NewYorkCourtofAppealsIn a controversial ruling last year in Congel v Malfitano, the Appellate Division, Second Department, affirmed and modified in part a post-trial judgment against a former 3.08% partner in a general partnership that owns an interest in a large shopping mall, and who unilaterally gave notice of dissolution, finding that

  • the partnership had a definite term and was not at-will for purposes of voluntary dissolution under Partnership Law § 62 (1) (b) based on the partnership agreement’s provisions authorizing dissolution by majority vote, notwithstanding a 2013 ruling by the Court of Appeals (New York’s highest court) in Gelman v Buehler holding that “definite term” as used in the statute is durational and “refers to an identifiable terminate date” requiring “a specific or even a reasonably certain termination date”;
  • the former partner’s unilateral notice of dissolution therefore was wrongful; and
  • having wrongfully dissolved the partnership and upon the continuation of its business by the other partners, under Partnership Law § 69 (2) (c) (II) the amount to be paid to the former partner for the value of his interest properly reflected a 15% reduction for the partnership’s goodwill value, a 35% marketability discount, a whopping 66% minority discount, and a further deduction for damages consisting of the other partners’ litigation expenses over $1.8 million including statutory interest.

The Appellate Division’s decision, which I wrote about here, and the former partner’s subsequent application for leave to appeal to the Court of Appeals, which you can read here, reveal, to say the least, a remarkable result: the former partner, whose partnership interest had a stipulated topline value over $4.8 million, ended up with a judgment against him and in favor of the other partners for over $900,000.

But the story’s not over. Last week, the Court of Appeals issued an order granting the former’s partner’s motion for leave to appeal. Sometime later this year, the Court of Appeals will hear argument in its magnificent courtroom pictured above and issue a decision in the Congel case which likely will have important ramifications for partnership law whatever the outcome. Continue Reading Court of Appeals to Decide Controversial Partnership Dissolution Case

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

Who paysThere are two breeds of buy-outs in corporate dissolution proceedings: voluntary and involuntary.

When a minority shareholder petitions for judicial dissolution on grounds of oppression, New York’s statutory scheme gives respondents the option to avoid a dissolution contest voluntarily by electing within 90 days to purchase the petitioner’s shares for “fair value” in an amount either to be agreed upon by the parties or determined by the court in an appraisal proceeding.

The buy-out statute (Business Corporation Law § 1118) grants the right of election to “any other shareholder or shareholders or the corporation” which, as a practical matter, leaves it up to the controlling shareholders whether to purchase the shares individually or through the corporation. Not surprisingly, in my experience the election overwhelmingly is made by the corporation. After all, who wants to undertake personal liability voluntarily, especially before the court determines the value of the petitioner’s shares and the terms of payment? Continue Reading Who Pays When the Court Compels a Buy-Out?

66discountTalk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

The defendant partner’s fateful decision took place in 2006, when he sent his fellow partners a written notice unilaterally electing to dissolve the partnership due to what he described as a “fundamental breakdown in the relationship between and among us as partners.” The other partners quickly responded with a damages lawsuit claiming that he had wrongfully dissolved in violation of the partnership agreement in an effort to force the partnership to buy out his interest at a steep premium. The defendant, arguing that the partnership was at-will and of indefinite duration, denied wrongful dissolution and counterclaimed for his full, pro rata share of the partnership’s value upon dissolution. Continue Reading Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount


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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

stock certificate 1First a books and records proceeding. Then a declaratory judgment action. Then dissolution proceedings. Six years of litigation including two appellate rulings, just to establish who’s a shareholder and who’s not, all because the owners of two closely held corporations formed decades ago never bothered to issue stock certificates or otherwise attend to corporate formalities.

It didn’t help that the two corporations, formed in the 1960’s, never elected pass-through taxation as subchapter S corporations, hence the companies never issued form K-1’s identifying the shareholders and their stock percentages.

In last week’s appellate ruling in Zwarycz v Marnia Construction, Inc., 2015 NY Slip Op 06239 [2d Dept July 22, 2015], which affirmed a June 2014 post-trial decision by Westchester County Supreme Court Justice Robert DiBella, the plaintiff Michael Zwarycz overcame the absence of a stock certificate or any other direct evidence of share ownership to establish his 50% interest in two corporations that own residential apartment buildings in Yonkers, New York.

Zwarycz’s victory last year before Justice DiBella turned bittersweet, however, when his follow-up petitions to dissolve the two corporations based on deadlock and internal dissension were dismissed by a different judge. Those November 2014 rulings are the subject of Zwarycz’s pending appeals. Continue Reading Fifty Years a Stockholder, Six Years to Prove it in Court

ZeroWhen it comes to fair-value jurisprudence, the Brooklyn-based Appellate Division, Second Department, works in mysterious ways.

Take, for instance, its 2010 Murphy decision, in which it noted without elaboration that the application of a discount for lack of marketability (DLOM) is not in all cases limited to the enterprise’s goodwill without so much as acknowledging 25 years of its own contrary precedent.

Then there’s last week’s decision in Chiu v Chiu, 2015 NY Slip Op 01427 [2d Dept Feb. 18, 2015], in which it upheld without comment a lower court’s decision to apply 0% DLOM in valuing a membership interest in a realty-holding LLC co-owned by two brothers. Considering the ongoing, vigorous debate in legal and valuation circles surrounding the existential propriety of DLOM under the statutory fair value standard, as recently played out in the Zelouf and Giaimo cases, it would have been extremely helpful to other litigants had the Second Department explained why it believed DLOM was inappropriate in Chiu. Oh well. Continue Reading Appellate Court Upholds 0% Marketability Discount in LLC Fair Value Case

Ready to take a pop quiz? Here we go:

  1. Can a 50% shareholder of a closely held corporation petition for judicial dissolution under the deadlock statute, Business Corporation Law § 1104?  __ Yes  __ No
  2. Can a 50% shareholder of a closely held corporation petition for judicial dissolution under the oppressed shareholder statute, Business Corporation Law § 1104-a?  __ Yes  __ No
  3. Can a 50% shareholder of a closely held corporation petition for judicial dissolution under common law?  __ Yes  __ No
  4. Can a 50% shareholder of Company A, who also is a director of Company B in which Company A holds a majority interest, petition for judicial dissolution of Company B under common law?  __ Yes  __ No

Let’s see how you did. If you answered “Yes” to #1, you’re right. But that was easy. Without even looking at the statute, BCL § 1104, logic tells you that a shareholder who possesses half the available voting power — that is, not enough to secure majority approval for shareholder or board action but enough to block the other 50% shareholder from doing the same — should be able to seek dissolution where deadlock results from disagreement with the other 50% shareholder. Continue Reading Take the 50% Shareholder/Dissolution Pop Quiz!

“[T]he Court concludes that it lacks subject-matter jurisdiction to dissolve a Delaware corporation, and thus dismisses the First Cause of Action.”

Sounds familiar? It should. The above ruling, found in Nassau County Commercial Division Justice Timothy S. Driscoll’s decision last month in Bonavita v Savenergy Holdings, Inc., Short Form Order, Index No. 603891-13 [Sup Ct Nassau County Dec. 8, 2014], adds to the growing list of cases in New York’s Second and Third Departments in which courts have declined subject-matter jurisdiction over claims for judicial dissolution of a foreign business entity. It also accentuates the schism, about which I’ve previously written, between decisions in those Departments and a smaller number of First Department rulings upholding jurisdiction in similar cases.

The plaintiffs in Bonavita, likely aware of the Second Department precedent stacked against them, took a somewhat different tack by asserting in their complaint’s First Cause of Action (read here) a claim for common-law dissolution of the subject Delaware corporation rather than a statutory claim for judicial dissolution under Article 11 of the Business Corporation Law. (Delaware has no statute authorizing judicial dissolution at the behest of a minority shareholder.) Continue Reading Court Declines Jurisdiction Over Claim for Common-Law Dissolution of Delaware Corporation

 

I’m pleased to present my sixth annual list of picks for the past year’s ten most significant business divorce cases. This year’s selections, featuring seven appellate decisions, include significant rulings on a variety of issues in dissolution and appraisal cases involving closely held corporations, partnerships and limited liability companies. All ten were featured in this blog previously; click on the case name to read the full treatment. And the winners are:

 

  1. Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), in which Manhattan Supreme Court Justice Anil C. Singh followed a 1994 First Department precedent in rejecting the argument that a New York court lacks subject matter jurisdiction to dissolve a foreign entity, in that case a Delaware limited partnership.
  2. Doyle v. Icon, LLC, 103 AD3d 440, 2013 NY Slip Op 00797 (1st Dept Feb. 7, 2013), where the First Department dismissed a complaint seeking judicial dissolution of an LLC, holding that allegations by a minority member of systematic exclusion by the controlling members, without more, fail to state adequate grounds for relief under LLC Law § 702.
  3. Sullivan v. Troser Management, Inc., 104 AD3d 1127, 2013 NY Slip Op 01634 (4th Dept Mar. 15, 2013), a 10-year litigation over a stock buy-out where the parties never updated the called-for Certificate of Value, in which the Fourth Department rejected the purchasing shareholder’s contention that the buy-out price should be based on book value.
  4. Gelman v. Buehler, 20 NY3d 534, 2013 NY Slip Op 01991 (Ct App Mar. 26, 2013), in which the Court of Appeals construed the phrases “definite term” and “particular undertaking is specified” as used in Section 62 of the Partnership Law in dismissing a complaint for wrongful termination of an oral partnership agreement.
  5. Mizrahi v. Cohen, 104 AD3d 917, 2013 NY Slip Op 02056 (2d Dept Mar. 27, 2013), where the Second Department ordered a buy-out of the defendant 50% member by the plaintiff 50% member as an equitable remedy in an LLC dissolution case.
  6. Born to Build LLC v. 1141 Realty LLC, 105 AD3d 425, 2013 NY Slip Op 02193 (1st Dept Apr. 2, 2013), in which the First Department ordered dismissal of a complaint for judicial dissolution of an LLC, brought by a party who purportedly acquired an undocumented membership interest at a judgment execution sale, where the LLC agreement negated the existence of the membership interest at issue.
  7. Matter of Sunburst Associates, Inc., 106 AD3d 1224, 2013 NY Slip Op 03368 (3d Dept May 9, 2013), an unusual case in which the Third Department dismissed a deadlock dissolution petition brought by a putative 50% shareholder on the ground that he had transferred his stock to the other 50% shareholder, notwithstanding evidence that, even after the transfer, the respondent shareholder had signed corporate tax returns reflecting the two of them as 50/50 shareholders. 
  8. Breidbart v. Wiesenthal, 108 AD3d 492, 2013 NY Slip Op 05040 (2d Dept July 3, 2013), where the Second Department held that a retired partner, or the estate of a deceased partner, who elects to receive post-withdrawal profits in lieu of interest under Section 73 of the Partnership Law is not entitled to recover appreciation on the value of the partnership assets.
  9. Ruggiero v. Ruggiero, 2013 NY Slip Op 31955(U) (Sup Ct Suffolk County July 29, 2013), in which Suffolk County Justice Emily Pines opted for one appraiser’s income approach over the other appraiser’s market approach in a stock valuation contest involving a family-owned kosher deli.
  10. Feinberg v. Silverberg, Decision and Order, Index No. 3120-11 (Sup Ct Nassau County Sept. 6, 2013), a decision by Nassau County Justice Vito DeStefano in which the court ruled that the petitioner’s alleged bad faith and creation of feigned deadlock is a cognizable defense in a proceeding for judicial dissolution under Business Corporation Law § 1104.