LLC enabling statutes authorize two types of management structures. The default structure is member-managed in which all members participate in the management of the company’s business affairs. Member-managed LLCs usually have a relatively small number of members who are actively involved in the company’s business and who owe fiduciary duties.

Then there’s the manager-managed LLC, more akin to a corporation-style management structure and sometimes featuring a Board of Managers and designated officers, in which one or more persons or entities (who may be, but need not be, members of the LLC) are responsible for managing the LLC’s business affairs. Manager-managed LLCs typically have a number (which could be large) of non-managing members who owe no fiduciary duties and essentially serve as passive investors, not unlike limited partners.

The manager-managed LLC offers flexibility and efficiencies not available with a member-managed structure. But, as with any agency relationship, care must be taken in the operating agreement to spell out not only the scope of the managers’ authority, but also the voting requirements and circumstances under which the managers can be removed or replaced by the members.

A California intermediate appellate court’s ruling earlier this month involving a manager-managed LLC, in Hillsborough Development Co., LLC v Annen, illustrates what can go wrong when the operating agreement names one of its members as sole manager but fails to include any provision addressing manager removal.

Continue Reading Statute Trumps LLC Agreement’s Voting Rights Provision in Dispute Over Manager’s Removal

It’s that time of year again, when I offer some lighter fare for poolside consumption consisting of summaries of a few recent decisions of interest involving disputes between business co-owners.

This year’s summaries include:

  • a New York case in which a minority member of a Delaware LLC asserted an ill-fated claim for minority “shareholder” oppression;
  • a California case in which the court disqualified a lawyer hired by one of two 50/50 partners to represent the partnership in a partition action;
  • a Delaware case in which the court dissolved a limited partnership going through a business meltdown exacerbated by the controlling general partner’s refusal to cooperate with the court-appointed receiver;
  • and an Illinois case in which an appellate court revived a minority shareholder’s suit to set aside a zero-dollar buyout settlement agreement based on an alleged pre-agreement misrepresentation by the buyer’s counsel that the company was in debt.

New York Court Dismisses Minority “Shareholder” Oppression Claim by Delaware LLC Member

Does Delaware law recognize a non-dissolution cause of action for “minority shareholder oppression” of an LLC member? In 3P-733, LLC v Davis, 2019 NY Slip Op 30946(U) [Sup Ct NY County Apr. 2, 2019], Manhattan Commercial Division Justice Andrea Masley dismissed such a claim on other grounds, namely, because the claim was duplicative of the plaintiff LLC member’s separate claim for breach of fiduciary duty. Continue Reading Summer Shorts: LLC Minority Member Oppression and Other Decisions of Interest

Strict procedural rules apply to corporate dissolution proceedings in New York, a difficult truth learned the hard way by a five-time rejected, would-be dissolution petitioner in a recent decision by Bronx County Supreme Court Justice Ruben Franco in Corner Furniture Discount Ctr., Inc. v Sapirstein, 2019 NY Slip Op 32245(U) [Sup Ct Bronx County June 14, 2019]. Four other decisions in a related case compounded the loss, as we shall see below.

The Underlying Facts

In the 1980s, Stechler and Sapirstein formed a retail furniture business. In the 2000s, Stechler’s son joined. The business expanded into four corporations. The two named plaintiffs – Corner Furniture Discount Center, Inc. and 2901 Furniture Outlet, Inc. (the “Furniture Entities”) – were operating entities. Two non-parties – Rongar Realty of N.Y., Inc. and 2926 Realty Corp. (the “Realty Entities”) – were real estate holding companies. Continue Reading How Not to Start a Corporate Dissolution Proceeding

Many thousands of closely held corporations, limited liability companies, and limited partnerships formed under Delaware law (and, to a much lesser extent, other foreign states) make their home in New York. Those entities, while tending to have more sophisticated organizational documents than domestic entities, are no more or less immune to internal dissension and litigation including applications for judicial dissolution.

New York jurisprudence and, for that matter, American jurisprudence, has evolved over many decades on the question of the judicial power of courts in one state to resolve disputes concerning the internal affairs of business organizations formed under the laws of another state. By now, it is universally recognized, at least as concerns non-existential matters, that courts can exercise jurisdiction in such cases. New York courts, especially those based in Manhattan, routinely decide disputes involving contract and tort claims among co-owners of Delaware entities and, in doing so, follow and apply Delaware law.

As for existential matters, it took even longer for New York law to coalesce around the question of subject matter jurisdiction to hear petitions to dissolve foreign business organizations — a question never addressed by the Court of Appeals, the state’s highest court. In 2016, however, the Manhattan-based Appellate Division, First Department, in Matter of Raharney Capital,  joined ranks with prior rulings by other intermediate appellate courts categorically holding that New York courts lack subject matter jurisdiction over petitions to dissolve foreign business entities.

Behind Raharney and other decisions of its ilk lurks an interesting question never fully answered in the case law: even if New York courts cannot dissolve foreign entities, do they have jurisdiction to hear what are called quasi-dissolution cases, that is, petitions alleging grounds for dissolution but seeking only lesser remedies such as compelling a buyout, adoption of a dividend policy, an accounting, or injunctive relief?

Rosania v Gluck

As far as I know, the first case to raise that lurking question post-Raharney is Rosania v Gluck, 2019 NY Slip Op 32087(U) [Sup Ct NY County July 8, 2019], decided earlier this month by Manhattan Commercial Division Justice Saliann Scarpulla. Continue Reading Court Blocks “End Run” Around Bar to Subject Matter Jurisdiction in Suit to Dissolve Foreign LLC

Last week’s post examined an unusual case in which the court appointed a temporary receiver of an LLC pending the adjudication of the minority members’ petition for judicial dissolution. But what about the court’s power to appoint a receiver a/k/a liquidating trustee following the court’s involuntary dissolution of an LLC?

There’s a statute for that, namely, section 703 of New York’s LLC Law. The statute authorizes a member “upon cause shown” to apply to the court for appointment of a receiver to wind up the affairs of an LLC that has been dissolved voluntarily or involuntarily. What “cause” suffices? The statute doesn’t say, leaving it entirely to the court’s discretion.

Appointing a post-dissolution receiver sometimes can seem like a no brainer, as when the LLC is owned and managed by two, co-equal managing members whose inability to co-manage precipitated the dissolution. In such cases, and depending on the nature of the business, a court may condition appointment of a receiver on the members’ ability to agree to a winding up plan by a specified date, or appoint a receiver from names supplied by the parties, or appoint one of the members as receiver, or appoint an outside receiver of its own choosing.

A recent decision by Manhattan Commercial Division Justice Andrew Borrok in Tufenkian v Tirakian, 2019 NY Slip Op 31052(U) [Sup Ct NY County Apr. 19, 2019], adds to the handful of reported LLC cases in which courts address post-dissolution receivership. Like the Cangro case examined in last week’s post, it stems from an unusual set of facts leading to appointment of a receiver, but there the similarity ends. Continue Reading LLC’s Post-Dissolution Receivership is On, is Off, is On

The limited liability company did not exist as a legally recognized business entity in New York when I first began handling business divorce cases in the 1980s. Decades later, the LLC is “King of the Hill,” having displaced closely held business corporations and partnerships as the entity of choice for newly formed businesses in New York and across the nation.

The legislative premise of LLC enabling statutes is freedom of contract. The statutes establish default rules that, with few mandatory exceptions, can be modified or even eliminated by the members in their operating agreement so as to order their internal affairs as they see fit to optimize management, operating, and economic efficiencies.

The default rules comprising New York’s LLC Law contain necessarily broad and undefined terms in identifying and enforcing the rights and responsibilities of LLC members and managers. As with other enabling statutes, by and large the legislature left it to the courts to construe, define, and refine the LLC Law’s provisions on a case-by-case basis. Over time, and through the doctrine of precedent known as stare decisis, the courts collectively fashion a common-law quilt that provides guidance for lawyers and other business advisors and, in turn, transactional certainty to the business community.

Matter of Cangro

These ruminations meet their antithesis in a recent decision in a case called Matter of Cangro, 2019 NY Slip Op 31846(U) [Sup Ct Richmond County May 16, 2019], in which two non-managing members together holding 25% of a family-owned, single-asset realty LLC petitioned for judicial dissolution under LLC Law § 702 based on allegations that they were being excluded from management and deprived of access to banking, insurance, and other granular business records. Continue Reading Court Appoints Interim Receiver for LLC, But at What Price?

Two years ago, we wrote about a bitter rivalry between two brothers, James and Vincent Cortazar, over their ownership and management of a single-asset real estate enterprise, 47th Road LLC, which owned an apartment building in Queens. In our last article, Queens County Justice Timothy J. Dufficy issued an order dissolving the LLC under Section 702 of the Limited Liability Company Law. The Court concluded that the brothers were so badly divided, and the LLC so mismanaged by James (the apartment building was in foreclosure), that the company was unable to function as intended, leaving dissolution the only option. The Court appointed a receiver to wind down the LLC’s affairs. Pursuant to a later order, the receiver sold the building for a purchase price of $2.5 million, subject to certain credits for outstanding code violations at the building, which became important in the trial to come.

Last month, after a seven-day bench trial, Justice Dufficy issued a lengthy Bench Trial Order and Judgment, a whopper of a follow up to his earlier dissolution ruling. In the dissolution decision that preceded it, the Court ruled that the evidence cast James, the brother in exclusive control of the business, in a decidedly unfavorable light. Did he fare any better after a full-blown trial on the merits? Let’s take a look. Continue Reading The Brothers Cortazar Wage War Once Again

  1. Business divorce cases more often than not include claims against the controlling owners for diversion or waste of company assets,  usurpation of corporate opportunity, taking excessive compensation and the like. The party directly harmed by the claimed misconduct is the company.

Under settled law, that means the claim belongs to the company and, at least in the first instance, is to be pursued or not in accordance with the business judgment of the board of directors or, in the case of an LLC, its managers. (For the sake of simplicity, I’ll use the word “board” to refer both to a corporation’s board of directors and the collective managers of an LLC whether or not denominated a board of managers, and I’ll use the word “controller” to refer to the individual board members.)

While the effects of the claimed misconduct may have no less of an impact on the non-controlling owner, the harm is indirect and therefore not amenable to a direct claim in the name and right of the non-controlling owner. Enter the derivative action, in which a shareholder or LLC member sues some or all the controllers for recovery on behalf of the company. Continue Reading The Demanding Demand Requirement in Shareholder Derivative Actions

Normally you don’t associate the lucrative sale of a closely held business with bitter disputes among the co-owners leading to judicial dissolution proceedings. When the cake is big enough, the thinking goes, each owner walks away sated with their own, generous slice.

But if I’ve learned anything as a business divorce lawyer, it’s that when it comes to family-owned businesses, there’s no normal. Take Hanley v Hanley, 2019 NY Slip Op 50970(U) [Sup Ct Albany County June 13, 2019], in which Justice Richard M. Platkin of the Albany County Commercial Division ordered the parties to confer regarding the use of early mediation after denying a motion to dismiss a judicial dissolution petition brought following the sale of the family business to a strategic buyer in a highly lucrative deal.

The Business

The Hanley siblings co-founded with their father a successful truck driving school organized as a New York corporation with its principal place of business in Florida. The business, known as The Commercial Driver’s License School, Inc. (CDL School), started in 1991 with the father as majority owner. Eventually, the three siblings came to own 100% of the stock: Albert 50%; Andrea 25%; Michael 25%.

CDL School built its growth and profitability in large part on contracts with the military to train service members on military bases.  Continue Reading Siblings Battle Over Spoils from Sale of Family-Owned Business

It’s commonly said there are three things that matter with real estate: location, location, location. Likewise, three things matter when choosing a lawyer to set up a limited liability company: experience, experience, experience.

Tom Rutledge’s terrific blog, Kentucky Business Entity Law, last week highlighted a case in which the admitted inexperience of the lawyer who organized an LLC ultimately proved fatal to its existence and to a farming operation owned by the same family for four generations over 100 years. It’s a sobering lesson for anyone contemplating forming a new LLC for a start-up business or to serve as the ownership vehicle for an existing business.

Felt v Felt, No. 18-0710, 2019 WL 2372321 [Iowa Ct App June 5, 2019], involved a dissolution lawsuit among the three children of Richard Felt, the third-generation owner of an Iowa farm. One of the children, David, worked and lived on the family farm for decades when his father was diagnosed with cancer in 2013 and died in 2015. Richard’s will left his property equally to David and his two siblings, Susan and Daniel. Continue Reading Trouble Down on the Farm: The Importance of Using Experienced Counsel When Forming an LLC