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

The Perils of Impromptu Buy-Out Settlement Agreements

Posted in Buyout, Family-Owned Businesses, Settlement

Settlements of corporate dissolution cases based on buy-out agreements come about in many different ways. Sometimes they’re the carefully designed product of weeks or even months of painstaking negotiation and drafting with coordinated input from clients, lawyers, bankers and tax advisors culminating with a formal set of closing documents that address every foreseeable contingency for buyer and seller. In such cases, most if not all the action occurs outside the courtroom, in the offices of lawyers and accountants, with the luxury of time to review, revise and perfect the deal documents before the litigation is formally discontinued.

At the other end are impromptu buy-out agreements forged on the fly in courthouse hallways or in chambers with the judge or law secretary on the day of trial or at the argument of a motion. There may be a sense of urgency on one or both sides or pressure from the judge to seize the moment, that is, not to walk out of the courtroom without a legally enforceable agreement so that the parties won’t or can’t change their minds when they get back to home or office.

The impromptu buy-out agreement can be a perilous undertaking, especially if counsel are not fully aware of the many things that can go wrong with half-baked stipulations verbally placed on the record in open court.

Take, for example, the recent case of Matter of D’Angelo (D’Angelo Funeral Home, Inc.), Mem. Decision, Index No. 13427/11 (Sup Ct Queens County Nov. 1, 2012), involving a corporate dissolution petition brought by the 50% shareholder of a family-owned funeral home business in Flushing, New York. The petitioner, Louis D’Angelo, filed for dissolution in June 2011. The other 50% shareholder, Robert D’Angelo, filed opposition. After a number of adjournments the parties appeared at a court conference in January 2012 at which they reached agreement for Robert to purchase Louis’s shares for $1.3 million. The agreement’s only memorialization was a short, simple statement read in open court on the record, as follows:

In the first instance, the settlement is with prejudice and without interest, cost and/or disbursements to any matter that Robert D’Angelo shall purchase the shares of stock in both corporations; that being D’Angelo Funeral Home and Seneca Chapels from Louis D’Angelo for the sum of $1,300,000. That Robert D’Angelo shall pay the above sum by certified bank check within 90 days of the date herein. That Louis D’Angelo will not enter into a competing business for ten years and within the City of New York. That all parties shall forthwith, exchange mutual general releases each as against the other from all claims arising out of this petition and the companion related shareholders derivative action under Supreme Court, Queens County, Index 11044/2011. Said releases shall include Anthony D’Angelo against each other; that the respondent Robert D’Angelo and Anthony D’Angelo shall hold and make available the family plot for the internment of the descendant of Louis D’Angelo and spouse of Louis D’Angelo.

The court also conducted an allocution of both shareholders and determined that they voluntarily and knowingly accepted the terms of the stipulation discontinuing and settling the dissolution proceeding.

The buy-out did not close within the stipulated 90 days. In June 2012, Louis filed a motion for the entry of a $1.3 million money judgment against Robert. The motion alleged that Louis complied with the terms and conditions of the settlement by delivering general releases, and that Robert defaulted as evidenced by a letter from his attorney stating that Robert was having difficulty obtaining financing, and making a “counteroffer” at a reduced price purportedly in “satisfaction” of the “original offer of settlement” made at the January 2012 court conference.

Robert opposed Louis’s motion and cross moved to conduct a hearing to determine the value of the funeral business pursuant to §1118 of the Business Corporation Law and, alternatively, to vacate the stipulation of settlement based on “unilateral mistake” allegedly stemming from Robert’s inability to understand the business appraisal he received in December 2011.

Both parties’ motions were denied by Queens County Supreme Court Justice Darrell L. Gavrin. Louis was not entitled to a money judgment, the court held, first, because the release he executed and delivered incorrectly stated that the purchase price is to be paid by the corporations instead of Robert as stipulated and, second, the stipulation “does not contain a provision for the entry of a judgment in the event that Robert D’Angelo defaulted in paying the purchase price.” Louis’s sole recourse, Justice Gavrin noted, “is to seek enforcement of the stipulation pursuant to CPLR §2104.”

The relief sought by Robert’s cross motion for a valuation hearing also was not available, Justice Gavrin ruled, because the stipulation of settlement “made no provision for reinstatement of the petition in the event that the parties did not comply with its provisions.” Nor was Robert entitled to vacate the stipulation based on his alleged unilateral mistake because “it was within [his] ability to know the contents of the appraisal he received in December 2011, and to communicate it to his counsel, and to petitioner.” In addition, the “settlement placed on the record is binding on Robert D’Angelo and the [corporations], notwithstanding his alleged error as to the value of his share of the business, since his mistake, if any, was made in the absence of ‘ordinary care.’”

The court’s decision leaves the parties at an untenable impasse. Presumably, Louis’s next step is to execute and deliver a corrected general release. Whether Robert will perform by delivering a certified bank check for $1.3 million, and how Louis will proceed to enforce the stipulation should Robert not perform, and whether the deal will be renegotiated, all remain to be seen.

For the rest of us, though, the lesson of D’Angelo is clear: proceed with extreme caution before entering into an impromptu, in-court buy-out agreement just for the sake of getting it done then and there. The risks of making a bad agreement are just as great if not greater than the risks of losing a deal upon reconsideration after the parties leave the courthouse. There are too many potential complications that need to be considered and addressed. To name just some of them:

  • The buyer’s identity, be it the individual shareholder or the corporation.
  • Seller and buyer representations regarding ownership, authority and known company liabilities.
  • The closing date and effective or “as of” date of the stock transfer.
  • The consequences of default at closing by buyer and seller.
  • Allocation of purchase price among multiple entities.
  • Allocation of purchase price between equity and restrictive covenants.
  • Disposition of any shareholder loans by the seller.
  • Buyer and seller indemnifications for third-party liability.
  • Seller indemnification for pass-through tax liability on undistributed income.
  • If the buy-out price will be paid over time, the terms of any promissory note, security agreement and any escrow agreement for the seller’s shares.
  • Well-defined restrictions on the seller’s ability to compete and solicit customers in the relevant business and geographic area, and the buyer’s rights of enforcement in the event of breach.
  • Restrictions on the seller’s possession and use of confidential or proprietary company information.

Update September 10, 2013:  The selling shareholder, Louis D’Angelo, followed Justice Gavrin’s advice and filed a new lawsuit against his brother to enforce the stipulation of settlement. In a decision dated September 3, 2013 (read here), Justice Robert McDonald granted summary judgment for Louis enforcing the stipulation and ordering entry of judgment in Louis’s favor for $1.3 million plus interest from April 10, 2012.

  • lisapom

    Even with the benefit of advice from competent legal and accounting advisors, it is not always possible to anticipate the issues that may come up in the wake of a buy-out.  I recommend including a mandatory mediation clause in the buy-out agreement so that such issues can be amicably resolved without having to resort to litigation.