Winding Up an Acrimonious Partnership Following Death of a Partner
According to a summary on the website of the Uniform Law Commissioners, thirty-four states have adopted the Revised Uniform Partnership Act of 1994 (RUPA) which, among other significant changes to the original Uniform Partnership Act of 1914 (UPA), no longer provides for automatic dissolution of a general partnership upon the ordinary dissociation of a partner, including upon the death of a partner. Under the default rules of RUPA §§601 and 801, the partnership continues after the death of a partner subject to the partnership's obligation under §701 to purchase the deceased partner's interest for a buyout price equal to the greater of liquidation or going-concern value. (Read here a summary of RUPA's major revisions. Read here the text of RUPA.)
New York is in the minority of states that has not adopted RUPA. Thus under §62(4) of New York's UPA-based Partnership Law enacted in 1919, absent contrary agreement the death of a partner automatically triggers dissolution of an at-will general partnership. While Partnership Law §73 permits continuation of the partnership accompanied by a buyout of a deceased member's interest under certain, narrowly-defined circumstances (e.g., see my previous piece on the Vick v. Albert case), otherwise the partnership must be dissolved and its business wound up.
Such was the case in Matter of Franzese (Franzese Realty Associates), 2009 NY Slip Op 33139(U) (Sup Ct Nassau County Dec. 16, 2009), in which Nassau County Commercial Division Justice Timothy S. Driscoll was tasked with cleaning up a messy dispute between the surviving siblings of a family-owned real estate partnership. Franzese does not involve any novel legal issues, but it nonetheless merits attention as an example of how courts deal with some of the typical problems that arise during the winding up of the partnership, and particularly the question of receivership.
Continue Reading...A Tale of Two Preliminary Injunction Applications in Corporate Dissolution Cases Decided Three Days Apart, Same Issue, Same Judge, Different Outcomes
The dynamic and often volatile nature of business partnership break-ups can necessitate the petitioner's application at the outset of a dissolution case for a preliminary injunction to restrain the other party from taking corporate actions pending determination of the petition. Depending on the circumstances and immediacy, the petitioner may seek to enjoin particular, threatened actions -- mortgaging company assets, signing a lease, terminating employees, making distributions, etc. -- and/or present the court with a generic request to restrain the respondent from engaging in any transactions on the company's behalf outside the "ordinary course" of business. As in any litigation, the grant or denial of injunctive relief at the earliest stage of the case can have a profound effect on the future course of the dissolution proceedings and the relative strengths of each side's negotiating position, and thus must be carefully considered by counsel before taking the plunge.
Recent back-to-back decisions by Queens County Commercial Division Justice Orin R. Kitzes illustrate the risk and reward of preliminary injunction skirmishes in corporate dissolution contests. In Matter of Vassilakis (150-11 Corp.), Short Form Order, Index No. 21248/08 (Sup Ct Queens County May 19, 2009), Justice Kitzes denied a 20% shareholder's application to preliminarily enjoin the majority shareholder from selling the business or, alternatively, sequestering the sale proceeds. Three days later, in Matter of Kan (3 Win, Inc.), Short Form Order, Index No. 6265/09 (Sup Ct Queens County May 22, 2009), Justice Kitzes granted the petitioner-50% shareholder's application to preliminarily enjoin the other 50% shareholder from doing any business outside the ordinary course, including selling any of the several companies at issue or relocating them to another state.
What makes these cases especially interesting is that in both, the respondent shareholder asserted the same primary defense of lack of standing, based on assertions that the petitioner was not a shareholder. In both, Justice Kitzes concluded that the defense could not be determined without an evidentiary hearing. Why, then, did he grant the injunction in one case and not the other?
Continue Reading...Court Orders Hearing On Minority Shareholder's Petition for Common Law Dissolution
Minority shareholders in closely held New York corporations, unlike many other states, must hold at least 20% of the corporation’s voting shares to petition for judicial dissolution on grounds of oppression under Section 1104-a of the Business Corporation Law. There’s little if any legislative history to explain the arbitrary 20% threshold. I imagine it was included as a compromise to satisfy legislators opposed to judicial interference with traditional corporate majority rule.
Shareholders with less than 20%, and without any claim for breach of shareholders' agreement, have limited options to right perceived wrongs by the controlling shareholders. They may bring a derivative action under BCL Section 626 for corporate waste, diversion of assets or other wrongs causing injury to the corporation, but first they either must make proper demand upon the board of directors or demonstrate demand futility. BCL Section 627 also requires a derivative plaintiff-shareholder with less than a 5% interest to give security for the corporation's costs including legal expenses. Furthermore, depending on the circumstances, commencing a plenary action for breach of shareholders' agreement or asserting derivative claims for recovery on the corporation's behalf may not provide sufficient leverage to induce a buy-out of the plaintiff's shares, assuming the plaintiff is pursuing an exit strategy.
The below-20% shareholder has one other option: common law dissolution. It carries no minimum ownership percentage. It's harder to establish than statutory oppression under BCL 1104-a, and rarely successful, but under the right circumstances it may give such a shareholder at least a toe-hold toward dissolution, which also may be enough to induce serious buy-out negotiations.
A recent decision by Queens County Commercial Division Justice Orin R. Kitzes presents one of the relatively rare instances in which a claim for common law dissolution successfully advances past the pleading stage. The case, Matter of Mouzakitis (Pearl Nightlife, Inc.), Index No. 28420/08 (Sup Ct Queens County Feb. 24, 2009), was previously featured on this blog when the court initially dismissed without prejudice a common law dissolution petition because the plaintiff's husband, who co-owned the shares as tenants by the entirety, was not a party to the action. Husband and wife thereafter filed a new action as co-plaintiffs, again suing for common law dissolution.
Continue Reading...Court Enjoins "Squeeze-Out" Capital Call by Controlling Members of LLC
Baseball has the squeeze play. Majority owners of closely held companies have the squeeze out. It's only fitting, then, that I refer to what happened in the recently decided case, Cooperstown Capital, LLC v. Patton, 2009 NY Slip Op 02277 (3d Dept Mar. 26, 2009), involving a dispute between majority and minority owners of a baseball camp, as the "squeeze-out play."
Martin and Brenda Patton owned land in upstate New York about 20 miles from the Baseball Hall of Fame in Cooperstown. In 2004, they entered into agreements with Cooperstown Capital, LLC to build and operate a baseball camp and hotel on the Patton land. The Pattons contributed the land to Abner Doubleday, LLC ("Abner") in exchange for 35% membership interests in Abner and a second company formed to operate the baseball camp, called Cooperstown All Star Village, LLC ("CASV"). Cooperstown Capital paid $400,000 and gave a $1 million promissory note for 35% interests in the two companies. A third investor, Marco Lionetti, acquired the remaining 30% interests.
The $1 million promissory note was made payable to the Pattons, but the operating agreements designated the payments as operating expenses of the companies and treated Cooperstown Capital's additional capital contributions as credits against the Patton note.
Continue Reading...Disputed Allegations of Shareholder Oppression Require Evidentiary Hearing
There's nothing special about the corporate dissolution case brought by David Wenger involving a family-owned construction business. The facts of the case are garden variety, as these things go. The case presents no novel legal issues. The court's decision, ordering an evidentiary hearing to determine the petition's disputed allegations of oppression, is nothing if not anti-climactic.
But that's exactly why I want to write about it, to illustrate what happens in the ordinary dissolution case, where there are no knockout punches in the first round. That plus, it's my first occasion to highlight a decision by Suffolk County Commercial Division Justice Emily Pines.
The court's decision in Matter of Wenger (L.A. Wenger Contracting Co.), Index No. 31701/08 (Sup Ct Suffolk County Nov. 12, 2008), describes a case of corporate and family dysfunction pitting father against son. In August 2008, the son, David, as a 31% shareholder filed a petition to dissolve L.A. Wenger Contracting Co. of which his father, Louis, is majority owner. Upon filing the petition David obtained a temporary restraining order enjoining his father from disbursing company funds to any shareholder, officer or director except in the ordinary course of business. David's petition also sought appointment of a receiver pursuant to Section 1113 of the Business Corporation Law.
Continue Reading...Anatomy of a Dissolution Slugfest: Part V
This is the last in a series of five postings about a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.
Part I of the series (read it here) reviewed the basic facts of the case as laid out in the court's September 2006 decision and discussed the court's denial of defendants' pre-discovery dismissal motion in which defendants argued that Marciano lacked standing to seek dissolution because allegedly he concealed from tax authorities and federal prosecutors his claimed stock ownership interest. Part II (read it here) covered some additional issues raised in the court’s initial decision including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment. Part III (read it here) highlighted portions of the court’s June 2007 decision in which it denied Marciano’s motion to compel payment to him of distributions pending the litigation and granted his motion for leave to amend his complaint. Part IV (read it here) addressed the court's September 2007 decision in which it denied defendants' motion for summary judgment contesting Marciano's share ownership and arguing that Marciano's March 2007 guilty plea to unrelated stock fraud charges justified their excluding him from the business operations.
This Part V examines the court's final decision dated December 7, 2007, concerning a new twist in the proceedings triggered by the defendants' assignment of a valuable dealership lease held by a company co-owned by Marciano to another company owned solely by the defendants. A postscript follows for readers interested in the outcome of the case and some reflections on its greater meaning.
Continue Reading...Anatomy of a Dissolution Slugfest: Part III
This is the third in a series of postings on a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.
Part I of the series (read it here) reviewed the basic facts of the case and discussed the defendants’ initial, unsuccessful challenge to Marciano’s standing to seek dissolution based on allegations that he deliberately sought to conceal from tax authorities and federal prosecutors his stock ownership interest. Part II (read it here) reviewed a number of additional issues addressed in the court’s September 2006 initial decision in the case, including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment; Marciano’s request to dissolve the related LLC’s; and Marciano’s application for various forms of interim relief and for extensive discovery.
In this Part III, we turn to the second of Justice Warshawsky’s four written opinions in the case, dated June 15, 2007, in which he considers Marciano’s motions to compel payment to him of distributions pending the litigation and for leave to amend his complaint to add claims based on defendants' alleged financial abuses in the year following commencement of the litigation.
1. Marciano’s motion to compel interim distributions.
A minority shareholder who is frozen out of the business and subsequently files for judicial dissolution is hardly surprised when the controlling shareholders cut off distributions while the litigation rages. The Appellate Division, First Department's decision in Matter of HGK Asset Management, Inc. (Greenhouse), 238 AD2d 291 [1997], authorizes a court to order payment of salary and benefits to the excluded shareholder pending the dissolution proceeding. The Second Department's decision in Deborah Int’l Beauty Ltd. v. Quality King Distributors, Inc., 175 AD2d 791 [1991], also gives courts authority to enforce provisions in shareholder agreements mandating distribution of net income pending dissolution proceedings.
Continue Reading...Roundup of 2007 Business Divorce Cases
The New York Law Journal recently published, for the 9th consecutive year, my annual review of business divorce cases (read it here). Most of the cases discussed in the article have been mentioned in previous postings.
Here's a rundown of the article's choices for 2007's most interesting business divorce cases, with links provided to the cases and to previous postings:
- Dissolution and Right of First Refusal: Matter of Schneck (R&J Components Corp.) (discussed here) and Matter of Schwimmer (El-Roh Realty Corp.), where two judges reached opposite results on the issue of whether the petitioner's filing of a dissolution petition triggered a right of first refusal and mandatory buyback under the shareholders' agreement.
- LLCs and Temporary Receivers: At the Airport, LLC v. Isata, LLC (discussed here) in which the court held that the LLC Law does not authorize the court to appoint a temporary receiver until after dissolution is ordered.
- Grounds for Dissolution: Matter of Cheung (Ho Foong Shiu Realty Corp.) and Matter of Livolsi (111 Glen Street Corp.) (discussed here) in both of which the courts denied dissolution petitions brought by 50% shareholders claiming oppression by the other shareholder.
- Restrictive Covenants: Matter of Autz (Ronald C. Fagan, M.D. and Arthur Lutz, M.D., P.C.) (discussed here) where the court ruled that the sale in liquidation of the company's good will is a sale "under compulsion" and therefore does not trigger an implied covenant not to solicit customers.
- Pre-Conversion Agreements: Matter of Hochberg (Manhattan Pediatric Dental Group, P.C.) (discussed here) in which the court compelled arbitration of a dissolution case under an arbitration clause in a partnership agreement that pre-dated the conversion of the business to a professional corporation.
- Partner Limited Liability Shield: Ederer v. Gursky (discussed here) where New York's top court interpreted Section 26(b) of the Partnership Law as not shielding partners in limited liability partnerships from personal liability against claims for breach of the partnership's or partners' obligations to each other.
If you'd like to read some of my previously published annual reviews, look under Links on the right sidebar of this blog's home page where you'll find links to my articles covering the years 2003 through 2006.
Next week, New York Business Divorce returns to Anatomy of a Dissolution Slugfest, Part III.
Anatomy of a Dissolution Slugfest: Part II
This is the second in a series of postings on a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.
Part I of the series (read it here) summarized the basic facts and discussed the defendants’ initial challenge to the plaintiff Marciano’s standing to seek dissolution. The court’s decision identified evidence suggesting that, as the defendants’ argued, the plaintiff deliberately elected not to have his alleged 38% ownership interest reflected in the corporate records or in tax filings. Ultimately, however, the court refused to dismiss the case because of the disputed facts surrounding the issue of plaintiff’s share ownership.
In this Part II, we examine the several other issues of interest addressed by Justice Ira Warshawsky in his initial decision in the case dated September 5, 2006.
1. Defendants’ argument that their exclusion of plaintiff from the business was reasonable following his indictment for stock fraud.
The majority owner defendants contended that, even assuming plaintiff Marciano could establish his ownership percentage in Champion above the minimum 20% required by the dissolution statute (BCL § 1104-a), their decision to exclude him from any involvement in the business, following his criminal indictment for stock fraud in December 2004, was reasonable as a matter of law.
As with the issue of stock ownership, Justice Warshawsky concluded that the reasonableness of defendants’ exclusionary actions "must await further factual development through discovery in the underlying action". The defendants’ evidence of damaging repercussions and concrete economic injury to the business from Marciano’s indictment, the court found, was "anecdotal" and lacked "determinative foundational support in the record".
Continue Reading...LLC Dissolution and Receivers
New York’s statutory scheme for dissolution of closely held business entities sometimes looks like a crazy quilt. For instance, for reasons that defy all logic, a petition for dissolution of a business corporation based on shareholder oppression triggers an absolute right on the part of the other shareholders to avoid dissolution by purchasing the petitioner’s shares for fair value, but if the petition is based on director or shareholder deadlock, there’s no buyout right. A petition for dissolution of a business corporation requires service upon the state tax commission and publication notice of the order to show cause in advance of the hearing, but no such service or publication is required in a proceeding for judicial dissolution of a limited liability company (LLC).
Here’s another. The statute governing judicial dissolution of LLCs, contained in Section 702 of the LLC Law (LLCL), has no provision for appointment of a temporary receiver to protect the company’s assets pending the dissolution proceeding. In contrast, Section 1113 of the Business Corporation Law (BCL) expressly authorizes a court to appoint a temporary receiver for that purpose in a dissolution proceeding.
The divergence on this point between the BCL and the LLCL is highlighted in a recently decided case called At the Airport, LLC v. Isata, LLC, 15 Misc 3d 1145(A) (Sup Ct Nassau County June 6, 2007). The case was brought by a 20% member of an LLC seeking its dissolution based on income diversion, financial mismanagement, and denial of access to company records. In a decision by Nassau County Supreme Court Justice Leonard B. Austin, the court notes that the only provision of the LLCL authorizing appointment of a receiver or liquidating trustee, found in LLCL Section 703(a), by its terms applies after the company has been dissolved. Said the court, "[petitioner] is putting the cart before the horse since there must first be a finding of the right to judicial dissolution before a receiver can be appointed."
The petitioner in that case was forced to seek appointment of a temporary receiver under the more formidable standards for receivership found in Article 64 of the Civil Practice Law and Rules. The court held that he failed to make the requisite clear showing that the company’s property was in imminent danger of being materially injured or destroyed, and therefore denied the application for appointment of a receiver.
The petitioner in the same case fared no better on a subsequent application for reconsideration based on newly discovered evidence (read opinion here). If anything, the court's second ruling makes the point more emphatically, that compared to applications involving corporations under the BCL, the courts have strictly limited authority to appoint a temporary receiver for an LLC prior to an order of dissolution.
