StandingThis article was co-authored by Franklin C. McRobertscounsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group.


The rules of “standing” in business divorce litigation generally require that the plaintiff have an ownership interest in the business entity at the time of the alleged wrongful conduct and, for derivative claims brought on the entity’s behalf, throughout the litigation.

In Lewis v Alcobi, 2017 NY Slip Op 30664(U) [Sup Ct NY County Apr. 6, 2017], Manhattan Commercial Division Justice Anil C. Singh considered whether a parent’s assignment of her young daughter’s membership interest in a limited liability company as security for the other parent’s unpaid debt deprived the daughter of standing to sue, despite the daughter’s claim to have received no consideration for the assignment.

The case provides useful lessons for litigating disputes of this sort and, perhaps more importantly, for transactional attorneys considering the use of LLC membership interests to secure payment obligations. Continue Reading Assignment of LLC Interest Defeats Standing Despite Alleged Lack of Consideration

litigiousThe U.S. reportedly has the world’s highest number of lawyers per capita (1 for every 300 people) and the 5th highest number of lawsuits per capita (74.5 for every 1,000 people, topped only by Germany, Sweden, Israel, and Austria).

If, as it appears, litigation has become a national pastime in the U.S., then why, when we describe someone as having a “litigious nature,” does that label carry such opprobrium? Is there an unspoken assumption that anyone who brings a multitude of lawsuits must not have meritorious claims, or has ulterior motives to sue? Then again, we recently awarded the presidency to someone who, according to a USA Today analysis, has sued or been sued in 3,500 cases over the last 3 decades.

These observations are spurred by a recent court decision in Pokoik v Norsel Realties, 2017 NY Slip Op 50459(U) [Sup Ct NY County Apr. 12, 2017], in which Manhattan Commercial Division Justice Jeffrey K. Oing cited the plaintiff’s “litigious nature” among the factors supporting dismissal of his derivative lawsuit brought against the fellow members of a real estate partnership, some of whom are relatives of the plaintiff, Leon Pokoik. Granted, it was not cited as the primary factor, but it’s one of those atmospheric factors in a litigation whose impact is hard to measure. Continue Reading Suing on Behalf of People You’re Suing Can Sink a Derivative Lawsuit — Especially If You Have a Litigious Nature

No U TurnFranklin C. McRoberts, counsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group, prepared this article.


Article 11 of the Business Corporation Law governs dissolution of closely held New York business corporations. Article 11 has existed, more or less in its current form, for decades. Some of its provisions have been heavily litigated, including Sections 1104 and 1104-a governing judicial dissolution for deadlock and oppression, and Section 1118 governing buyout of a minority’s interest in an oppression proceeding. Other provisions have received surprisingly little attention.

In Morizio v Roeder, 2017 NY Slip Op 50248(U) [Sup Ct Albany County Feb. 17, 2017], Albany County Commercial Division Justice Richard M. Platkin addressed one of these latter, relatively-overlooked sections.

Section 1116 of the Business Corporation Law governs the circumstances in which a party who sues for dissolution may later change his or her mind and withdraw the claim for dissolution. The key language of the statute provides that a petitioner who wishes to withdraw his or her claim must “establish” to the court “that the cause for dissolution did not exist or no longer exists.”

What does that mean? Only a few courts have considered the issue, including a decision last year by Justice Timothy Driscoll in the Cardino case. As it turns out, a leading case to consider the legal standard to withdraw a dissolution claim was an earlier decision in the Morizio litigation. Continue Reading Withdraw a Dissolution Claim? Not So Fast

USA

It’s true that the statutory and common-law rules at play in business divorce cases can vary widely from state to state. But it’s also true that court decisions in one state can influence courts in other states, and can provide business divorce lawyers with fresh ideas and novel arguments. I like to think of it as legal cross-pollination.

For many years, one of the nation’s leading authorities on business organization law, Professor Elizabeth Miller at Baylor Law School, has been collecting, curating, and publishing detailed synopses of cases from around the country involving LLCs and other unincorporated business entities, with a large complement of dissolution, breach of fiduciary duty, and other cases featuring disputes among business co-owners. It’s a terrific resource for keeping up with nationwide case law developments. Some of Professor Miller’s summaries can be found online, but the best way for lawyers to gain access to them on a regular basis is to join the LLCs, Partnerships and Unincorporated Entities Committee of the ABA’s Business Law Section. That’s the same committee that sponsors the incomparable LLC Institute every year.

Professor Miller’s most recent sampling of (non-Delaware) partnership and LLC cases was presented at a session of the 2017 Spring Meeting of the Business Law Section in New Orleans. I’ve selected from it and further distilled in the following summaries a quintet of business divorce cases from a quintet of states other than New York. Continue Reading Business Divorce Nation: Five States, Five Cases

jurisdiction1I can count on one hand the number of federal court cases I’ve featured on this blog since I started it almost 10 years ago — and that’s no coincidence.

Federal courts are courts of limited jurisdiction, requiring either the presence of a claim arising under federal law — so-called federal question jurisdiction — or the opposing litigants are citizens of different states — so-called diversity jurisdiction.

Federal question jurisdiction rarely exists in business divorce cases involving the internal affairs of closely held business entities which are the peculiar province of state law. Federal courts are especially loathe to decide judicial dissolution cases, to the point where they routinely exercise their discretionary power to abstain from exercising jurisdiction even in dissolution cases where diversity exists (read here).

Inevitably there are some small number of diversity suits filed in federal court asserting state-law claims other than dissolution between business co-owners. Even in these cases, however, there is a potential trap for the unwary plaintiff if the subject business entity is a limited liability company, as nicely illustrated by a Manhattan federal judge’s decision last month in Sullivan v Ruvoldt, Opinion and Order, 16 Civ. 583 [SDNY Mar. 24, 2017]. Continue Reading Beware Diversity Trap in Federal Court Business Divorce Cases Involving LLCs

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

Martini2Franklin C. McRoberts, counsel in the Uniondale office of Farrell Fritz and a member of the firm’s Business Divorce Group, prepared this article.


Oh, the things that can happen when the LLC members identified in the company’s operating agreement differ from those identified in official documents submitted to government agencies.

Recently, this blog reported on one case in which the court found in favor of two individuals on their claimed LLC membership interests as evidenced by an application for a food service permit filed by the LLC with the New York City Health Department naming them and the defendant as members, notwithstanding an operating agreement that identified the defendant as the LLC’s sole member. That case involved ownership of a hot dog franchise.

From hot dogs we move to martinis. On an interesting set of facts, Brooklyn Commercial Division Justice Lawrence S. Knipel recently ruled the other way. In the whimsically captioned Cupcake & Boomboom, LLC v Aslani, 2016 NY Slip Op 32310(U) [Sup Ct Kings County Nov. 22, 2016], the outcome was anything but whimsical for the defendant. Justice Knipel discredited documents the LLC submitted to the New York State Liquor Authority (“SLA”) as part of an application to obtain a liquor license, including an operating agreement intentionally misidentifying the members. Instead, the court credited an earlier, inconsistent operating agreement as determinative of the members’ ownership status, thereby reducing the defendant’s claimed interest from 50% to 10%. Continue Reading Operating Agreement Trumps Falsified Liquor License Application In Dispute Over LLC Membership

shareholderWhat makes a shareholder a shareholder? What makes an LLC member a member?

The simplicity of the questions belies the difficulties and endlessly unique fact patterns encountered in case after case involving close corporations and LLCs in which one faction claims the other has no ownership interest in the entity and therefore lacks standing to seek judicial dissolution or other remedies predicated on violation of owner rights.

That’s not to say there aren’t common characteristics of such ownership contests. Usually they spring from one or more of the following circumstances: lack of shareholder or operating agreement; lack of certificated interests or other formal ownership documents; lack of transparency of tax returns and other business documents requiring owner identification; prior, inconsistent representations in tax returns or court proceedings; and, sometimes, intentional concealment of ownership interests to avoid creditors, tax authorities, ex-spouses, etc.

Last month, in a pair of noteworthy decisions, Nassau County Commercial Division Justice Stephen A. Bucaria rejected challenges to claimed ownership interests in two very different cases, one involving a close corporation and the other an LLC, in both of which one party unsuccessfully claimed to be the sole owner. In the corporation case, Justice Bucaria granted summary judgment upholding the contested 4% stock ownership as evidenced by a stock purchase agreement and stock certificate notwithstanding the shareholder’s sworn testimony in a prior, unrelated case denying that he was a shareholder. In the LLC case, Justice Bucaria granted preliminary injunctive relief in favor of two individuals claiming one-third membership interest each as evidenced by documents provided to a franchisor and municipal agency, notwithstanding an operating agreement naming the adverse party as sole member. Continue Reading Sole Owners of Close Corporation and LLC Discover They’re Not So Sole

shorts

It’s late August, when the lure of the seashore and vacation plans push aside all but the most serious work-related endeavors, and when I share with my readers a few short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision in a dispute among former law firm partners in which the court upheld a partnership agreement amendment by the defendant majority partners, reducing the plaintiff’s percentage interest after he announced his intention to withdraw but before the actual withdrawal became effective. Next up is a relatively rare decision in an LLC dissolution case granting a motion to disqualify defense counsel under the advocate-witness rule of professional conduct. In the third case highlighted below, the Delaware Chancery Court dismissed a books-and-records action for lack of standing where the shares issued to the plaintiff never existed.

Court Enforces Eve-of-Withdrawal Reduction of Partnership Interest

Zohar v LaRock, Short Form Order, Index No. 14826/10 [Sup Ct Nassau County July 25, 2016]Article 8-B of New York’s Partnership Law authorizes regulated professional practices to organize as registered limited liability partnerships. The LLP form is highly popular with law firms because it offers the same limited liability protection afforded corporation shareholders and LLC members, except for their own professional negligence or malpractice. The LLP otherwise is subject to the same statutes and common-law rules governing general partnerships, which give partners great leeway in ordering their own affairs in their partnership agreement. Continue Reading Summer Shorts: Partnership Interest Reduction and Other Recent Decisions of Interest

consentThe pick-your-partner principle is universally embedded in the default rules of limited liability company enabling acts, including Sections 601 through 604 of the New York LLC Law which permit free assignment of distributional and other economic rights appurtenant to a membership interest but require the other members’ consent before an assignee is granted full member status with voting and other rights associated with membership in an LLC.

The distinction between a “mere” assignee versus a transferee with member status can become a battle ground when a putative LLC member who received his, her or its interest by assignment brings legal action against the LLC’s managers for dissolution, access to books and records, or asserting derivative claims on behalf of the LLC. That’s because by statute and/or common law, the suing party’s requisite legal standing to assert such claims depends on having member status.

A recent decision by Manhattan Commercial Division Justice Saliann Scarpulla in MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which she dismissed derivative claims by a mere assignee of LLC interests, starkly illustrates the distinction and the importance of compliance with the LLC agreement’s provisions for bestowing member status on assignees. Continue Reading Operating Agreement’s Two-Step Consent Provision Foils Assignment of LLC Member Interest