Statute Constrains Commissions for Court-Appointed Receivers in Corporate Dissolution Proceedings
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A decision this month by the Albany-based Appellate Division, Third Department, in Matter of Eklund Farm Machinery, Inc., 2010 NY Slip Op 04097 (3d Dept May 13, 2010), spotlights anew the inadequate statutory compensation scheme governing court-appointed receivers in corporate dissolution proceedings.
Section 1113 of the Business Corporation Law (BCL) authorizes the court to appoint a receiver at any stage of a dissolution proceeding. When appointed prior to an order of dissolution, the receiver's role is to preserve corporate assets and to rescue the business from a controlling shareholder's mismanagement or from the paralysis of deadlock between two 50% owners. If the court orders dissolution, the receiver is charged with winding up the business, liquidating its assets, discharging its liabilities, and distributing the remainder to the shareholders.
BCL Article 12 lays out a comprehensive scheme governing the powers and duties of corporation receivers. Section 1217 specifies the receiver's entitlement to commissions for his or her services using a sliding scale of percentages of "the sums received and disbursed." The scale is 5% on the first $20,000; 2.5% on the next $80,000; and 1% on the remainder. Note how stingy the rate is compared to the straight 5% commission authorized by § 8004(a) of the Civil Practice Law and Rules (CPLR) which applies to receivers appointed under CPLR Article 64 including, for example, receivers appointed in mortgage foreclosure proceedings.
Continue Reading...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...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.
