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
Road Trip

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
Fall Road

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
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The absolute litigation privilege is a long-standing legal principle that statements made during the course of a judicial proceeding by participants in the proceeding (whether parties, attorneys, witnesses, or judges) are absolutely privileged, protecting the speaker from subsequent claims of defamation or libel arising out of those statements.

The public policy objective behind the privilege is fairly straightforward. Parties to an action should be free to litigate their case—whether zealously prosecuting their claims or vigorously defending against an adversary’s claims—without fear that statements made during litigation will open them up to future claims for defamation. A recursive loop of litigation (i.e. suing you because of what you said when you sued me) serves no one, least of all the courts.

As such, the privilege is a broad one. When applied, it offers a complete defense regardless of the truthful of the statement, even where the statement was made with malice or ill-intent.  

But, broadly applied does not mean blindly applied. The application of the privilege to contract claims is a question courts have only recently started to wrestle with.

Today’s post concerns a decision out of the Delaware Chancery Court, in which the Court was tasked with determining whether the absolute litigation privilege bars the exercise of a contractual repurchase option triggered by claimed disparaging statements made in a prior litigation.  

In Sevatec Holdings Inc. v Octo Platform Equity Holdings, LLC, C.A. No. 2022-0437-PRW, the Court held that, no, the absolute litigation privilege “has no bearing on the validity of the repurchase.”

Continue Reading Freedom (But with Consequences): In Delaware, Absolute Litigation Privilege Inapplicable to Nullify Contractual Non-Disparagement Repurchase Trigger

If Sisyphus were a judge, he’d be assigned the Fuks case.

Fuks began on December 26, 1996. Fire up your mental time machine, travel back in time, and picture what was going on in your life those many years ago.

I just finished my first semester of college. My biggest worry was what to do for New Year’s Eve because my favorite band was not playing MSG. Over the next 28 years, I attended and graduated college. Moved to Colorado. Moved back to New York. Attended and graduated  law school. Took the bar exam. Began and grew a law career. Met friends, lost friends, got married, had two kids, got divorced, got promoted to partner, got remarried to the greatest woman ever. And all this time, the Fuks case remained a constancy, a Sisyphean boulder for the unfortunate jurists assigned to it.

An end of sorts finally arrived in June, when Manhattan’s Appellate Division – First Department issued Fuks v Rakia Assocs., 228 AD3d 501 [1st Dept 2024]. In Fuks, the Court affirmed the imposition of a $375,000 money damages award in favor of a 50% general partner against the other for breach of fiduciary duty.

What jumped out about Fuks was not the case’s astounding longevity, but the following snippet of legal doctrine:

While there was little direct evidence of the amount of damages, there is no question that Shomron’s breaches caused plaintiff injury. This, along with the other evidence in the record of damages caused by Shomron, was sufficient, given the special nature of fiduciary duty claims and the lenient standard for proof of damages in such cases.

Is there a more “lenient standard” for “proof of damages” where the plaintiff alleges breach of fiduciary duty? If so, when will courts apply this more forgiving evidentiary standard?

We’ll consider those questions in this week’s piece.

Continue Reading Breach of Fiduciary Duty: A More “Lenient Standard” for Damages?
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“It all started when the distributions stopped.”  In my travels as a business divorce litigator, I’ve seen many disputes between LLC co-owners that begin with that message.  A minority owner is content to remain a “silent partner”—letting the majority run the business—for as long as the checks keep coming.  Once the distributions stop, the minority partner begins to distrust, investigate, and second-guess, and the embryo of a business divorce takes shape.

But unless they find evidence of the majority’s self-dealing or other affirmative misconduct, minority owners seeking to restart a dried-up distribution tap find themselves at the bottom of a very steep climb.  Absent some provision in the operating agreement saying otherwise, the decision to distribute profits lies in the discretion of those in control.  That reality can lead to frustration and financial strain, particularly when the minority owner relies on the distributions as a return on their investment.

So, under what circumstances can a minority LLC owner compel the majority to issue distributions?  That question, and a recent decision from New York County Justice Reed, Schneider v Pine Mgt., Inc., 2024 NY Slip Op 51030(U) [NY County Aug. 8, 2024], inspires today’s discussion. 

Continue Reading Prudent Management or Financial Starvation: Can Minority Members Compel the Majority to Make Distributions?

Welcome to this 14th annual edition of Summer Shorts. This year’s edition features brief commentary on three recent decisions by New York courts in business divorce cases. The featured cases involve a suit pitting three siblings against their aunt and uncle over a realty holding LLC initially co-owned by the siblings’ deceased mother; the grant of a large bonding requirement in a fair value appraisal proceeding that landed the subject company in Bankruptcy Court; and a dispute between former partners in a dissolved law firm over the post-dissolution allocation of cases and fees. Click on the case names to read the decisions.

Did These Alleged One-Third LLC Members Need an LLC Law § 608 Rescue?

In the last year there have been significant court decisions in business divorce cases seemingly expanding the rights of representatives of the estates of deceased LLC members. Last year, in Andris v 1376 Forest Realty LLC, New York’s Appellate Division, Second Department, condoned without discussion a judicial dissolution petition by the executor of a deceased LLC member under § 608 of New York’s LLC Law, which confers upon the estate representative “all of the member’s rights for the purpose of settling his or her estate or administering his or her property” (read here).

Continue Reading Summer Shorts: An Unusual Application of LLC Law § 608 and Other Decisions of Interest

Contracts with “prevailing party” provisions offer the tantalizing, coveted prospect of the winner recovering attorneys’ fees from the loser in legal disputes over the contract’s enforcement.

Prevailing party fee-shifting provisions are an exception to the litigant-loathed “American rule,” under which the winner cannot recover attorneys’ fees from the loser unless explicitly authorized in an “unmistakably clear” contract, statute, or court rule.

A simple prevailing party provision goes something like: “If either party brings an action to enforce the terms of this agreement, the prevailing party shall be entitled to reimbursement of its reasonable attorneys’ fees, costs, and expenses in connection with such action.”

Prevailing party provisions can be simple to read, but difficult to apply, occasionally spawning a litigation within a litigation over whether one side or the other actually prevailed. A court’s task of determining whether one side or the other – or any side at all – is the prevailing party gets complicated when each side lobs a raft of claims and counterclaims against the other, and neither wins much of the relief it sought.

This problem arose in a recent decision concluding a proceeding to confirm an arbitration award in an astoundingly long-running legal dispute among three doctors in a medical practice called New York Urologic Institute (“NYUI”).

YC MD, P.C. v Shusterman (___ AD3d ___, 2024 NY Slip Op 03893 [2d Dept July 24, 2024]), is a warning to petitioners / plaintiffs to critically and objectively assess the strength of their claims before embarking upon a legal proceeding under a contract with a prevailing party provision. Unsuccessful prosecution of those claims can have dire consequences, the resulting fee award dwarfing any actual monetary award to either side.

Continue Reading “Prevailing Party” Attorneys’ Fee Provisions