limited partnershipNotwithstanding the ascendency of the limited liability company, the Delaware limited partnership continues to serve as an important, tax-advantaged vehicle for certain capital-intensive ventures — especially in the energy sector — featuring centralized management and limited liability for large numbers of passive investors.

Late last month, the Delaware Supreme Court handed down two noteworthy decisions springing from suits by limited partners challenging the fairness of conflicted transactions by general partners that were approved by conflicts committees. In one, the high court affirmed Chancery Court’s order rejecting a claim based on the implied duty of good faith and fair dealing where the transaction’s approval by the conflicts committee complied with the agreement’s safe harbor provision and thus contractually precluded judicial review. Employees Retirement System v TC Pipelines GP, Inc., No. 291, 2016 [Del. Sup. Ct. Dec. 19, 2016].

In the other, Supreme Court reversed Chancery Court’s post-trial decision holding the general partner liable in damages owed directly to limited partners for a conflicted, over-priced  “dropdown” transaction by the general partner. The high court disagreed with Chancery Court’s application of the Tooley standard, instead finding that the claims were exclusively derivative and that the post-trial, pre-judgment acquisition by merger of the partnership extinguished the plaintiff limited partner’s standing to seek relief. El Paso Pipeline GP Company, LLC v Brinckerhoff, No. 103, 2016 [Del. Sup. Ct. Dec. 20, 2016].

Together, the two decisions re-affirm the primacy of contract in the realm of alternative entities including limited liability companies, limited partnerships, and master limited partnerships. Continue Reading Limited Partners Take a Licking in Two Delaware Supreme Court Decisions

door“Marriage is tough, business relationships may be tougher.”

Wise words from someone who should know — Nassau County Supreme Court Justice Timothy S. Driscoll, who presided over matrimonial cases before joining the Commercial Division where he has adjudicated some of the thorniest business divorce cases such as the AriZona Iced Tea donnybrook.

The quoted words appear in an oral argument transcript in a case called Cardino v Feldman pending before Justice Driscoll involving a fight between 50-50 owners of a construction company operated by the defendant Feldman. It’s a factually and procedurally complex matter, the details of which I’ll spare readers in favor of focusing on the main takeaway from Justice Driscoll’s recent decision in the case, namely, that once a business owner asserts a claim for judicial dissolution under Section 1104-a of the Business Corporation Law — even if not pleaded in strict accordance with the statute — it’s very difficult to reverse course after the other shareholder timely elects to purchase the petitioner’s shares for fair value under BCL Section 1118. Continue Reading Once Opened, The Door to Judicial Dissolution and Buy-Out Is Hard to Close

SurchargeHidden in plain view in Section 1104-a (d) of the New York Business Corporation Law, which authorizes an oppressed minority shareholder to petition for judicial dissolution, is a provision empowering the court to adjust stock valuations and to “surcharge” those in control of the corporation for “willful or reckless dissipation or transfer” of corporate assets “without just or adequate compensation therefor.”

A second, fleeting reference to surcharge appears in Section 1118 (b) of the buy-out statute, empowering the court in its determination of the stock’s fair value to give effect to any surcharge “found to be appropriate” under Section 1104-a.

The ordinary definition of surcharge, at least in the context of settling accounts, is to show an omission for which credit ought to have been given. But what does it mean in its statutory setting, and how has it been applied by the courts? Continue Reading The Elusive Surcharge in Dissolution Proceedings

Pay UpIn 2005, Luciano Bonanni sued his business partners in a profitable limited liability company that provides MRI scanners to hospitals and management services to an affiliated radiology practice. The thrust of Bonanni’s multiple-count complaint was that the majority members had squeezed him out of the business, discontinued his profit share, and canceled his 20% membership interest.

In one of the earliest rulings in the case, which I featured in the very first post I published on this blog in 2007, the presiding judge, Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson, dismissed Bonanni’s claim for judicial dissolution of the LLC. Justice Emerson’s decision, which pre-figured by several years the Second Department’s landmark opinion in 1545 Ocean Avenue, held that Bonanni’s reliance on the grounds for dissolution available to oppressed minority shareholders under Business Corporation Law § 1104-a did not state a valid claim for relief under LLC Law § 702 governing judicial dissolution of LLCs.

As it turned out, the dismissal of the dissolution claim probably was a blessing in disguise for Bonanni. The company continued to generate healthy profits for many years while the litigation dragged on, culminating with a lengthy bench trial on Bonanni’s assorted direct and derivative claims. Earlier this month, Justice Emerson’s post-trial decision in Bonanni v Horizons Investors Corp., 2016 NY Slip Op 50281(U) [Sup Ct Suffolk County Mar. 9, 2016], found in Bonanni’s favor on most of his claims, including a determination that the defendants unlawfully converted his 20% membership interest by pretending he had withdrawn from the LLC.

The price tag? When all is said and done, including damages on Bonanni’s direct claims, his share of derivative damages, an upcoming accounting, and hefty interest charges at the 9% statutory rate, the recovery likely will exceed $1 million. Continue Reading A Decade Later, LLC’s Majority Members Pay The Price For Converting Minority Member’s Interest

deathThe death of a shareholder amidst a court battle for control of a closely held business can have a dramatic effect on the direction and outcome of the case.

We saw it happen in my post a few weeks ago about the Catalina Beach Club case which started as a deadlock dissolution case between feuding 50/50 factions, but was discontinued abruptly after the petitioning faction gained voting and board control by acquiring an additional 25% interest from the estate of one of the respondent shareholders who died a few months after the suit began, much to the chagrin of the surviving 25% respondent now downgraded to non-controlling, minority shareholder.

Not one but two deaths in another, fractious family-owned business resulted in shifts in control with game-changing consequences for the positions and leverage of the litigants. The resulting travails of two generations of the Lewis family are laid bare in a recent decision by Albany Commercial Division Justice Richard M. Platkin in Heller v Lewis, 2015 NY Slip Op 51867(U) [Albany County Dec. 21, 2015], in which he denied preliminary injunctive relief sought by the majority-turned-minority faction. Continue Reading Death of a Shareholder

No  SaleA bitter feud among third-generation owners of a family business has yielded a notable court decision upholding the plaintiff’s standing to seek common-law dissolution and to assert shareholder derivative claims in the face of the defendants’ argument that the plaintiff’s shares automatically were redeemed by operation of the shareholders’ agreement upon the termination by the defendants of the plaintiff’s husband’s employment.

Sounds complicated? Not really.

Queens County Commercial Division Justice Duane A. Hart’s decision in Berger v Friedman, Short Form Order, Index No. 702322/15 [Sup Ct Queens County Oct. 27, 2015], centers on a wholesale distributor of electrical parts and equipment founded in 1945 by the grandparents of the three sibling litigants who each acquired a one-third interest from their parents in 1993. The siblings entered into a shareholders agreement (read here) naming each of them as an officer and director, requiring their unanimous consent for specified “major actions,” and defining a series of trigger events compelling stock redemption at a defined purchase price and on specified terms. Continue Reading Court Rejects Majority’s Gambit to Compel Buyback of Shares in Family-Owned Business

limited partnershipA post I wrote two years ago referred to the limited partnership as “the dinosaur of business forms in New York” destined for “virtual extinction” due to New York’s outmoded partnership laws coupled with the meteoric rise of the limited liability company. As the years roll by, the limited partnership’s obsolescence is especially pronounced for those governed by New York’s Uniform Limited Partnership Act of 1922 (“NYULPA”) codified in Article 8 of the New York Partnership Law, applicable to limited partnerships formed prior to, and exempted from, the New York Revised Uniform Limited Partnership Act of 1991 (“NYRULPA”) codified in Article 8-A of the Partnership Law.

The rarity of new business divorce cases involving NYULPA-governed limited partnerships makes it all the more intriguing when one comes along, as happened earlier this month in a case called Doppelt v. Smith, 2015 NY Slip Op 31861(U) [Sup Ct NY County Oct. 1, 2015], decided by Manhattan Commercial Division Justice Eileen Bransten.

Doppelt doesn’t disappoint, thanks to its holding that a provision in a limited partnership agreement, authorizing voluntary dissolution upon the majority vote of the limited partners, precluded the plaintiff’s claims seeking judicial (involuntary) dissolution. Although neither the court nor the parties labeled it as such, and while the defendant in his briefs referred to plaintiff’s lack of “capacity” to seek judicial dissolution, I believe a more apt description of the court’s holding is that, effectively, it enforced a contractual waiver of the limited partner’s statutory right to seek judicial dissolution. Continue Reading Court Enforces Waiver of Limited Partner’s Right to Seek Judicial Dissolution — Or Did It?

winding roadThe Delaware Supreme Court last week refused to rehear its affirmance of Chancery Court’s post-trial decision in a case called Zutrau v Jansing. The Appellate Division of the New York Supreme Court last May affirmed a post-trial decision in a closely related case involving the same parties. The two appellate decisions effectively close out a tenaciously fought, seven-year litigation saga involving a minority shareholder’s largely unsubstantiated, multi-faceted attack on the majority shareholder’s management and financial stewardship of a small, New York-based Delaware corporation specializing in proxy servicing.

The litigation history includes an initial books-and-records proceeding in New York followed by serial suits in New York and Delaware asserting a variety of claims for unlawful termination of the minority shareholder’s employment; direct and derivative claims for breach of fiduciary duty; breach of contract; and a challenge to the validity and fairness of a reverse stock split that cashed out at fair value the minority stockholder’s shares while litigation was pending concurrently in New York and Delaware courts. [Disclosure: The defendants are clients of my firm which served as co-counsel in the New York litigation and acted as lead counsel in connection with the reverse stock split.]

The case spawned a plethora of pretrial motions, lengthy trials in New York Supreme Court and Delaware Chancery Court, and appeals in both jurisdictions. Ultimately, the courts rejected the plaintiff’s claims for unlawful termination of her employment and contract breach, rejected the bulk of her claims against the majority shareholder for breach of fiduciary duty, upheld the validity of the reverse stock split, and upheld the company’s fair value appraisal with modest adjustments. Continue Reading Business Divorce Case Reaches End of Long and Winding Road

Out of businessNot surprisingly, the vast majority of business divorce cases involve firms with valuable assets and/or profitable operations. After all, outside of creditor claims in bankruptcy court, who wants to invest time and money fighting over the corpse of a business with little or no equity value?

Still, it happens once in a while. Take, for example, a case recently decided by Manhattan Commercial Division Justice Shirley Werner Kornreich involving a limited liability company that was up and running for a couple of years before it went insolvent and shut down. Almost five years after a minority member brought suit against the controlling majority member, and after the court’s denial of summary judgment on the plaintiff’s primary claim for recovery, the majority member settled the case for $30,000 which, I imagine, is a small fraction of the legal fees spent by both sides.

Justice Kornreich’s decision in Mazel Capital, LLC v Laifer, 2015 NY Slip Op 30295(U) [Sup Ct NY County Mar. 3, 2015], tells the story of a short-lived business called Heartwatch that unsuccessfully marketed a heart monitoring device in tandem with a live 24-hour call center staffed by cardiologists and other medical professionals. In 2006, the business was organized as an LLC by its founder and sole managing member, Dr. Franklyn Laifer, a retired cardiologist and the defendant in the case. The plaintiff, Mazel Capital, LLC, initially invested $250,000 cash and contributed other assets in consideration of a 9% membership interest in Heartwatch. A year later Mazel invested another $300,000 cash, raising its stake to 12%. Dr. Laifer’s son and others invested another $100,000 in exchange for an 8% membership interest, leaving Dr. Laifer with the remaining 80% for his “sweat equity.”

The LLC’s operating agreement gave Dr. Laifer exclusive management authority but also provided that he was “not entitled to any compensation for serving as Manager.” A contemporaneous side  agreement placed limits on monthly expenditures during the first six months absent Mazel’s consent. Continue Reading Business Partners Fighting Over the Company’s Corpse

Unclean HandsJudicial dissolution of a business entity, whether pursuant to statute or common law, is an equitable remedy subject to equitable defenses, including the doctrine of “unclean hands.”

As described a few years ago by Justice Emily Pines in the Kimelstein dissolution case, the unclean hands doctrine “bars the grant of equitable relief to a party who is guilty of immoral, unconscionable conduct when the conduct relied on is directly related to the subject matter in litigation and the party seeking to invoke the doctrine was injured by such conduct.”

The doctrine has been employed in dissolution cases in two ways. First, it can defeat a petitioner’s standing to seek dissolution, as in Kimelstein where Justice Pines held that the petitioner’s admitted concealment from his ex-wives, creditors and federal government of his alleged, undocumented 50% equity interest in two corporations owned by his brother barred him from asserting the requisite stock holdings to seek statutory dissolution. Second, even when the petitioner’s stock ownership is conceded, the doctrine can bar the petitioner’s dissolution claim on the merits.

The doctrine’s latter use rarely has been successful. A recent exception is Sansum v Fioratti, 128 AD3d 420 [1st Dept 2015], in which the Appellate Division, First Department, ordered the dismissal of a common-law dissolution claim brought by a 6% shareholder in an art gallery based on the plaintiff’s “embezzlement” of company funds for which he pled guilty to larceny and related charges. The decision packs an even more powerful punch by virtue of the court’s summary disposition of the claim, disagreeing with the lower court that a hearing was required and invoking the doctrine of in pari delicto (Latin for “in equal fault”) to reject the plaintiff’s counter-argument, that the defendant stockholders themselves conducted illegal business operations. Continue Reading Wash Hands Before Suing