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.
Dissolution and Restrictive Covenants
Under the Mohawk Maintenance doctrine, named after a case decided by New York’s highest court, the seller of a business including its good will is under an implied covenant not to solicit the seller’s former customers. Yet to be decided by the same court, although it’s come close on a couple of occasions, is whether a stock buyout resulting from an election to purchase in a dissolution proceeding likewise triggers the implied covenant. The key issue in these cases in whether the sale is deemed to be one “under compulsion” and therefore not within the Mohawk Maintenance rule. Lower court decisions have been less than uniform in their approach and the results.
A dissolution case decided earlier this year raised the issue anew in an interesting context. In Matter of Autz, 16 Misc 3d 1140(A) (Sup Ct Nassau County 2008), the antagonists were minority and majority shareholders in a professional corporation that operated walk-in medical clinics. The petitioner sought dissolution as an oppressed minority shareholder under Section 1104-a of the Business Corporation Law (BCL). The majority shareholder did not elect to purchase the petitioner’s shares. Rather, he consented to dissolution and asked the court (a) to determine that the corporation is not a going concern, and (b) to order a liquidation sale of the corporation’s hard assets and the division of its receivables. The petitioner sought a sale of the corporation as a going concern, inclusive of good will, along with a determination that such a sale is voluntary and therefore imposes a restrictive covenant upon the unsuccessful shareholder-bidder.
In a decision by Justice Leonard B. Austin of the Nassau County Supreme Court, Commercial Division, the court ruled that there was evidence that the corporation had saleable good will, but that a transfer of shares resulting from an involuntary dissolution, in the absence of an election to purchase the petitioner’s shares for fair value under BCL Section 1118, is a sale under compulsion and thus does not implicate the non-solicitation covenant.
Like so many other issues that come to haunt partners who find themselves embroiled in business divorce litigation, covenants not to compete or to solicit customers and employees are most efficiently dealt with in a shareholders agreement made at the beginning of the relationship.
