Contender to 50% Stock Interest Wins Decisive Round in Battle Over Nominee Agreement
I previously reported on a March 2009 appellate decision in a case called Yemini v. Goldberg involving a fight over stock ownership in a holding company called ANO, Inc. The appeals court reversed a trial court decision denying Oded Goldberg's application for a preliminary injunction against Ari Yemini. The dispute centered on the enforceability of a Nominee Agreement that identified Goldberg as the "true owner" of a 50% interest in ANO and designated Yemini as Goldberg's nominee to act on the latter's behalf with respect to the acquisition and operation by ANO of what became a two-thirds interest in another company called Candlewood Holdings, Inc. The appeals court held that the Nominee Agreement was an enforceable "declaration of trust" notwithstanding that Goldberg's 50% interest never was reflected in ANO's corporate records or tax returns, or that other corporate documents including a shareholders agreement expressly identified Yemini as 100% stockholder, or that Goldberg omitted ANO in his net worth affidavit in legal proceedings with his ex-wife.
Now the other shoe has dropped on Yemini. Following the appellate decision Goldberg moved for partial summary judgment prohibiting Yemini from holding himself out as ANO's 100% owner and directing Yemini to issue and deliver certificates to Goldberg's wholly-owned assignee, Goldberg Commodities, Inc., reflecting its 50% ownership of ANO. In addition to the Nominee Agreement, Goldberg offered evidence of his funding of the Candlewood acquisition and a subsequent $1.5 million loan agreement that identified each of Goldberg and Yemini as 50% owners of ANO.
Continue Reading...Delaware Chancery Court Rulings Interpret Member Rights to Inspect LLC's Books and Records
Last year I wrote about the uncertainty surrounding the rights of members of New York LLCs to gain access to company books and records primarily due to the paucity of court decisions construing the inspection statute, LLC Law Section 1102 (read here). At the time I knew of only two, significant New York cases on the subject, Matter of Hay and Matter of O'Neill, which took markedly different approaches to the problem.
It's been over a year since, and those apparently remain the only two cases of significance. However, in the last few months there have been several, interesting decisions by the Delaware Chancery Court resolving disputes over access to LLC books and records. (HT: Delaware Corporate and Commercial Litigation Blog) The decisions address important issues concerning standing to seek inspection; the meaning of the phrase "books and records" as commonly used in inspection provisions in operating agreements; whether the right of access includes the right to photocopy records; and, perhaps most importantly, the degree to which a court will scrutinize the "proper purpose" basis for the member's inspection demand. Given the similarities between the Delaware and New York statutes, these decisions could be persuasive in resolving books and records actions in the New York courts. Here's a summary:
1. Court may consider evidence outside the operating agreement to determine if party is a "member" entitled to demand access to books and records.
Section 18-305(a)(1) of Delaware's LLC Act gives each LLC "member" defined rights to obtain LLC records, as does its New York counterpart. In a letter ruling in Mickman v. American International Processing, LLC, Del. Ch. C.A. No. 3869-VCP (Apr. 1, 2009), Vice Chancellor Parsons denied the defendant LLC's motion for summary judgment seeking to dismiss a books and records action on the ground that the plaintiff was not listed as a member in the operating agreement and therefore lacked standing under the statute. The plaintiff, who was divorced from one of the two members identified in the operating agreement, submitted an LLC tax return identifying her and her ex-husband as co-owners of a membership interest. She also submitted her ex-husband's Offer in Compromise to the IRS in which he stated under oath that his "only assets are his house . . . and stock in a number of closely held companies owned jointly by Taxpayer and his wife."
Continue Reading...Controlling Shareholder's Unreasonable Refusal to Admit Petitioners' Stock Ownership Constitutes Ground for Corporate Dissolution, Incurs Award of Attorney's Fees
"Well over one and a half years have been wasted on a defense which is utterly without support."
Pretty strong stuff, coming from a recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria in Rosenfeld v. Luccaro, 2009 NY Slip Op 30963(U) (Sup Ct Nassau County Apr. 23, 2009), where the court granted dissolution of two closely held corporations based on "hopeless" deadlock and bitter dissension between two 50% shareholder factions. The court's sharp words were provoked by the respondent's assertion that the petitioners were not -- and had never been -- shareholders, despite a seeming avalanche of corporate and tax records to the contrary.
The subject corporations were formed in the 1970s by 50-50 shareholders Anthony Luccaro's father and Walter Rosenfeld to own and operate a marina called Toms Point Marina located in Port Washington on Long Island. Anthony Luccaro subsequently acquired his father's interest, and Rosenfeld died some time in the 1980s. His estate's distributees included his second wife, Judith, and his three children from a prior marriage.
Fast forward to 2007, when the Rosenfeld children commenced judicial dissolution proceedings under Sections 1104 and 1104-a of the Business Corporation Law, claiming deadlock and oppression by Luccaro who allegedly refused to recognize the election of petitioner Todd Rosenfeld as director, refused access to the bylaws and other books and records, threatened the life of petitioner Steven Rosenfeld if he entered the marina property, operated the marina as a cash business without proper controls and employed his family members without proper accounting, refused to issue K-1 tax forms to the Rosenfelds, and took cash and other distributions for himself without making any distributions to the Rosenfelds.
Continue Reading...Judicial Estoppel Doctrine Defeats Ex-Convict's Standing to Bring Shareholder Derivative Action Based on Failure to Disclose Alleged Stock Interest to Probation Authorities at Time of Sentencing
The doctrine of judicial estoppel in general prevents a party who asserts a factual position in one legal proceeding from taking an inconsistent position in subsequent litigation. Judicial estoppel occasionally comes into play in shareholder disputes when the complaining party's status as a shareholder, and thus his or her standing to sue, is challenged based on the failure to disclose the stock interest in prior legal proceedings.
For example, last year I wrote about a case called Light v. Boussi in which the court dismissed a corporate dissolution proceeding brought by a putative 50% shareholder due to his failure to list the shares as an asset in his prior bankruptcy proceeding. A recent decision by Suffolk County Commercial Division Justice Emily Pines provides another example, this time involving a shareholder's derivative action in which the plaintiff failed to disclose his alleged stock interest at the time of his sentencing in prior criminal proceedings. Watkins v. J C Land Development, Ltd., Short Form Order, Index No. 30679-08 (Sup Ct Suffolk County June 19, 2009).
The plaintiff, William "Chip" Watkins, filed a shareholder's derivative action in 2007 alleging that he owned a 50% stock interest in a real estate company called J C Land Development, Ltd. ("JCLD") formed on March 25, 1999. Watkins alleged that he invested $600,000 in JCLD including $130,000 in start-up cash. Watkins claimed that the other 50% shareholder, John Cenci, and another co-defendant as "agent" subsequently diverted ownership of JCLD's real properties by placing title in their own names for "no adequate consideration". The suit asked to set aside the allegedly improper transactions and to have the title to the real properties transferred to the corporation.
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...Appellate Court Affirms Caplash Ruling Rejecting Authority of 50% LLC Member to Hire Company Counsel in Proceedings Against Other 50% Member
The fascinating case of Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC, involving a multi-faceted litigation between 50-50 members of a dental surgery practice, was fodder last year for several appellate and trial court decisions which in turn were fodder for several posts on this blog (see here, here and here). In what likely is the case's last hurrah, the Appellate Division, Fourth Department, earlier this month affirmed a series of trial court rulings by Monroe County Commercial Division Justice Kenneth R. Fisher including orders upholding the plaintiff's standing to seek dissolution and granting dissolution based on deadlock.
The threshold issue in the case was whether an attorney hired by the defendant 50% member, Dr. Mohammed Salahuddin, had authority under the operating agreement (a) to accept on the company's behalf a letter of resignation from the plaintiff Dr. Jolly Caplash, and (b) to assert counterclaims in the LLC's name against Dr. Caplash. If the attorney had authority to accept the resignation letter, which in turn depended on which of the two doctors held the office of President in the aftermath of a June 2007 member meeting, Dr. Caplash's membership was terminated and he lacked standing to seek dissolution.
In February 2008, the Fourth Department ruled that the issue could not be resolved without a trial of disputed factual issues. In a May 2008 mid-trial decision, Justice Fisher dismissed the counterclaims brought against Dr. Caplash in the LLC's name, concluding that even if Dr. Salahuddin was President of the LLC with general authority to hire company counsel, he had no authority to hire company counsel to prosecute an action against a co-equal 50% member. Justice Fisher's June 2008 post-trial decision found that Dr. Caplash held the President's office and, therefore, the attorney hired by Dr. Salahuddin had no authority to accept Dr. Caplash's resignation letter on the company's behalf which left intact the latter's entitlement to judicial dissolution of the deadlocked company.
Continue Reading...Court Grants 50% LLC Member's Petition for Judicial Dissolution of Passive Holding Company
A recent decision by New York County Commercial Division Justice Bernard J. Fried addresses issues of interest concerning (a) the standing of an assignee of a member's economic interest to seek judicial dissolution of an LLC, and (b) grounds for dissolution of a two-member, 50-50 LLC that functioned as a holding company for a non-managing minority interest in another company.
The memorandum decision in Matter of Cline (Private Capital Management, LLC), Index No. 650117/09 (Sup Ct NY County May 29, 2009), grows out of a mega-lawsuit started by Ficus Investments, Inc. (Ficus) against Thomas Donovan, Lawrence Cline and Private Capital Management, LLC (PCM). PCM, a New York LLC co-owned 50-50 by Donovan and Cline, was the managing 20% member of a Florida LLC called Private Capital Group, LLC (PCG) that purchased, managed and sold non-performing mortgages. Ficus, which invested $300 million in the venture, held the remaining 80% interest. In 2007, Ficus terminated PCM as PCG's manager and brought suit against it along with Donovan and Cline allegedly for misappropriating over $20 million.
Early on Cline settled with Ficus and entered into a cooperation agreement as part of which he conveyed to a Ficus-owned entity called PCM Interest Holding, LLC (Holding) all of Cline's economic interest in PCM and his irrevocable voting proxy. Meanwhile, amidst burgeoning litigation proceedings between Donovan and Ficus, in April 2008 Justice Fried ruled that Donovan was entitled to advancement of his legal expenses under PCG's operating agreement. Ficus's appeal from that ruling was rejected in January 2009 (read here my post on the appellate ruling). In February 2009, Justice Fried also granted PCM's motion for advancement of its legal expenses. As part of the same ruling, Justice Fried denied without prejudice a procedurally defective cross-motion by Ficus and nominal defendant Cline seeking judicial dissolution of PCM (read here my post on that ruling).
Continue Reading...Nominee Agreement Trumps Corporation Records in Fight Over Stock Ownership
I recently did a series of postings on challenges to standing in corporate dissolution cases where the petitioners lacked stock certificates or other conclusive evidence of their share ownership (see here, here and here). I didn't expect to return to the topic so soon, but a new decision out of the Appellate Division, Second Department, reversing a lower court's order denying injunctive relief, warrants another visit.
The case, Yemini v. Goldberg, involves a fight over the ownership of a New York corporation called ANO, Inc. which is an acronym for Ari N Oded, Ari being plaintiff Ari Yemini and Oded being defendant Oded Goldberg.
ANO was formed in June 1999 to purchase an interest in another company called Candlewood Holdings, Inc. The only ANO stock certificate ever issued was issued on June 22, 1999, to Yemini who also was identified as sole director and shareholder in corporate resolutions adopted the same date.
On July 1, 1999, ANO acquired a 50% interest in Candlewood (later increased to two-thirds). On that same date, Yemini and Goldberg entered into a "Nominee Agreement" denominating Goldberg as "Principal" and Yemini as "Nominee". The Nominee Agreement contains the following two recitals:
Continue Reading...Undocumented Stock Interests Invite Challenges to Standing in Corporate Dissolution Cases: Part Three
[This is the third in a three-part series on challenges to standing to petition for judicial dissolution where the petitioner lacks a stock certificate or other definitive evidence of shareholder status. Part One looked at a recently decided case where the court ordered an evidentiary hearing to resolve the parties' contradictory factual contentions. Part Two discussed a dissolution case involving two contested corporations, in which the court rendered a split decision after an eight-day evidentiary hearing to determine whether the petitioner owned any shares. This week's highlighted case adds a family dimension to the problem of inadequate documentation of share ownership.]
If a corporate dissolution contest could be re-imagined as a TV game show, I'd call the case of Rodriguez v. Estevez, "Who Wants to be a Shareholder: Family Feud Edition".
In many instances, the same bonds of kinship and trust that give life and success to family-owned businesses can lead to the most bitter of courtroom disputes when the family members/business partners have a falling out. In Rodriguez, the dilution of family ties as control passed to the second generation, combined with a dramatic increase in the value of the business assets, created conditions rife for dissension. The resulting legal conflagration over the question of share ownership was made even more predictable by the family members' traditional aversion to the use of "outsider" lawyers and accountants to maintain proper corporate records.
The Rodriguez saga starts with two first generation immigrants to the United States, Rafael Rodriguez and Joaquin Estevez, who became successful retail business owners in New York City. Rafael owned and operated a liquor store. Joaquin went into the retail grocery and food trades. Rafael married Joaquin's sister. Joaquin had two daughters and five sons, several of whom became involved in their father's businesses.
Continue Reading...Undocumented Stock Interests Invite Challenges to Standing in Corporate Dissolution Cases: Part Two
[This is the second in a three-part series on challenges to standing to petition for judicial dissolution where the petitioner lacks a stock certificate or other definitive evidence of shareholder status. Last week's post set the stage and looked at a recently decided case where the court ordered an evidentiary hearing to resolve the parties' contradictory factual contentions. This week's post discusses another recent dissolution case involving two contested corporations, in which the court conducted an 8-day evidentiary hearing to determine whether the petitioner owns any shares.]
"In the real world, particularly that in which close corporations operate, clear evidence of share ownership is often not found in the corporate books and records, for any number of reasons."
So writes Kings County Supreme Court Justice Jack M. Battaglia as he paints a vivid picture of contradictory, ambiguous and incomplete evidence in a five-year court contest over the stock ownership of two Brooklyn-based businesses in Matter of Pappas (Corfian Enterprises, Ltd.), 2009 NY Slip Op 50109(U) (Sup Ct Kings County Jan. 23, 2009).
The case began in 2004 when Theano Pappas, as executrix of the estate of her late husband, Eleftherios Pappas, petitioned under Business Corporation Law 1104-a for judicial dissolution of two corporations, Corfian Enterprises, Ltd. and Epiros Realty, Ltd. The petition named as respondents Paul Fotinos and Theodoros Kalogiannis, alleged to be the corporations' controlling shareholders. BCL 1104-a conditions the right to seek dissolution on holding a minimum 20% stock interest. Mrs. Pappas alleged that the estate, Fotinos and Kalogiannis each hold one-third of the two corporations' shares. Kalogiannis filed an answer agreeing with Mrs. Pappas as to share ownership and also seeking dissolution. Fotinos, however, claimed to be 100% shareholder of both corporations and denied that the late Mr. Pappas or Kalogiannis ever held shares in either corporation.
Continue Reading...Undocumented Stock Interests Invite Challenges to Standing in Corporate Dissolution Cases: Part One
In the world of closely held corporations, what makes a shareholder a shareholder?
Section 508 of New York's Business Corporation Law states that "the shares of a corporation shall be represented by certificates or shall be uncertificated shares." Scattered throughout the BCL are references to "shareholders of record". BCL Section 624 requires every corporation to keep "a record containing the names and addresses of all shareholders" and makes such record "prima facie evidence of the facts stated therein" in any action or special proceeding against the company, its directors, officers or shareholders.
However, ask lawyers about their experiences with small, closely held corporations and you will hear countless stories about companies that never issued stock certificates, never kept a stock ledger, never adopted bylaws, never had a written shareholders' agreement, and never held formal shareholder meetings much less kept meeting minutes.
Such widespread record keeping lapses create fertile ground for disputes over shareholder status in many different legal settings, including corporate dissolution contests. Sometimes the dispute is over the stock percentage held by an otherwise acknowledged shareholder. This kind of dispute is geared toward either supporting or defeating the specific stock-holding percentage requirements for bringing a deadlock dissolution proceeding under BCL 1104 (50%) or an oppressed minority shareholder dissolution proceeding under BCL 1104-a (20%).
Then there are the cases in which the respondent contends that the petitioner never held a stock interest. More often than not, these cases are brought under the oppression statute by putative minority shareholders who lack control of, or access to, the corporation's books and records.
This is the first of three consecutive posts on the standing challenges to be overcome by a petitioner who holds no stock certificate or other direct evidence of a stock interest. Each of the three cases highlighted in these posts presents a distinct factual scenario. All three cases remind us of the substantial additional litigation costs and time involved when an initial evidentiary hearing must be held to determine the petitioner's standing before proceeding to a hearing on the merits of the dissolution petition.
Continue Reading...Top 10 Business Divorce Cases of 2008
The nominations are in, the votes are counted, envelope please! Following are my picks for last year's top 10 business divorce cases, all of which were featured in prior posts:
- Tzolis v. Wolff, 10 NY3d 100 (2008), in which the Court of Appeals resolved conflicting First and Second Department decisions on the question whether LLC members can bring derivative actions on the LLC's behalf. They can.
- Matter of Beverwyck Abstract, LLC, 53 AD3d 503 (3d Dept 2008), in which an appellate court upheld a lower court's ruling that the de facto dissolution of an LLC did not terminate the members' fiduciary duty to account for ongoing profits up until formal dissolution.
- Tal v. Superior Vending, LLC, 20 Misc 3d 1103(A) (Sup Ct Westchester County 2008), in which the court crafted an equitable remedy in an LLC dissolution by ordering a return of the petitioner's investment.
- Dingle v. Xtenit, Inc., 20 Misc 3d 1123(A) (Sup Ct NY County 2008), in which the court required a bona fide purpose for a controlling shareholder's dilution of the minority shareholder's interest.
- Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC, 19 Misc 3d 1138(A) (Sup Ct Monroe County May 12, 2008), subsequent decision, 20 Misc 3d 1104(A), in which the court upheld the petitioner's standing to seek LLC dissolution after finding that the other member lacked authority to engage the LLC's attorney who had accepted the petitioner's resignation.
- Hellman v. Hellman, 19 Misc 3d 695 (Sup Ct Monroe County 2008), modified, 2009 NY Slip Op 02418 (4th Dept Mar. 27, 2009). involving a corporation owned 50-50 by brothers, in which the court upheld a new company lease executed by the brother who served as president over the other's objection that the lease required board approval.
- Murphy v. U.S. Dredging Corp., 2008 NY Slip Op 31535 (Sup Ct Nassau County May 19, 2008), a valuation proceeding involving shares in a subchapter C real estate holding corporation in which the court applied a discount for built-in capital gains.
- Matter of Youngwall, 2008 NY Slip Op 30811(U) (Sup Ct Nassau County Mar. 14, 2008), adhered to upon reargument in unreported decision dated July 28, 2008, in which the court granted dissolution of an unprofitable LLC and also ruled that a provision in the operating agreement waiving the right to seek judicial dissolution is void as against public policy.
- Ross v. Nelson, 54 AD3d 258 (1st Dept 2008), in which the court enforced the LLC's default statute in upholding a majority vote of the members to remove one of the managers.
- Manitaras v. Beusman, 56 AD3d 735 (2d Dept 2008), in which the court found that an LLC operating agreement's silence on the sale of the LLC's sole asset permitted majority approval under the default statute even though the sale automatically triggered dissolution.
What will 2009 bring? It's not illogical to think that the stress of the economic meltdown will lead to an increase in business divorce. But in my years watching the scene I've never detected any correlation between business cycles and the rate of litigious business break-ups involving closely held companies. If anything, I would lean in favor of the theory that financial success and opportunity in a business create even more incentive for dissension among co-owners. A recent NY Times article pointed out how falling real estate values are impeding marital divorces by eliminating the primary resource for financial settlement. I think a similar phenomenon could be at play with businesses in the current climate, by reducing the upside for a disgruntled owner contemplating a tactical lawsuit designed to induce a buyout.
Court Bars Minority Member From Intervening in Creditor's Suit Against LLC
The whimsically named Rocketboom LLC runs a videoblog offering what it calls "daily internet culture." A dust-up between the company's owners has now made a small but noteworthy contribution to the legal culture of New York LLCs, in the form of a recent appellate court decision holding that an LLC member may not intervene as a party defendant in a creditor's suit against the LLC, even if the suit and its settlement allegedly result from impropriety by the controlling member. Baron v. Rocketboom, LLC, 2008 NY Slip Op 09656 (1st Dept Dec. 9, 2008).
Rocketboom was formed in 2005, owned 51% by Andrew Baron and 49% by Amanda Congdon. Congdon stopped working at the company in June 2006 under disputed circumstances. Congdon claimed that Baron terminated her. Baron claimed that Congdon left voluntarily and thereby forfeited her membership interest.
From inception Rocketboom was financed by Baron's father, Fred. In October 2006, by which time Fred had loaned approximately $300,000, he and his son on Rocketboom's behalf executed a Loan and Security Agreement establishing a $500,000 loan facility collateralized by all property of Rocketboom. In March 2007, Fred sued Rocketboom for nonpayment and to foreclose Rocketboom's interest in the collateral (read complaint here).
Continue Reading...Dissolution May Be Sole Remedy When Minority Shareholder's At-Will Employment is Terminated
It's among the most common scenarios seen by business divorce lawyers: A minority shareholder of a non-dividend paying close corporation -- let's call him Joe the Shareholder -- for years has been a full-time employee, officer and director of a company he co-founded. Joe the Shareholder's salary and occasional bonus are the sole source of return on his investment in the company. Without any advance notice, the majority shareholders fire Joe the Shareholder, remove him from the payroll, cut off his access to the company computer and change the office locks. Joe the Shareholder can't believe that, as a company owner, he can be fired and thrown out by his business partners just like that. Joe the Shareholder wants to know what his remedies are and, in particular, whether he can sue for wrongful termination of his employment to recover lost salary and other damages.
Joe the Shareholder has a standard shareholders' agreement that gives a majority of the Board of Directors control of all company business affairs. The shareholders' agreement does not fix any definite term of employment for any of the company's shareholders, and it has no language limiting the Board's authority to terminate an officer or employee with or without cause. Joe the Shareholder has no separate employment agreement with the company.
So what's the answer to Joe the Shareholder's question? In New York, without any agreement for employment of a definite duration, Joe the Shareholder is considered an at-will employee of his own company who can be fired for any or no reason (except for reasons made illegal under federal and state workplace anti-discrimination laws), and therefore he has no claim for wrongful termination of his employment. If Joe the Shareholder has any remedy, he must look to his statutory right to seek judicial dissolution for shareholder oppression under Section 1104-a of the Business Corporation Law.
Continue Reading...Court Enforces Stock Buyout Triggered by Shareholder's Death Notwithstanding Pending Dissolution Proceeding
According to one online review, Greek restaurant Telly's Taverna located in Astoria, Queens, "exudes Mediterranean calm with its beach mural, bucolic back garden and airy main dining room."
Nine miles away, in the courtroom of Queens County Commercial Division Justice Orin R. Kitzes, the atmosphere has been anything but bucolic as the restaurant's 50-50 owners have waged a bitter shareholder dispute for over two years, including a deadlock dissolution proceeding under Section 1104 of the Business Corporation Law.
In the midst of those proceedings, the 50% shareholder who petitioned for dissolution died. The ensuing, convoluted legal proceedings ultimately boiled down to one question: Did the petitioner's death entitle the surviving shareholder to enforce the valuation and buyout provision in the shareholders' agreement, thereby mooting the dissolution proceeding?
The short answer is "yes". Here's the full story:
In January 2001, Joanna ("Nana") Loiselle and Aristotelis ("Telly") Vagianderis as 50-50 shareholders formed Kalamaki Taverna, Inc. to operate the restaurant known as Telly's Taverna. A month later they entered into a written shareholders' agreement including an optional provision for stock buyout upon death, as follows:
Continue Reading...In the event of the death of a stockholder, the Corporation business may be continued by the surviving parties on giving notice of such election to continue to the legal representative of said deceased party within thirty (30) days following the death of such deceased party. The deceased party's interest in the Corporation shall terminate on the date of his or her death and the value of the interest of such deceased party in the Corporation shall be determined as of the date of such deceased party's death. The interest so determined shall be paid to his or her legal representative . . ..
Terminated Member of Professional Corporation is Not Entitled to Statutory Stock Redemption
Professional service corporations are "interesting" and "strange creatures". So says Nassau County Commercial Division Justice Ira B. Warshawsky in an interesting (but not strange) post-trial decision issued last month, rejecting a claim for statutory buyout in a suit brought by a terminated partner in a law firm organized as a professional corporation.
The case is Lubov v. Welikson, 2008 NY Slip Op 28392 (Sup Ct Nassau County Sept. 29, 2008). You can read the decision here. Additional background is found in the court's January 2008 decision denying summary judgment motions (read here).
The law firm in Lubov initially was organized in 1989 as a general partnership. In 1993 it converted to a professional service corporation ("P.C.") under Article 15 of the Business Corporation Law. P.C.s are a popular form of limited liability entity eligible for partnership tax treatment, available to lawyers, doctors, accountants and other regulated professions.
The plaintiff alleged that prior to the firm's conversion to a P.C. the partners made an agreement to redeem the interest of a withdrawing partner for the sum of the partner's capital contribution and percentage of accounts receivable. Plaintiff also alleged that the shareholders nee partners of the P.C. adopted the same agreement.
Plaintiff's percentage interest in the P.C. started at 30%. In 1994 he voluntarily surrendered half his interest at the same time he began working fewer days and pursued other personal business affairs. At the time, he allegedly asked about redemption of the surrendered shares, but supposedly was put off by the majority shareholder. Plaintiff's percentage interest rose to 16% in 1997 when another 10% shareholder left the firm.
Continue Reading...Post-Tzolis Rulings Address Demand and Contemporaneous Ownership Requirements for LLC Derivative Actions
Last February, in Tzolis v. Wolff, 10 NY3d 100 (2008), the New York Court of Appeals ruled that members of limited liability companies may bring derivative actions on behalf of LLCs notwithstanding the legislature's deliberate omission of statutory authorization for derivative actions when it enacted the LLC Law in 1994. (Read my post on Tzolis here).
The dissenting judges in Tzolis objected that the majority had created a common law right of derivative action "unfettered by the prudential safeguards against abuse that the Legislature has adopted when opting to authorize this remedy in other contexts," namely, the statutory provisions imposing demand, contemporaneous ownership, security, attorney fees and settlement restrictions on derivative suits brought on behalf of business corporations and limited partnerships.
The majority responded to this charge, stating that "the right to sue derivatively has never been 'unfettered'"; that "the limitations on it are not all of legislative origin"; and most importantly:
What limitations on the right of LLC members to sue derivatively may exist is a question not before us today. We do not, however, hold or suggest that there are none.
In Tzolis's aftermath, lower courts have taken their cue from the majority's response by imposing prior demand and contemporaneous ownership requirements on putative LLC derivative plaintiffs.
Continue Reading...Spouses Holding Shares as Joint Tenants Must Jointly Petition for Corporate Dissolution
When husband and wife hold shares as joint tenants with right of survivorship, can one of them seek corporate dissolution without joining the other?
The answer is "no," according to a recent decision by Queens County Supreme Court Justice Patricia P. Satterfield in Matter of Mouzakitis (Pearl Nightlife, Inc.) (read decision here).
Petitioner Marianthi Mouzakitis and her husband, Leonidas, own 15% of the common shares of Pearl Nightlife, Inc. as tenants by the entirety. The corporation operates a restaurant in Bayside, New York, that opened in March 2008. The Mouzakitises contributed $125,000 for their interest. Ms. Mouzakitis alleged that the controlling shareholders failed to make required contributions, failed to pay salaries and dividends, withheld access to corporate books and records, and diverted corporate funds and assets including liquor and food allegedly diverted to other restaurants separately owned by the corporation's president. In May 2008, the other shareholders allegedly had the petitioner arrested at the restaurant.
Continue Reading...Delaware and New York Courts Agree that 50% LLC Member May Not Hire Lawyer to Represent Company Adverse to Other 50% Member
There's been a recent flurry of courtroom battles over the authority of one 50% owner to engage counsel to represent the company adverse to the other 50% owner in dissolution proceedings or other types of internecine corporate warfare. I've previously written about some of these cases, including Sports Legends, Inc. v. Carberry, in which the court dismissed as unauthorized a suit by the corporation initiated by one 50% shareholder against the other for conversion of company assets (read here), and the infinitely fascinating Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC, where one 50% LLC member hired company counsel in a multi-faceted litigation with the other 50% member that included dueling dissolution applications (read here and here).
Two new decisions reinforce the general proscription against the hiring and militant alignment of company counsel by one 50% owner against the other. One comes out of the Delaware Court of Chancery, which many -- present company excluded, I'm a dyed-in-the-wool New York partisan -- consider the premier business law court. The other decision appears to be the final word in the Caplash saga.
Continue Reading...Failure to Disclose Stock Interest in Bankruptcy Petition Defeats Standing in Later Dissolution Proceeding
It's not often that bankruptcy law intersects with corporate dissolution proceedings based on deadlock or minority shareholder oppression, but when it does, likely it's bad news for the petitioner seeking to liquidate the company or to be bought out by another shareholder.
Such was the fate of the plaintiff in a recently decided dissolution case called Light v. Boussi, 2008 NY Slip Op 51212(U) (Sup Ct Kings County June 19, 2008). In 2006, plaintiff Beril Light sued Samuel Boussi for an accounting, imposition of constructive trust, damages and an order compelling dissolution of a real estate holding company formed in 1995 called 10-18, Inc. Light claimed that he and Boussi were 50-50 shareholders. Light alleged that Boussi failed to maintain corporate formalities, provide him with notice of corporate meetings or financial information, or distribute to Boussi 50% of the company profits. Boussi denied that Light ever was a shareholder and also asserted as affirmative defenses that Light lacked legal capacity to sue, and that Light's claims were barred by the doctrine of judicial estoppel.
Both defenses arose from the fact that in 1998, Light and his wife filed a voluntary petition under Chapter 11 of the Bankruptcy Code. Their petition listed various assets owned by them including real properties and interests in stock corporations, but made no mention of 10-18, Inc. The bankruptcy court entered a final decree in 2002, Light's bankruptcy case was closed, and the trustee was discharged.
Continue Reading...Caplash Redux: 50% Member Cannot Hire Lawyer to Represent LLC in Dispute with Other 50% Member
When 50-50 business partners have a falling out, the ensuing battle for the high ground can lead one of them to take hostile action in the company's name without the other's consent.
Examples of the phenomenon, recently featured in this blog, include the case of Hellman v. Hellman, where the court upheld the authority of a 50% shareholder as president to enter into a lease opposed by the other shareholder, and Sports Legends, Inc. v. Carberry, where the court refused to authorize a lawsuit brought in the company's name by one 50% shareholder against the other.
Then there's Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC. About four months ago I wrote about an appellate decision in the Caplash case in which the court reversed a trial court order dissolving a medical practice LLC because of unresolved factual issues concerning the plaintiff's standing to seek dissolution. The issue before the court was whether to give legal effect to the plaintiff's letter to the company resigning his employment, and thereby terminating his LLC membership, where the company's requisite acceptance of the resignation was by letter from an attorney whose authority under the operating agreement to act on the company's behalf was not established. The appellate court sent the case back to the trial court for a hearing to determine the issue.
Since then, there's been a flurry of activity in the Caplash case and a new trial court decision (reported at 19 Misc 3d 1138(A)) which, I'm happy to report, supplies many of the underlying facts missing from the appellate decision. The recent decision, by Justice Kenneth R. Fisher of the Monroe County Supreme Court, Commercial Division, addresses two issues of interest. First, it examines the interplay between the parties' operating agreement and the LLC Law in deciding whether the lawyer engaged by one member with 50% voting power had the authority to accept on the LLC's behalf the other member's resignation. Second, it determines whether the same lawyer could act on the entity's behalf in asserting claims against the resigning member for wrongful competition and other economic injury to the LLC.
Continue Reading...50% Shareholder May Not Sue Other 50% Shareholder in Company's Name
The concept of the corporation as a separate "person", with a legal identity distinct from its shareholders and the ability to sue and be sued in its own name, is the cornerstone of the corporate form of business organization. The essential corporate attribute of limited liability and the attendant imposition of fiduciary duties of loyalty and care on those entrusted to manage the corporation's affairs, could not comfortably exist without corporate separateness.
Okay, I admit that's a highfalutin way to introduce the discussion that follows, of a trite lawsuit between shareholders of a two-bit sports memorabilia business, but that's the beautiful thing about the law, its noblest notions inform even the most mundane of disputes.
The dispute in question is the subject of a decision last month by New York County Supreme Court Justice Joan Madden in a case called Sports Legends, Inc. v. Carberry, 2008 NY Slip Op 30718(U) (Sup Ct NY County Mar. 10, 2008) (read decision here). The case arose when one of two 50% shareholders of a sports memorabilia business caused a suit to be filed in the name of the corporation against the other shareholder, asserting claims to recover company merchandise allegedly taken by the defendant and not returned. The primary issue in the court's decision, of no interest here, was whether the action was barred by the statute of limitations (the court found that it was). Secondarily, and the reason I'm discussing the case, the court addressed the issue whether the shareholder who brought the suit in the company's name had the authority to do so.
Continue Reading...Anatomy of a Dissolution Slugfest: Part IV
This is the fourth 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 in Champion. Part II (read it here) covered some additional issues raised in the court’s initial decision in the case, 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 second decision in the case 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.
In this Part IV, we look at Justice Warshawsky's third decision in the case dated September 19, 2007, occasioned by the defendants' renewed assertions that Marciano lacked standing to seek dissolution and that their exclusion of him from the business was reasonably required to protect the business in response to the unrelated stock fraud charges brought against him by federal prosecutors.
Continue Reading...Anatomy of a Dissolution Slugfest: Part I
Question: What do you get when you take a luxury automobile dealership consisting of multiple corporations and limited liability companies, stir in three business partners, add contradictory documents concerning one partner’s ownership interest, season with a federal indictment of that same partner for stock fraud following which the other two partners freeze him out of the business, top off with a pair of litigators and bring to a boil?
Answer: A great recipe for a corporate dissolution slugfest recently played out in Nassau County Supreme Court.
Business divorce devotees can go to school on this case, thanks to a series of fact-filled and law-laden written decisions authored by Justice Ira B. Warshawsky of the Nassau County Supreme Court, Commercial Division. About the only disappointing thing about this battle royal, entitled Matter of Marciano (Champion Motor Group, Inc.), is that the plaintiff’s first name isn't Rocky.
This first of five consecutive postings on the Marciano case summarizes the underlying facts. It then examines the court’s handling of the primary defense raised by the defendants in their initial attack on the dissolution petition, in which they challenge Marciano’s standing as a shareholder to seek dissolution. In subsequent postings New York Business Divorce will discuss a number of other issues discussed in each of the court’s four, separate decisions, including:
- whether Marciano’s criminal indictment justified the defendants’ decision to exclude him from the business;
- Marciano’s application under Section 702 of the LLC Law to dissolve the several LLCs formed by the parties;
- Marciano’s request for appointment of a limited receiver or financial monitor to oversee the business;
- Marciano’s request for access to all corporate records;
- Marciano’s request to compel distributions to him pending the proceedings;
- Marciano’s application to amend his pleading to add post-commencement derivative claims for waste and mismanagement;
- Defendants’ application made after discovery for summary judgment dismissing the action based on lack of standing and Marciano’s eventual guilty plea to unrelated federal charges;
- Marciano’s application to dismiss defendants’ “unclean hands” and estoppel defenses; and
- Marciano’s application for injunctive relief concerning the defendants’ alleged self-dealing when they assigned the dealership’s lease to a related company in which they alone are principals, following which the related entity exercised an option to purchase.
LLC Members May Bring Derivative Suits
The New York Court of Appeals (the state's highest court), in a split decision with a vigorous dissent by three of the court's seven judges, today resolved the hotly debated question whether members of New York limited liability companies may bring derivative suits on the LLC's behalf. Answer: they may. Here's the decision in Tzolis v. Wolff, 10 NY3d 100 (2008).
A number of lower courts, in refusing to grant member standing to sue derivatively, interpreted the LLC Law's legislative history as indicative of the legislature's deliberate omission of statutory authority for derivative suits. The Court of Appeals majority held otherwise, finding the legislative history "too ambiguous to permit us to infer that the Legislature intended wholly to eliminate, in the LLC context, a basic, centuries-old protection for shareholders, leaving the courts to devise some new substitute remedy" (p. 11).
Waving the separation of powers banner, the dissenters accuse the majority of "judicial fiat" by "effectively rewrit[ing] the law to add a right the Legislature deliberately chose to omit", adding: "The proponents of derivative rights for LLC members -- who were unable to muster a majority in the Senate -- have now obtained from the courts what they were unable to achieve democratically" (p. 20).
The availability to LLC members of derivative rights will have a substantial impact on LLC member relations and the kind of litigation that may ensue when members seek judicial recourse. Without such rights, members holding minority interests in LLCs had little recourse against majority abuses that caused direct injury only to the LLC (e.g., taking excessive compensation or other forms of self dealing). The LLC Law's provision for judicial dissolution has not proved to be a potent remedy in the face of typical operating agreement provisions giving broad management control to the majority owners. Today's decision in Tzolis evens the playing field by providing an alternative avenue for judicial relief.
Continue Reading...Decision Highlights Interplay Between Employment Status and LLC Membership
Closely held companies with multiple owners actively involved in the business sometimes use employment agreements between the company and the owners, separate and apart from the shareholders’ agreement (for corporations) or operating agreement (for LLCs). Such employment agreements are especially prevalent in medical practices where, among other reasons, restrictive covenants are routinely used to prevent departing doctors from establishing competing practices in the same locality.
Quite often the shareholders’ or operating agreement and the employment agreement will provide that, upon termination of employment, the shareholder or member is required to redeem his or her interest in the company on specified terms. Disputes and litigation, including proceedings for judicial dissolution of the business, may erupt when the outgoing owner perceives enough of a disparity between the specified compensation (or lack thereof) and the “real” value of his or her interest.
A decision last week by an intermediate appellate court in Rochester, involving a medical practice organized as an LLC, highlights the interplay between the interest redemption triggered by termination of employment and the threshold issue of standing to seek judicial dissolution of an LLC under Section 702 of the Limited Liability Company Law. The statute confers standing to seek dissolution upon members only.
In Caplash v Rochester Oral & Maxillofacial Surgery Assoc., LLC, 48 AD3d 1139 (4th Dept 2008), the trial court summarily granted the plaintiff’s application to dissolve the practice. On appeal by defendant, the panel of five appellate judges unanimously reversed the lower court’s decision on the ground that defendant raised a genuine issue for trial whether, based on plaintiff’s apparent resignation, he was a member of the company within the meaning of the statute when he sought dissolution. Here’s what the court said:
Defendant submitted a letter from plaintiff to the company indicating that plaintiff was resigning as an employee of the company, and he also submitted a letter from an attorney who purported to accept plaintiff's resignation on behalf of the company. The company operating agreement unequivocally provides for the termination of membership in the event of the termination of a member's employment with the company, and plaintiff's employment agreement specifies that "This Agreement shall terminate . . . at any time by mutual agreement in writing by Employer and Employee." The record does not disclose the circumstances under which the attorney came to represent the company and whether such representation was authorized by the operating agreement. We thus conclude that there is an issue of fact whether plaintiff has standing to seek dissolution.
The appellate decision does not reveal any additional facts, such as the percentage membership interest of the plaintiff and whether, for instance, the issue concerning the attorney’s authority to act on behalf of the company arose because the plaintiff and defendants were 50/50 members. In any event, the decision is another reminder that, no matter how high temperatures rise when business partners are on the brink of breakup, careful reading of agreements and obtaining advise of counsel should precede any decisive steps.
Double Whammy: When Romantically Involved Business Partners Fall Out
The mom-and-pop business is engrained in the American psyche as a symbol of combined domestic and business durability. I have two theories about that. One, in the olden days if the business was incorporated, chances are the husband owned 100% notwithstanding the wife’s equal labors. Two, those were the days before a 50% divorce rate.
Today, women have become equal forces as entrepreneurs and managers in most areas of the business world. Combine that with the high incidence of unmarried couples not only living together, but also going into business together, and you have a sure-fire recipe for heated business divorce cases when a good number of these couples inevitably break up.
The mix of personal and business relationship turned volatile in a recent case (read opinion here) in which the girlfriend – let’s call her Barbie – commenced a proceeding for judicial dissolution of a company she allegedly owned 50-50 with her former boyfriend – let’s call him Ken – alleging that he had looted, wasted or diverted company assets and was engaging in oppressive acts toward her. The court’s opinion doesn’t describe the company business, though it does mention that the company owned the house in which Barbie lived. Indeed, Barbie filed for dissolution shortly after Ken caused the company to serve her with eviction papers.
Ken asked the court to dismiss Barbie’s case on the ground she was not a shareholder and therefore lacked standing. The company’s stock register listed Ken and Barbie as the only two shareholders with 100 shares each. Relying on § 624(g) of the Business Corporation Law (BCL), Barbie contended that the register was prima facie evidence of ownership even if the stock certificate never was physically delivered to her. Ken countered that Barbie had failed to pay an agreed upon price of $165,000 for her shares, and cited BCL § 504(h) which states that stock certificates may not be "issued" until payment is made for the shares. Barbie did not claim that the shares were a gift nor, apparently, did she deny her agreement and failure to pay $165,000. The court found for Ken and dismissed the case.
Did Mattel ever make a Shareholder Barbie?
The case, Matter of Sanyou New York, Inc., 2007 NY Slip Op 33326(U) (Sup Ct Queens County Sept. 25, 2007), was decided by Justice Joseph P. Dorsa of the Queens County Supreme Court.
