a pleasure speaking with you. Thanks so much for taking the time to share your views on business divorce litigation, a subject that will bear your imprint for a long time to come.

Update April 3, 2012:  By order dated March 29, 2012, the NY Court of Appeals denied further review of the Murphy v. U.S. Dredging decision.