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

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

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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

The limited partnership is the dinosaur of business forms in New York, on its way to virtual extinction (outside of estate planning*) due to the availability since 1994 of the vastly superior LLC form and the inherent shortcomings of New York’s limited partnership statutes.

When New York finally enacted a Revised Uniform Limited Partnership Law in 1991 (NYRULPA), it exempted from its application all pre-existing limited partnerships which, unless the partnership later files an amended certificate, continue to be governed by the Uniform Limited Partnership Act of 1916 adopted by New York in 1922 (NYULPA). Meanwhile, there appears to be no interest or effort underway to modernize New York’s limited partnership laws, as almost 20 other states have done, by adopting the re-Revised Uniform Limited Partnership Law of 2001.

In its pre-LLC heyday, the limited partnership was a popular form of business association for real estate investments, and there remain some number of legacy limited partnerships that never filed a certificate of amendment and therefore remain subject to NYULPA’s antiquated provisions. One of the ways we know these dinosaurs are still roaming about is the occasional court decision, which invariably involves some of the messiest and most prolonged litigation you’re ever likely to come across.

Take, for example, Alizio v. Perpignano, pending in Nassau County Supreme Court for over ten years, involving multiple litigations over multiple real estate limited partnerships, in the course of which two of the five general partners died. By my count the case has generated at least 50 motions and 27 written decisions by the lower court, and another 17 appellate decisions on motions and appeals, which by any standard represents an extraordinary expenditure of judicial resources on one case. Continue Reading Equitable Dissolution of Limited Partnerships

The internal affairs doctrine is a choice of law rule under which a court will apply the law of the state of the subject entity’s formation (lex incorporationis) rather than the law of the jurisdiction where suit is brought (lex fori) to governance disputes and other internal conflicts concerning rights and duties among the entity, its owners and managers. So, for instance, when a shareholder or member of a New York based Delaware corporation or LLC brings suit in a New York court against an officer or manager for breach of fiduciary duty, the New York judge ordinarily will adjudicate the claim under Delaware law, which may differ materially from the analogous New York common or statutory law.

The internal affairs doctrine in theory acknowledges the superior interest of the state of formation in the application of its laws to the entity’s internal governance, even when the entity is based outside the state and has no connection with the state other than its formation. The doctrine also serves to avoid the uncertainty and high transactional costs that would occur if a business entity operating in multiple states was subject to different rules of governance in each state. Finally, it reflects a strong presumption that those who chose to form their entity in a particular state desire to have their legal relations governed by the laws of that state.

I don’t think I’m going out on a limb stating that the overwhelming majority of partnership agreements, shareholder agreements and LLC agreements that contain an express choice of law provision select the law of the state of formation, i.e., there is no inconsistency between the parties’ contractually stated preference and the internal affairs doctrine. But once in a while I come across an exceptional case. Those of you who followed the Pappas v. Tzolis saga may recall that the New York-based Delaware LLC involved in that case had an operating agreement with a New York choice of law clause. As I noted in one of my several posts about the case (read here), the trial judge side-stepped the conflicts of law issue by finding the result the same under either state’s law, and the issue unfortunately was not addressed in the subsequent appellate rulings deciding the case under New York law.

Another exceptional case recently came to my attention. Gelman v. Gelman, Index No. 12664/10 (read here), is an unreported decision dated April 3, 2013, by Nassau County Supreme Court Justice Daniel Palmieri involving a dispute between two siblings who co-own a Delaware LLC. The court enforced a New York choice of law provision in the operating agreement in deciding the right to appointment of a receiver. As in Pappas, however, the court opined that the result would be the same under either state’s law. Continue Reading What Law Applies When Internal Affairs Doctrine Clashes With Choice-of-Law Clause?

At this wintry beginning of the new year I like to scour last year’s court decisions in business divorce cases to see if I overlooked any noteworthy ones. The following case summaries are the result, featuring a pair of decisions involving deadlock and oppressed minority shareholder disputes, and another pair of decisions involving receivership applications.

Matter of McKeown (Image Collision, Ltd.), 94 AD3d 1445, 2012 NY Slip Op 03016 (4th Dept Apr. 20, 2012).   This is a deadlock dissolution case between 50/50 shareholders in which the Rochester-based Appellate Division, Fourth Department, affirmed a post-trial decision granting the petitioner’s application for dissolution, awarding the respondent the continued use of the business, and awarding the petitioner 70% of the value of the corporation. The court rejected the respondent’s challenge to the trial court’s valuation of the shares based on the expert testimony of the expert appraisers, and also rejected his challenge to the petitioner’s expert’s qualifications for failure to object during the trial. The court also disagreed with respondent’s contention that the petitioner himself engaged in oppressive conduct by setting up another business before suing for dissolution after respondent locked him out of the business,  The petitioner only did so, the court noted, in response to respondent’s oppressive acts including buying the premises upon which the 50/50 corporation conducted business and then raising the rent to siphon away corporate profits. The decision unfortunately does not shed light on the trial court’s unusual remedy, i.e., awarding a buyout in a deadlock case under Business Corporation Law §1104 instead of liquidating the corporation, and giving the 50% petitioner 70% of the corporation’s value. Continue Reading Some Winter Case Notes

Here we are again, in the doldrums of the last week of August. Offices are semi-deserted. The phones are quiet. Even the email traffic is down. Last chance to recharge the batteries before the post-Labor Day onslaught begins. A perfect time to offer vacationing readers summaries of a few recent decisions of interest involving disputes between business co-owners.

First, we’ll look at what appears to be a decision of first impression, holding that a liquidating receiver may consider the tax advantages of a shareholder bid for the dissolved corporation’s assets structured as a stock redemption. Then we’ll look at a pair of decisions addressing derivative versus direct claims, in one finding that the plaintiff’s claims were properly brought as direct claims, and in the other finding that the plaintiff failed to plead justification for failing to make a pre-suit demand.

Liquidating Receiver Authorized to Accept Shareholder Bid for Corporation’s Real Property Structured as Stock Redemption

Matter of Gohil (Bayside Mini Grocery, Inc.), 2012 NY Slip Op 30320(U) (Sup Ct Nassau County Jan. 23, 2012). The case was brought by the controlling shareholders of two corporations, one operating a bodega and the other owning the building housing the bodega, under §1103 of the Business Corporation Law for judicial dissolution of the corporations pursuant to majority shareholders’ resolution. In April 2011, the court appointed a receiver to liquidate the business and the real property. In July 2011, the court authorized the receiver to hire a real estate broker to market and sell the property at an initial listing price of $2.6 million. The court’s order also permitted the shareholders to put in topping bids to any outside offer. In August 2011, the broker obtained a $2.4 million all-cash outside offer. In September 2011, the petitioners put in a $2.5 million topping bid structured as a stock redemption agreement pursuant to which the respondents would sell to the realty corporation their 30% interest and petitioners would then own 100%. The proposed redemption also was designed to avoid approximately $75,000 in realty transfer taxes. The respondents did not at that time put in a topping bid, and the receiver determined that the petitioners’ bid was the highest offer.

Continue Reading Summer Shorts: Liquidating Receiver’s Authority to Compel Share Redemption and Other Recent Decisions of Interest

Kim Kardashian’s marriage last summer to Kris Humphries famously lasted only 72 days. Their divorce proceeding even more famously is now in its seventh month. A less celebrated but similar fate may befall the short-lived business marriage of two partners in a Long Island restaurant/deli business, who are now embroiled in three lawsuits with one another including a proceeding to dissolve their limited liability company (LLC). Alas, a pair of rulings last month prefigures a divorce that likely will last longer and cost more than the marriage.

The S’s in S&S Eatery, LLC are Elaine Shure and Anthony Spota who in mid-2010 agreed to go into business together as 50/50 co-owners and operators of a new restaurant/deli on Rockaway Avenue in Valley Stream, New York. They decided to situate the restaurant in a vacant unit in a commercial building owned by a trust set up by Ms. Shure’s late husband, of which she was the trustee. In retrospect, the decision at the outset to invest in space indirectly owned and controlled by one of the members may have been the beginning of the end of the business relationship.

Spota and Shure agreed that he would manage the restaurant operations and she would oversee bookkeeping, other administrative responsibilities, and food pickup and delivery. In July 2010, Spota commenced renovation of the space after they agreed to invest equally in the construction expenses. In August 2010 they entered into a 10-year lease between the trust and S&S Eatery, and they also signed an operating agreement providing for management of the LLC by its members. In September 2010 they signed an amendment which included a provision requiring them to devote equal time to the business which opened in January 2011.

Continue Reading LLC Dissolution Case Highlights Divergent Interests When One Member is Also the Landlord

It’s not surprising that the ancient adage, “Never mix family and business,” is more honored in the breach than the observance. After all, as the late Professor Larry Ribstein observed in his terrific 2010 research paper entitled “Close Corporation Remedies and the Evolution of the Closely Held Firm” (reviewed here):

The earliest small firms were partnerships, which began as intimate, usually family, relationships. They were referred to as ‘compagnia,’ which means those sharing bread, reflecting their origins in households. Kinship ties were an important mechanism for controlling agency costs. As Kerim told James Bond in From Russia with Love, “all of my key employees are my sons. Blood is the best security in this business.”

Blood may be the best security in some family-owned businesses, but in many others the same bonds of kinship and trust that induce family members to enter into a business association in the first place, when abused or perceived to be abused, can and often do instigate conflict, entropy, and ultimately the dissolution of the firm and destruction of family ties. In other words, the emotional ties that encourage family members to dispense with diligence and formalities when starting and operating a business can also drive them apart with even greater force when things go wrong, in no small part due to those very dispensations.

For this column I’ve chosen three recent, illustrative cases presenting dissolution and related claims involving family-owned businesses. The substantive issues in each case are interesting and informative, if not novel. I wasn’t involved in any of the cases, so I can’t really say to what extent the blood relations of the parties contributed to the outbreak of hostilities or the underlying problems. But I think it’s fair to say that each case in its own way shows tell-tale signs of the dysfunctional circumstances and dissension peculiar to business divorce, family style.

The case summaries follow after the jump.

Continue Reading A Toxic Mix of Family and Business