The limited liability company is relatively young.  Though origin research is always a dubious task, my efforts tell me that the first LLC was created in 1977 in Wyoming, followed by other LLCs in Florida in 1982.  The years since then have witnessed the LLC’s rise to the closely held entity of choice among business owners.

One benefit of the LLC’s youthful age is that many of the minds that were most influential in its early-stage development are still teaching, practicing, and studying, all while continuing to lend their expertise on LLC formation, regulation, and litigation.  And your best chance of catching all those prominent minds in one place is at the American Bar Association’s annual LLC Institute.

For those interested in learning the intricacies of the LLC laws directly from the experts, I highly recommend attending the two-day conference.  While a single-post recap inevitably won’t do justice to the many presentations, panels, and discussions at the Institute, this week’s post attempts to sample some of the best business divorce topics highlighted in the 2024 LLC Institute.

Continue Reading Greetings from the American Bar Association’s 2024 LLC Institute

It wasn’t long ago that my partner, Peter Sluka, posted about the Andris case where the Appellate Division, Second Department, reinstated an LLC judicial dissolution proceeding brought by the estate of a deceased member.

Andris was a enigmatic ruling that raised as many questions as it answered, not least of all because, notwithstanding a number of prior lower court rulings denying non-economic member rights to estates of deceased members, such as the right to sue derivatively on the LLC’s behalf, the respondent never contested the estate’s standing to seek judicial dissolution under LLC Law 702, which can only be brought by a member.

Adding to the uncertainty, the decision failed to clarify or even address how the right to seek dissolution meshes with the language of LLC Law 608, which gives the estate of a deceased member the right to exercise “all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member” (italics added).

Whatever doubts Andris left behind, are no more. Last week, in a case called Weinstein v Wallace, the Second Department squarely held that the rights granted to the estate of a deceased LLC member by LLC Law 608 “include a member’s voting rights.”

Continue Reading Appellate Division Construes LLC Law 608 as Giving Voting Rights to a Deceased Member’s Estate

A general principle of business valuation is that courts may consider “known or knowable” events as of the “valuation date” – the date as of which the court values the entity – but not post-valuation date events or financial performance.

In Matter of Murphy v U.S. Dredging Corp. (74 AD3d 815 [2d Dept 2010]), a valuation proceeding resulting from a judicial-dissolution-provoked buyout election under Section 1118 of the Business Corporation Law (the “BCL”), the Court reversed a trial court for considering a multi-million-dollar pension liability substantially diminishing the entity’s value because the liability arose shortly after the valuation date, even though the liability was contemplated pre-valuation date.

The Murphy Court wrote, “Contrary to the Corporation’s contention, notwithstanding that the pension obligation . . . was discussed prior to the valuation date, it did not constitute a future event which was known or susceptible of proof as of the valuation date” (id. [quotations omitted]).

In Miller Bros. Indus., Inc. v Lazy Riv. Inv. Co. (272 AD2d 166 [1st Dept 2000]), a valuation proceeding under BCL § 623 resulting from a merger from which shareholders dissented, the Court affirmed a trial court’s rejection of the shareholders’ attempt to rely upon the entity’s actual financial performance in the immediate aftermath of the valuation date.

The Miller Court wrote, “We reject the dissenting shareholders’ argument that investment value as of the valuation date may be computed retrospectively based on the corporation’s reported actual earnings for the fiscal year ending eleven months after the valuation date, since fair value may include elements of future value only if known or susceptible of proof as of the date of the merger” (id. [quotations omitted]).

Notwithstanding these authorities, litigants hoping to either increase or decrease an entity’s valuation often ask courts to consider post-valuation date events or financial performance as affirmatory or disaffirmatory of financial projections or assumptions made before or as of the valuation date. And sometimes, litigants succeed in that endeavor.

Earlier this month, the same court which in Murphy forbade courts from considering post-valuation date events in BCL § 1118 appraisal proceedings issued Magarik v Kraus USA, Inc. (___ AD3d ___, 2024 NY Slip Op 04964 [2d Dept Oct. 9, 2024]).

In Magarik, contrarily to Murphy, the Court rejected a dissenting shareholder’s challenge to a trial court’s consideration of the corporation’s actual financial performance post-valuation date as a basis to completely reject his expert’s would-be reliance upon pre-valuation date financial projections prepared by the entity itself and submitted to a lender as part of a $10 million loan application.

Continue Reading Can Post-Valuation Date Historical Performance Trump Pre-Valuation Date Financial Projections?

Some years ago, the question whether New York courts have subject matter jurisdiction over petitions to dissolve foreign business entities garnered much interest amongst business divorce lawyers and on this blog. The debate was resolved against subject matter jurisdiction following an inter-departmental split that the Appellate Division, First Department, patched up in its 2016 Raharney decision.

The same cannot be said for petitions seeking inspection of the books and records of foreign business entities. Decisions addressing subject matter jurisdiction in such cases have been few and far between, with minimal appellate guidance.

In two decisions of interest handed down earlier this month by two different Manhattan judges in two separate cases involving New York-based foreign entities — one a Delaware corporation and the other a Nevada LLC — the courts addressed two very different approaches by plaintiffs to access books and records, with mixed results.

Continue Reading Foreign Affairs of the Books and Records Kind

The shareholder oppression claim under BCL 1104-a has a unique relationship with claims for money damages.

A minority shareholder petitioning for dissolution under BCL 1104-a must establish that the majority shareholders have engaged in “illegal, fraudulent or oppressive actions,” or that the “property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.”

Based on that standard, it’s easy to imagine conduct by the majority that both meets the criteria for dissolution and constitutes a separate tort compensable with money damages (for instance, a claim for the majority’s breach of fiduciary duty).  For that reason, it’s very common to see a dissolution petition coupled with money damages claims, all arising out of the same conduct. 

But where the money damages claims are filed before the dissolution petition, a plaintiff might be forced to litigate those to completion prior to pursuing their dissolution petition.  That’s the tough lesson learned by the petitioner of a dissolution proceeding brought under BCL 1104-a, in Ramirez v Issa, 2024 N.Y. Slip Op. 33488[U] [NY County 2024], the subject of this week’s post.

Continue Reading Corporate Dissolution Petition Hits Back Burner in Favor of Earlier Filed Claims for Money Damages

Accountants are professionals. They carry malpractice insurance. They are potential deep pockets. For these reasons, accountants sometimes find themselves defending against liability claims in business divorce lawsuits. The theories of accountant liability vary. Accountants owe their clients a duty of reasonable care, breach of which exposes the accountant to a claim of professional negligence / accounting malpractice. Alternatively, or in addition, accountants can face liability for “aiding and abetting” another person’s torts, like aiding and abetting another’s breach of fiduciary duty, fraud, or conversion, including failure to report fraud an accountant discovers while performing its services. Our blog about 1650 Broadway addressed these principles.

But, “[a]s a general rule, accountants are not fiduciaries as to their clients,” except where they are “directly involved in managing the client’s investments” (Caprer v Nussbaum, 36 AD3d 176 [2d Dept 2006] [citations omitted]).

What about bookkeepers? Unlike accountants, who generally have their own accounting firm or practice, bookkeepers often (though not always) work in-house, either as an employee or independent contractor. Is a bookkeeper a fiduciary to a business entity where an accountant is not?

A recent appeals court decision, Schiano v Harsanyi (230 AD3d 820 [2d Dept 2024]), considered this interesting question along with whether courts may hold bookkeepers liable for “aiding and abetting” a business owner’s fraud. The answer: bookkeepers beware.

Continue Reading Bookkeeper Liability? It’s a Real Thing

While there is tremendous diversity from state to state when it comes to statutory and judge-made law in business divorce cases, business valuation principles are—with a few notable exceptions—far more homogenous.  So it makes sense to occasionally venture beyond New York’s borders to see how other courts and experts are addressing the business valuation questions that New York-based business divorces often encounter.

This week’s post looks at several recent decisions across the country concerning valuation principles and discounts.  While each case features different applicable rules and agreements, our New York readers would be wise to note the persuasive power of these cases, especially given the sometimes-thin body of New York caselaw on business valuation issues.

Continue Reading Cross-Country Valuation Check-Up: Discounts, Buy-Sell Agreements, and Ambiguity Potholes
Save the Date! On November 7 & 8, 2024, the LLCs, Partnerships and Unincorporated Entities Committee of the ABA’s Business Law Section, a/k/a The Best Damn Committee in the ABA, is hosting its annual LLC Institute in Tampa, Florida. This year’s CLE-accredited program features panels on important topics of interest to transactional counsel, litigators, and anyone else invested in the field of closely held “uncorporations.” I’ll be on a panel highlighting recent LLC caselaw in business divorce matters. The program also features a keynote address by the inimitable Professor Dan Kleinberger on Oppression Doctrine in the Age of LLCs, and the annual Lubaroff Award Dinner honoring Paul Altman of Richards Layton & Finger. There’ll be plenty of time to network and meet heavy hitters in the field, and there’s a reception hosted by Holland & Knight the evening of the 6th. Stay tuned for details on registration and accommodations, which should be available soon on the Business Law Section’s events page. Hope to see you there!

The era of the old-fashioned general partnership long ago petered out, largely displaced by subchapter S corporations and, in the last few decades, limited liability companies, both of which allow pass-through taxation without exposure to personal liability for company obligations.

Which explains why, other than occasional posts on this blog about professional service providers (primarily lawyers) organized as limited liability partnerships, our forays into cases governed by general partnership law — whether it’s New York’s ancient Partnership Law drawn from the 1914 Uniform Partnership Act, or the Revised Uniform Partnership Act of 1997 adopted in most other states — are few and far between. Each time I write about a general partnership case, I figure it’s the last time.

I’m proved wrong once again, this time by two recent partnership cases involving novel issues decided by appellate courts in Pennsylvania and New Jersey. So without further ado . . .

Pennsylvania Supreme Court Holds That Spouse of Deceased Partner, Who for Years Afterward Was Acknowledged as a Partner, Does Not “Step Into the Shoes” of the Deceased Partner for Purposes of Enforcing the Original Partnership Agreement’s Buy-Sell Provision

I’ve lost count how many times I’ve cautioned that any buy-sell agreement between co-owners that prices the buy-out at book value upon death or other trigger event, virtually guarantees litigation when triggered. Estate of Caruso v Caruso is one of those cases, fought in the setting of a realty holding general partnership, that went up to the Pennsylvania Supreme Court.

Continue Reading Recent Appellate Rulings Address Novel Issues in General Partnership Disputes

How often do hopeful beneficiaries of a last will and testament expect to receive what they think will be a valuable bequest of a business interest, only to find their joy turn to despair when they discover the bequest violates a buy-sell agreement or transfer restriction in the business’s governing instrument?

Fairly often, actually. In the past few years, we’ve written about at least three such instances (see Finlaw, Harris, and Worbes).

How do courts resolve a direct conflict between a will, in which the testator tries to bequeath an ownership interest in a business, and the entity’s contract, in which the owners forbade conveyance of that very interest?

In short: not in favor of the beneficiary.

A growing body of case law – including a new, treatise-like decision from Bronx County Commercial Division Fidel E. Gomez – holds that a business entity’s governing instrument executed by a deceased owner will trump an attempted, conflicting testamentary bequest of an ownership interest in violation of the entity’s contract.

Pappas v B & G Holding Co. (2024 NY Slip Op 51218(U) [Sup Ct, Bronx County Sept. 6, 2024]), was reminiscent of the Worbes case I blogged about and then substituted in as counsel helping to bring the case to a successful conclusion – but with the parties’ roles reversed.

Continue Reading A Gift Horse with Rotten Teeth: When Equity Bequests Violate Transfer Restrictions or Buy-Sell Agreements

In the world of business divorce litigation, this summer saw everything but a slowdown.  We witnessed (and blogged about) Justice Crane cap a long-running fair value proceeding with helpful guidance on appraisals and discounts, watched the birth of a potential claim for equitable dissolution of Delaware LLCs, and heard from the Court of Appeals on the internal affairs doctrine

Now, along with shorter days, crisper mornings, and the sound of school buses returning to their routes, comes more fresh cases and hot topics.  Especially in the context of limited liability companies, the ingenuity of closely held business owners, the variety of their arrangements/disputes, and the creativity of counsel all ensure that the already rich body of caselaw governing LLCs and their members will grow even richer.

This week’s post kicks off the season with some fall table-setting.  Two cases, both of which should cause an LLC to think twice about what it means to award equity to an employee, are worth closely watching as the leaves turn.

Continue Reading Conditional Grants of Membership Interests Are a Roadway to Courtroom Conflict