Family-Owned Businesses

Gun4HireThe title of this post notwithstanding, the judge’s decision in the recent, high-stakes stock valuation case I’m about to describe, featuring a clash of business appraiser titans whose conclusions of value differed by almost 400%, did not refer to them as “hired guns.”

But the judge did not mince her words in expressing the view that, while “unquestionably qualified to testify on the issue of valuation,” the two experts, whose “zealous advocacy” for their respective clients “compromised their reliability,” offered “wildly disparate” values that were “tailored to suit the party who is paying for them.” Ouch!

The 54-page decision by a Minnesota state court judge in Lund v Lund, Decision, Order & Judgment, No. 27-CV-14-20058 [Minn. Dist. Ct. Hennepin Cnty. June 2, 2017], rejected both experts’ values — $80 million according to the expert for the selling shareholder and $21 million according to the expert for the purchasing company — in arriving at the court’s own value of $45 million for a 25% interest in a chain of 26 upscale grocery stores in the Twin Cities area known as Lunds & Byerlys together with affiliated management and real estate holding companies. Continue Reading Appraisers’ Valuations Are Light-Years Apart, But Does That Make Them Hired Guns?

Therapy1At first glance, you might think the plaintiff minority shareholder in Sardis v Sardis, 2017 NY Slip Op 27163 [Sup Ct Suffolk County May 11, 2017], achieved her derivative lawsuit’s goal when the defendant controlling shareholder, about a month after suit was filed, suddenly reversed course by revoking the corporation’s allegedly wrongful voluntary dissolution that seemingly was the lawsuit’s raison d’être.

You might also think, having apparently forced defendant’s capitulation, the minority shareholder would be entitled to recover her legal fees in the action as authorized by Section 626 (e) of the Business Corporation Law whenever a shareholder derivative action “was successful, in whole or in part, or if anything was received by the plaintiff . . . as a result of the judgment, compromise, or settlement of an action or claim.”

But, as often is the case in shareholder lawsuits, first impressions can be deceptive.

The Sardis case, in which Suffolk County Commercial Division Justice Elizabeth H. Emerson denied the plaintiff’s fee application seeking $650,000, is noteworthy for a couple of reasons. First, the facts and circumstances leading up to the decision — starting with the settlement of a complex matrimonial divorce in which the ex-spouses continued to co-own interests in a valuable operating company, followed by legal proceedings in Delaware, followed by legal proceedings in New York — tell a fascinating story of a high-stakes, three-dimensional legal chess game.

Second, and more importantly for practitioners, Justice Emerson’s opinion is one of the very few New York state court decisions that takes a probing look at the prevailing “substantial benefit” standard for an award of legal fees under Section 626 (e). Continue Reading Finding No “Therapeutic” Benefit to Corporation, Court Denies Fee Award in Discontinued Shareholder Derivative Action

Food-Fight1A little over three years ago I reported on the first round of a fascinating “food fight” among four siblings, each of whom is a 25% shareholder of a Brooklyn-based, second-generation food distributor known as Jersey Lynne Farms, Inc. (the “Corporation”), and each of whom also is a 25% member of Catarina Realty, LLC (the “LLC”) which leases its sole realty asset to the Corporation.

The occasion back then was the court’s decision in Borriello v Loconte denying a dismissal motion in a derivative suit brought by Dorine Borriello on the LLC’s behalf in which she alleged that her three siblings breached fiduciary duty by leasing its realty to the Corporation at a drastically below-market rent and by imposing on the LLC certain expenses that ought to be borne by the Corporation as tenant.

In 2011 — the same year her siblings entered into the challenged lease — they ousted Dorine as a director, officer, and employee of the Corporation. In 2012 Dorine and her siblings negotiated a Separation Agreement and General Release setting forth terms for payment of compensation and benefits along with non-compete and non-disclosure provisions. The agreement left intact Dorine’s 25% stock interest in the Corporation.

Dorine’s derivative suit filed in 2013 claimed that the 2011 below-market lease rendered the LLC unprofitable while increasing the Corporation’s income used to pay salaries and other benefits to her siblings. The first round went to Dorine when the court ruled that her General Release did not encompass her derivative claim and enjoined her siblings from advancing their legal expenses from LLC funds.

In the end, however, and subject to any appeals Dorine may bring, it appears that the siblings have won the food fight’s final rounds. Continue Reading “Food Fight” Sequel Ends Badly for Ousted Sibling

Brothers1Like most civil cases, the vast majority of business divorce disputes get resolved before trial, which is disappointing for us voyeurs since only at trial with live witnesses undergoing cross examination does one get the full flavor of the case’s factual intricacies, credibility issues, and the emotional undercurrents.

Even rarer are written post-trial decisions by judges with detailed findings of fact and conclusions of law, which is why I was so pleased recently to come across a trio of expansive post-trial decisions by Queens County Justice Timothy J. Dufficy in three business divorce cases involving family-owned businesses.

One of them, Shih v Kim, was featured in last week’s post on this blog, in which a romantically-involved couple started a business while engaged and continued as business partners even after the engagement broke off — until the defendant went rogue by diverting cash to himself and diverting business to a competing company.

The two other cases form interesting bookends, metaphorically speaking. Both involve businesses run by brothers. Both involve challenges to the documented ownership of the business. In one case, Justice Dufficy rejected a bid to establish an undocumented, de facto partnership interest and dismissed the case. In the other, Justice Dufficy upheld the documented, 50/50 ownership of an LLC, granted dissolution, and appointed a receiver. Let’s take a closer look. Continue Reading A Pair of Unbrotherly Business Altercations Go to Trial

crazyWhenever I contemplate New York’s unusual case law on the discount for lack of marketability (DLOM) in statutory fair value buy-out proceedings, I cast my eyes westward, to the far banks of the Hudson River, and take comfort in the fact it could be worse — I could be in New Jersey.

A “business appraiser’s nightmare” is how Chris Mercer described New Jersey’s “bad behavior discount” in his commentary on the Wisniewski v Walsh case decided a little over a year ago by a New Jersey appellate court, in which it affirmed the trial court’s application of a 25% DLOM seemingly plucked out of thin air, and notwithstanding what the trial court itself admitted were “strong indicators of liquidity,” for the stated purpose of penalizing the selling shareholder for his oppressive behavior toward the other shareholders — behavior that in no way harmed the corporation’s business or affected its marketability!

Now comes another New Jersey trial court decision in another fair value buy-out case, and guess what? The court applied the same 25% DLOM without any discussion of the factors supporting its application or quantification other than the court’s finding that the selling shareholder was guilty of oppressive conduct against the purchasing shareholder.

In Parker v Parker, 2016 N.J. Super. Unpub. LEXIS 2720 [Dec. 22, 2016], two brothers, Richard and Steven Parker, took over from their parents and for the next 25 years operated as 50/50 owners a wholesale flower business and a separately incorporated wholesale plant business which eventually became a garden center. Richard ran the flower business and Steven the garden business as separate fiefdoms with minimal overlap. Continue Reading Has New Jersey Gone Off Its DLOM Rocker?

OppressionFranklin C. McRoberts, counsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group, prepared this article.


An earlier post on this blog, examining a post-trial decision in Matter of Digeser v Flach, 2015 NY Slip Op 51609(U) [Sup Ct Albany County Nov. 5, 2015], described the minority shareholder’s dissolution claim under Section 1104-a of the Business Corporation Law as a “classic case of minority shareholder oppression.” The Albany-based Appellate Division, Third Department, recently agreed with that assessment in affirming the lower court’s order finding sufficient grounds for dissolution.

The appellate panel’s unanimous decision in Matter of Gould Erectors & Rigging, Inc., 146 AD3d 1128, 2017 NY Slip Op 00228 [3d Dept Jan. 12, 2017], affirmed in every respect Albany County Commercial Division Justice Richard M. Platkin’s post-trial decision to dissolve two affiliated construction businesses. Here’s a quick recap of the case as it unfolded at the trial level.

Background

The story begins with two father-son pairs. The petitioner, Henry A. Digeser, is a 25% shareholder of two New York corporations, Gould Erectors & Rigging, Inc. (“Gould”) and Flach Crane & Rigging Co., Inc. (“Flach Crane”). The respondent, John C. Flach, owns the remaining 75%. Digeser’s father was a close friend and business colleague of Flach’s father, who founded the companies, and served on the businesses’ boards. Eventually, the younger Digeser got involved in the businesses and became an owner. Continue Reading An Oppression How-To: Revoke Employment, Profit Sharing and Control

Lady Justice

Welcome to another edition of Winter Case Notes in which I clear out my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

And speaking of digging deeper, if you don’t already know, New York’s e-filing system has revolutionized public access to court filings in most parts of the state. The online e-filing portal (click here) allows searches by case index number or party name. Once you find the case you’re looking for, you’ll see a chronological listing with links allowing you to read and download each pleading, affidavit, exhibit, brief, decision, or other filing. No more trips to the courthouse basement to requisition paper files!

This year’s synopses feature matters that run the gamut, from a claimed de facto partnership, to several disputes pitting minority against majority shareholders, to an LLC case in which the court resolved competing interpretations of a somewhat murky operating agreement. Continue Reading Winter Case Notes: De Facto Partnership and Other Recent Decisions of Interest

tie-breaker[N.B. Younger readers of this post may be forgiven for not catching the title’s play on the refrain of a certain 1976 hit song by one of the oldest and most hirsute recording groups around. Click here if you’re still stumped.]

LLC deadlock’s been on my mind more than usual of late, after interviewing LLC maven John Cunningham for a podcast and last week co-presenting with John a webinar on the subject for the ABA Young Lawyer’s Division.

During the webinar’s Q&A session, a listener asked about potential liability of an appointed deadlock tie-breaker. I mentioned that I had not seen any cases involving the issue. Lo and behold, several days later up popped a decision by Queens County Commercial Division Justice Martin E. Ritholtz presenting exactly that issue, in which the court denied the tie-breaker’s motion for summary dismissal of a claim brought against her for breach of fiduciary duty by one of two 50/50 members of a family-owned LLC. Fakiris v Gusmar Enterprises LLC, 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016]. Continue Reading She’s a Tie-Breaker, She’s a Risk Taker

Hirsch 2015 bio picture“What’s a marital business divorce?” you ask. Just what it sounds like: a business divorce wrapped inside the marital divorce of spouses who hold joint ownership interests in a closely held business entity.

Fighting over kids, money, the house, and the business? Sounds messier and possibly more destructive of business value than an ordinary, non-marital business divorce. But it needn’t be, says attorney Ladd Hirsch in a recent interview for the Business Divorce Roundtable podcast, a link to which appears at the bottom of this post.

Ladd is a partner at the Dallas office of Diamond McCarthy LLP where he focuses his practice on complex business litigation including business divorce, which is how our paths crossed some years ago. Ladd has carved out a niche within a niche, working with family law practitioners in marital divorce cases to optimize value for the soon-to-be-exes who either legally co-own a business or, in community property states, are deemed to co-own a business whose shares are held by one spouse but nonetheless included in the marital estate and subject to division or sale by the family court. Continue Reading Optimizing Value in a Marital Business Divorce

4CThe case I’m about to describe involves an unusual clash of two fundamental principles of corporate governance for closely held corporations:

Principle No. 1:  Stock transfer restrictions may be used to preserve continuity of ownership and management within a family or other control group, without violating the common law rule against unreasonable restraints on alienation of property.

Principle No. 2:  Controllers owe a fiduciary duty to treat all shareholders fairly and evenly when authorizing and issuing new shares, and must have a bona fide business purpose for any departure from precisely uniform treatment.

The clash came to a head in a decision this month by Brooklyn Commercial Division Justice Lawrence Knipel involving 4C Foods, a well-known, fourth generation, family-owned business that manufactures and markets under the 4C® brand grated Italian cheeses, bread crumbs, iced tea, and drink mixes. The suit pits Nathan Celauro, a non-managing, minority owner holding directly or beneficially about 22% of 4C’s voting and non-voting shares, against his cousin John Celauro, the managing majority shareholder who controls or has aligned with him the remaining 78%. (Disclosure: Farrell Fritz represents the minority shareholder in the case.)

The case and Justice Knipel’s decision in Celauro v 4C Foods Corp., 2016 NY Slip Op 31917(U) [Sup Ct Kings County Oct. 12, 2016], is the latest in a series of litigations and court rulings between two factions of the Celauro family beginning around 2005, following the death of Nathan’s father the year before. About 20% of the father’s voting and non-voting shares passed to his wife either directly or to trusts under her control, with the remaining 2% going directly to Nathan. Continue Reading Too Clever By Half? Court Permits Suit Challenging Share Increase Tied to Transfer Restrictions