powerlessAn appellate decision last week sounds alarm bells for minority members of New York LLCs that have no operating agreement and for anyone considering becoming a minority member of an LLC without first having in place an operating agreement.

By the same token, the decision provides opportunities for majority members of existing LLCs without operating agreements to cement and expand their control powers.

Last week’s unanimous decision by the Manhattan-based Appellate Division, First Department in Shapiro v Ettenson, 2017 NY Slip Op 00442 [1st Dept Jan. 24, 2017], affirmed the lower court’s order enforcing an operating agreement signed by two of the LLC’s three co-founding, co-equal members, adopted two years after the LLC’s formation without the signature or consent of the LLC’s third member. Among other features, the operating agreement departed from the statutory default rule by authorizing the reduction of the percentage interest of a member who fails to satisfy a capital call approved by the majority, which is exactly what the two majority members did following their adoption of the agreement, along with eliminating the minority member’s salary. Continue Reading Thinking About Becoming a Minority Member of a New York LLC Without an Operating Agreement? Think Again

SushiThe Japanese word “omakase” translates as “I’ll Ieave it up to you” and is used by patrons of sushi restaurants to leave the selection to the chef rather than ordering à la carte.

The minority member of an LLC that operates a high-end Japanese restaurant in Brooklyn featuring omakase service, and who sued for judicial dissolution, recently learned a different meaning of omakase, as in, don’t leave it up to the court to protect you from being frozen out by the majority member when you don’t have a written operating agreement, much less a written operating agreement containing minority-interest safeguards.

The hard lesson learned by the petitioner in Matter of Norvell v Guchi’s Idea LLC, 2016 NY Slip Op 32307(U) [Sup Ct Kings County Nov. 18, 2016], has been taught before, starting most prominently with the First Department’s 2013 decision in Doyle v Icon, LLC and reinforced by that court two years later in Barone v Sowers, holding that minority member claims of oppressive majority conduct including systematic exclusion from the LLC’s operations and profits, in the absence of a showing that the LLC is financially unfeasible or not carrying on its business in conformity with its operating agreement, do not constitute grounds for judicial dissolution under LLC Law § 702. Continue Reading Another Frozen-Out Minority LLC Member’s Petition for Dissolution Bites the . . . Sushi?

RutledgeThe business community’s growing preference for the LLC entity form over the traditional corporation and partnership forms has introduced a whole new set of planning issues for lawyers who counsel clients at the formation stage in preparing the new LLC’s constitutional documents, including most importantly the operating agreement.

Tom Rutledge (photo right), one of the nation’s leading experts on LLCs and a principal drafter of his home state of Kentucky’s LLC Act among his many other accomplishments and leadership roles in the field of business organizations, recently published an article in the Journal of Passthrough Entities on the hot-button topic of LLC member expulsion with the provocative thesis that counsel need to actively consider and draft operating agreements that authorize forced expulsion of a member under specified circumstances in order to protect the venture’s ongoing activities and viability. The article is entitled “It’s Not Me, It’s You: Planning for Expulsion of LLC Members” and you owe it to yourself to read it here.

The article addresses the statutory backdrop for member expulsion; the grounds for expulsion to consider including in the operating agreement; the voting prerequisites and procedure for effectuating expulsion; the effect of expulsion including buy-out; and judicial review of expulsion decisions.

After reading the article, I asked Tom if he would discuss LLC member expulsion on my Business Divorce Roundtable podcast. I’m happy to report that Tom obliged, and you can hear my interview of Tom by clicking on the link at the bottom of this post.

The interview covers not only LLC member expulsion pursuant to the operating agreement which is the subject of Tom’s article, but also judicial expulsion of LLC members, a topic that recently generated headlines (and a post on this blog) when the New Jersey Supreme Court earlier this month issued its decision in IE Test v Carroll reversing an order of judicial expulsion under that state’s LLC Act. Judicial expulsion is destined to take on greater importance and controversy as more states adopt the Revised Uniform LLC Act which authorizes courts to expel an LLC member at the behest of the company or the other members on grounds involving breach of the operating agreement or other misconduct, or because it’s not reasonably practicable to carry on the business of the LLC with the member whose expulsion is sought.

There’s much more food for thought in Tom’s article and the podcast interview. I urge you to read and listen to both.

ExpulsionThere are arguments pro and con when it comes to the power to expel a/k/a dissociate an LLC member. On the one hand, expulsion can be viewed as a necessary measure to preserve the LLC as a going concern when faced with persistent misconduct or failure to perform by one of its members. On the other hand, depending how broadly or narrowly the expulsion criteria are drawn, the power to expel can be a tool of oppression and abuse by those wielding it for their self-advantage.

Expulsion can occur in one of two ways. First, the operating agreement can authorize member expulsion under specified circumstances by self-executing action of the other members or managers. This is not a feature I regularly come across in operating agreements of LLCs, especially those whose membership consists of founding owners actively involved in the business.

Second, in states that have adopted the Revised Uniform LLC Act — to date numbering 16 plus the District of Columbia; New York is not one of them — courts are authorized to expel an LLC member on application by the company or a member on three specified grounds, two of which entail fault-based standards based on intentionally wrongful conduct or material breach, and the third of which dispenses with the notion of wrongful conduct by authorizing judicial expulsion of a member who

has engaged or is engaging in conduct relating to the company’s activities and affairs which makes it not reasonably practicable to carry on the activities and affairs with the person as a member.

Not surprisingly, the open-endedness of the above provision when utilized in LLC disputes has generated litigation, with New Jersey courts taking the lead. Last week, in IE Test, LLC v Carroll, 2016 WL 4086260 [NJ Sup Ct Aug. 2, 2016], that state’s Supreme Court handed down a major decision in which it reversed the lower courts’ summary judgment order expelling an LLC member and adopted a series of factors to assist trial courts in determining whether it is not reasonably practicable to operate an LLC in light of a subject member’s conduct. Continue Reading New Jersey Supreme Court Raises the Bar for Judicial Expulsion of LLC Members

LLCIf there’s a common theme to the trio of LLC cases highlighted in this post, it’s that having a well-crafted written operating agreement is no guarantee there won’t be a litigation dust-up, while not having a written operating agreement greatly enhances the odds of a legal dispute among members at some point down the road.

Let’s start with the well-crafted operating agreement in Estate of Calderwood v Ace Group International LLC, 2016 NY Slip Op 30591(U) [Sup Ct NY County Feb. 29, 2016], in which Manhattan Commercial Division Justice Shirley Werner Kornreich ruled that upon the death of the subject Delaware LLC’s majority member, under the express terms of Sections 9.7 and 7.1 of the LLC Agreement (read here), his estate was deemed a “Withdrawing Member” with no management rights and retaining solely the right to receive distributions. Continue Reading LLC Case Notes: Member Expulsion, Withdrawal, and LLC Purpose


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Stratospheric real estate values in New York City have bestowed great wealth on those lucky or wise enough to have invested before or in the early stages of the city’s demographic, cultural, and commercial renaissance over the last 25 or so years.

The dramatic rise in property values also has spawned more than its fair share of business divorce litigation by exacerbating the divergence of interests among co-owners, between those who desire to sell and take their profit and those who prefer to hold and/or develop the property. This phenomenon is especially observable in family-owned real estate holding companies where the potential for intra- and inter-generational conflict is more pronounced.

Take the case of the Kassab brothers, who co-own through two holding companies a nondescript, outdoor parking lot also home to a flea market near downtown Jamaica, Queens. The property consists of three contiguous parcels with a footprint of about 42,000 square feet. Under existing zoning the properties are buildable as of right to about 380,000 square feet. Recent valuation estimates for the undeveloped properties, which were acquired by the Kassabs between 1992 and 2001 at a small fraction of current value, start over $14 million.

In 2013, the younger brother owning 25% sued to dissolve the holding companies — one organized as a corporation, the other as a limited liability company — claiming oppression and freeze-out by his elder brother owning the other 75%. The younger brother claims the freeze-out tactics are designed to force him to sell his interest to his elder brother for a pittance. The elder brother counters that he has no desire to deprive his younger brother of his ownership rights and that his younger brother is attempting to force him to sell the properties due to the younger brother’s supposedly dire financial straits.

Last week, the case produced not one, not two, but three separate appellate decisions addressing a potpourri of rulings on issues of vital interest to business divorce counsel. Summaries follow after the jump. Continue Reading One Parking Lot, Two Brothers, Three Decisions

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


ChhoseThe Revised Uniform Limited Liability Company Act (2006) or “RULLCA” continues to gain momentum as it spreads across the United States. Currently, fourteen states plus the District of Columbia have adopted RULLCA including California, Florida, and two of New York’s neighbors — New Jersey and Vermont. If and when adopted by Pennsylvania and Connecticut, where RULLCA legislation already has been introduced, New York will be surrounded by RULLCA jurisdictions with the exception of Massachusetts. RULLCA legislation also is pending in Illinois and South Carolina.

Of greatest interest to business divorce lawyers are (1) RULLCA’s relatively expansive grounds for judicial (involuntary) dissolution of LLCs including oppressive conduct by managers and authorizing remedies other than dissolution, i.e, buy-out, and (2) RULLCA’s provision, completely foreign to LLC laws in New York and elsewhere, authorizing judicial dissociation (expulsion) of a member under certain circumstances.

The two provisions have a lot in common. Indeed, there’s substantial overlap between the statutory grounds for dissolution and dissociation under RULLCA. A recent appellate ruling out of the District of Columbia provokes examination of the strategic choice to be made when initiating a business divorce litigation whether to pursue dissolution, dissociation, or both. Continue Reading Choose Carefully: Dissolution vs. Dissociation Under RULLCA

Lady JusticeWe’re two-thirds of the way through the official winter season, which thus far has dumped a lot of snow on the Northeast making it a good one for skiers. It’s also been a good season for business divorce aficionados with plenty of interesting decisions in judicial dissolution cases and contested buy-outs.

Each August for the last five years, I’ve published a Summer Shorts edition offering several bite-sized case synopses highlighting decisions that, while not meriting extended analysis, nonetheless offer valuable insights for business owners, transactional lawyers involved in business formation and, of course, business divorce lawyers. I figured it’s time to start the hibernal version, so welcome to the inaugural edition of Winter Case Notes.

First up is a decision by Justice Richard Platkin in which the validity under the operating agreement of an LLC manager’s removal hinged on the parties’ relative capital contributions. Next is Justice Stephen Bucaria’s latest of many rulings in a decade-long litigation saga, dissolving a holding company with an indirect ownership interest in a Massachusetts operating company. Last is a decision by Justice Cynthia Kern in which she denied dismissal of a claim for the belated sale of a LLC membership interest. Continue Reading Winter Case Notes: LLC Manager Removal and Other Recent Decisions of 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