Arbitration and Mediation

RosenbloomAMediation continues to grow in popularity as a means of resolving legal disputes in lockstep with the rising costs and delays attendant to litigation and arbitration. Mediation allows the parties to air their grievances face-to-face in a confidential setting and, with the help of a skilled mediator and a willingness to compromise on both sides, to arrive faster and more economically at a resolution of their own design rather than having one imposed on them by a judge or arbitrator.

An argument can be made that business divorce disputes are less amenable to mediation, not only because of the high emotions and sense of betrayal experienced by the co-owners, but also due to the loosely framed legal standards in the governing statutory and common law that give courts broad discretion in the exercise of their equitable powers. In other words, the bitterness and intrinsic uncertainty of business divorce litigation outcomes can foster a zero-sum approach on both sides that favors combat over conciliation.

On the other hand, if the relationship between feuding co-owners is terminally ill but the business nonetheless remains viable, chances are one side eventually is going to buy out the other, which is where, in my opinion, mediation can be most effective in bringing about a resolution by focusing on valuation of the equity interest of the selling business owner.

Which brings me to the topic at hand, my podcast interview of Arthur Rosenbloom (pictured above) for the Business Divorce Roundtable, a link to which appears at the bottom of this post.

Art is a veteran lawyer, mediator, and arbitrator who last year was appointed by the court to mediate a case in which I represented the majority owner in litigation that followed a cash-out merger of the minority owner who was contesting the value placed on his interest. What distinguished Art from other mediators was his in-depth knowledge of business valuation, much of it gained from his many years working as an investment banker. In the course of the mediation, Art employed his valuation expertise to critique each side’s valuation reports, and by doing so was instrumental in getting the parties to bridge the gap between their respective valuation positions.

In my interview with Art, he shares his insights on a number of issues vital to the mediation of business valuation disputes, including the different pathways to mediation, the optimal timing for mediation, the utilization of appraisal reports in mediation, the retention of a neutral appraiser to assist the mediation, the mediator’s role in critiquing the parties’ valuation positions, and how the mediator deals with the  intense emotions the parties often bring with them to the mediation.

After you listen to the podcast, I recommend you also read Art’s article, Mediating Valuation Disputes in Minority Oppression Litigation, published last year in the New York Law Journal.

 

got purposeUnder the LLC Law’s provision authorizing judicial dissolution and its interpretive case law, determining an LLC’s purpose can be essential to adjudicating whether it no longer is reasonably practicable to carry on its business in conformity with the operating agreement — in other words, whether its purpose has failed.

Failed purpose cases generally fall into one of two categories: those with written operating agreements containing express purpose clauses, and those without. In the latter category, where the LLC either has no written operating agreement or has one lacking a purpose clause, the member seeking dissolution may succeed through testimony and circumstantial evidence showing the failure of the LLC’s intended purpose. The Natanel case, which I litigated and wrote about here, was such a case resulting in judicial dissolution of a single asset, realty-owning LLC purchased to house the co-owners’ separate moving and storage business which eventually went out of business leaving the building largely vacant.

In the former category, the petitioner may face a more daunting if not impossible path to dissolution when an otherwise financially viable LLC’s written agreement contains a typical, broad purpose clause permitting any lawful business activity, such that the termination of the LLC’s initial business, e.g., owning a certain property or holding a certain investment portfolio, may transmute into something entirely different without running afoul of the dissolution statute. Continue Reading LLC Agreement’s All-Purpose Purpose Clause Defeats Dissolution Petition

They say this summer has been unusually cool in the Northeast, but it’s been a hot one for business divorce litigation, judging from the number of recent court decisions involving various and sundry disputes among co-owners of closely held businesses. So, once again, it’s time for my annual summertime post featuring a few, short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision by Justice Melvin Schweitzer in a battle between 50/50 ownership factions over control of an international translation services company with over 3,000 employees. Next up is Justice Carolyn Demarest’s ruling denying a change of venue in a corporate dissolution case. Last is a decision by Justice Marcy Friedman in which she addressed an interesting statute of limitations defense in a drawn-out dissolution case.

Shareholder of Parent Corporation Has Standing to Sue Derivatively to Remove Subsidiary’s Director But Not for Dissolution

Elting v Shawe, 2014 NY Slip Op 32126(U) [Sup Ct, NY County July 24, 2014]. It’s not everyday you encounter business divorce litigation on the scale of this case, involving a firm with over 3,000 employees and revenues over $350 million. The subject company is a closely held Delaware holding corporation owned 50/50 by two individuals who also comprise its two-director board, and its wholly owned New York subsidiary providing international translation services. One owner-director sued the other for alleged financial and management abuses, asserting direct and derivative claims seeking the defendant’s removal as an officer and director of the subsidiary under BCL §§ 706 (d) and 716 (c), and also seeking deadlock dissolution of the subsidiary under BCL § 1104 (a). Continue Reading Summer Shorts: Director Removal and Other Recent Decisions of Interest

Courts determine the value of equity interests in closely held firms in a variety of settings, including (among others) dissenting shareholder proceedings triggered by mergers; elective stock buy-outs triggered by minority shareholder dissolution petitions; partnership buy-outs triggered by death or dissolution; disputes over contractual buy-outs contained in agreements among the co-owners; and damages claims arising from buy-outs tainted by fraud or wrongful nondisclosure.

The central feature of a valuation contest is the battle of the opposing appraisal experts. Nothing is more critical to the success of a litigant’s valuation case than putting on the testimony of a qualified, independent, experienced, credible, well-prepared, articulate appraiser who, using his or her written appraisal report as a springboard, can both educate and persuade the judge (or jury in certain types of cases) who has ultimate responsibility for  determining the value of the equity interest under the applicable standard of value.

In most valuation proceedings, the parties either are required to, or voluntarily agree to, disclose certain information concerning their intended expert witnesses in advance of the valuation hearing. I say in most cases because the governing rules can vary depending whether the case is brought in court or as an arbitration and, if in court, as a plenary action versus a special proceeding, or in the court’s Commercial Division versus in a general civil part. Disclosure practices also can vary from judge to judge. Continue Reading The High Price of Bungled Expert Disclosure in Valuation Cases

The prosecution or defense of a business divorce case, like any other civil litigation, is subject to a mind boggling set of procedural rules which, in the event of noncompliance, can deal either side a significant setback or even dismissal. Adding to the complexity are the rules specific to business divorce cases, which are contained in the statutes governing judicial dissolution cases.

Besides the potential jeopardy to a client’s position on the merits, failure to comply can cost the client time and money. The client’s confidence in his or her attorney also can be compromised by needless errors that detract from achievement of the client’s litigation goals.

Recently, I was asked about the most common mistakes attorneys make when filing or defending dissolution cases. I figured others might benefit from the answer, so compiled below is a list of 10  snafus highlighted in cases that I’ve previously featured on this blog. Follow the links to read more about each one.

  1. File a bare-bones dissolution petition.  Judicial dissolution of a corporation must be brought by way of petition in a special proceeding, that is, not by ordinary summons and complaint where the rules essentially permit a bare-bones pleading that alleges the elements of a claim in conclusory fashion. The petition is different. It must provide detailed and, if necessary, documented facts establishing entitlement to dissolution. Failure to do so likely will result in a painful dismissal. Read more here. Continue Reading 10 Ways to Screw Up Your Business Divorce Case
Disclosure: The author represented the prevailing party in the case discussed in this post.

As I’ve previously written (read here), the usual, broad form of arbitration clause found in many shareholder agreements mandates the arbitration of petitions for judicial dissolution of closely held corporations brought under Article 11 of the Business Corporation Law (BCL). A decision earlier this month by Brooklyn Commercial Division Justice Carolyn E. Demarest (pictured) in Pisane v. Feig, Decision and Order, Index No. 12246/11 (Sup Ct Kings County Sept. 14, 2012), serves as a compelling reminder of the extremely limited scope of judicial review of the arbitrator’s award including the arbitrator’s interpretation of the shareholders’ agreement and stock valuation.

Round One: The Court Orders Arbitration of Dissolution Petition

Justice Demarest’s 22-page decision gives a detailed description of the proceedings. In brief, in May 2011, Neil Pisane, as 42.5% shareholder of S&N Chemical Co. and several affiliated companies, petitioned for judicial dissolution under BCL §1104-a predicated on allegations of oppressive actions and diversion of corporate assets by respondent Steven Feig, who also held a 42.5% interest in the companies. (A third shareholder, who was not named as a party, held a 15% non-voting interest.) After Feig moved to compel arbitration under the arbitration clause in the governing shareholders’ agreement, the court entered a stipulated order staying the litigation proceedings pending arbitration.

Pisane thereafter refiled his dissolution petition as an arbitration claim with the American Arbitration Association. Feig’s answer included a number of counterclaims, one of which asserted that Pisane’s filing of a dissolution petition triggered his contractual obligation under the shareholders’ agreement to sell his shares to Feig at a specified formula price and terms. In another counterclaim, Feig alternatively elected to purchase Pisane’s shares for fair value under BCL §1118.

Continue Reading Arbitration Award in Stock Buy-Out Dispute Withstands Challenge

Buy-sell provisions in shareholder agreements are good. Arbitration provisions in shareholder agreements are good. Inconsistent buy-sell and arbitration provisions in shareholder agreements are bad.

That pretty much sums up the lesson to be learned from an appellate opinion handed down last month in Matter of Grande’ Vie, LLC, 2012 NY Slip Op 02190 (4th Dept Mar. 23, 2012), in which a majority of the court, with one judge dissenting, ordered arbitration over an appraisal for the buy-out of a deceased LLC member’s interest notwithstanding language in the buy-sell provision stating that the appraisal “shall be binding.”

The case involves two real estate holding companies organized as LLCs owned equally by three members, one of whom died in 2008. The operating agreement included buy-sell provisions triggered, inter alia, by the death of a member whose estate was entitled to be paid a purchase price determined by appraisal. The agreement also included a broad arbitration clause. Litigation broke out in 2010 after the estate sought arbitration of the value of the decedent’s membership interest, while the surviving members sought to compel a sale at a value set forth in a written appraisal rendered by an appraiser selected by the surviving members after the appraisers specifically named in the agreement declined the assignment.

Continue Reading Clash of the Clauses: Divided Appellate Panel Rules that “Binding” Appraisal Per Buy-Sell Agreement Must be Arbitrated

Lundy’s on Sheepshead Bay in Brooklyn was a world famous seafood restaurant for over 40 years. Today, it’s the site of Masal Café, a successful Turkish coffee house and restaurant that opened in 2003. It’s also the site of a food fight (sorry, I couldn’t resist) that landed in court when each of two shareholder factions claimed to hold majority ownership and control of the restaurant corporation.

The fight took an unusual turn with a ruling earlier this month compelling arbitration of one side’s claims of financial wrongdoing but reserving for judicial determination the stock ownership issue. This rare instance of concurrent arbitration and court proceedings stems from highly unusual dispute resolution provisions in the shareholders’ agreement, as well as from the procedural course charted by the parties in court.

The power struggle in Boz Export & Import, Inc. d/b/a Masal Café v. Karakus, 2011 NY Slip Op 51685(U) (Sup Ct Kings Co Sept. 15, 2011), pits shareholders Mustafa Boz and Ammer Muslu against a third shareholder, Selahattin Karakus. Before the falling out, Karakus and his cousin, Tahsin, each held 36% of the corporation’s shares while Boz and Muslu together controlled the remaining 28%. Karakus also was president. Sometime in 2010 Tahsin left the United States and was barred from reentry.

Continue Reading Concurrent Arbitration and Court Proceedings in Shareholder Dispute? It Can Happen.

The pictured courthouse in Mineola, New York, is home to the three judges of the Commercial Division of the Nassau County Supreme Court.  They are, in order of seniority on the Supreme Court bench, Justice Stephen A. Bucaria, Justice Ira B. Warshawsky and Justice Timothy S. Driscoll.  As someone who constantly monitors newly issued court decisions throughout New York State involving shareholder disputes and the like, I can say with a high degree of confidence that these three, prolific judges generate a greatly disproportionate share of the accessible decisions in business divorce cases.

Whether it’s because there’s something in Nassau County’s water that breeds dissension among business partners, or because these three judges like to write about business divorce cases, or because Nassau County Supreme Court makes more of its trial court decisions available online than other counties, I can’t say.  But I can say it provides a great service for attorneys in need of judicial guidance to help navigate and advise their clients through the perilous waters of business breakups.

Without further ado, I give you three recent decisions of interest by the three Justices of the Nassau County Commercial Division.

Justice Warshawsky Orders Arbitration of LLC Dissolution Petition 

In a post two months ago I wrote about a Montana Supreme Court decision that denied an application to compel arbitration of an LLC dissolution lawsuit because the arbitration clause in the operating agreement did not specifically mention dissolution, even though it broadly encompassed any dispute concerning “any activity conducted pursuant to” the operating agreement.  I also suggested that under New York law the outcome likely would be different.

Continue Reading New Decisions of Interest by Nassau County’s Commercial Division Judges

Somewhere out on the grasslands of Big Sky Country, the controlling member of a cattle ranch organized as a Montana LLC is sighing "oy vey" instead of singing "yippie-yi-yo-ki-yay" after a recent decision by the Montana Supreme Court holding that the operating agreement’s arbitration clause does not require arbitration of another member’s petition for judicial dissolution of the LLC.  Gordon v. Kuzara, 2010 MT 275 (Dec. 21, 2010).

The case involves an application to dissolve Half Breed, LLC by one of the managing members (Gordon) based on allegations that the controlling member (Kuzara) engaged in a variety of misconduct including diversion of assets and improper accounting and tax reporting.  Kuzara responded with a motion to compel arbitration based on the following arbitration clause in the operating agreement:

Before an action may be brought by any member of the company challenging this agreement, any activity conducted pursuant to this agreement, or any interpretation of the terms of this agreement … one meeting of company members shall thereafter be held for the purpose of resolving a challenge. . . . [I]f a challenge cannot be resolved in such a meeting by a vote of a majority of actual member ownership interests, then the issue shall be submitted to a group of three arbitrators [for binding arbitration].

Continue Reading A Lesson in Arbitration Clause Drafting from Big Sky Country