There are plenty of advantages to practicing business divorce litigation in New York.  The diversity of businesses and clients, complexity of agreements and transactions, and excellence of judges and attorneys make New York, in my view, the place to be for commercial litigators of all stripes.

One downside is the reality that crowded dockets and busy judges sometimes results in too terse decisions from the trial and appellate courts.  At the appellate level, hundreds of pages of evidence, and nuanced, extensively briefed legal theories are sometimes reduced to a one-line decision.  Not only do those one-liners inevitably leave the parties dissatisfied, but they also miss an opportunity to lend reasoned, precedential analysis to complex and unsettled questions of law.

But in some sense, that’s where the lawyers come in.  New cases can be won or lost in the grey areas created by brief appellate authority, and the sharpest lawyers will find the precedential value in even the shortest appellate decisions.

These few paragraphs are already much longer than the Fourth Department’s recent decision affirming dismissal of a shareholder’s claim for dissolution pursuant to BCL 1104-a in Kavanaugh v Consumers Beverages, Inc., 205 NYS3d 637 (4th Dept 2024).  But in a few words, the Fourth Department packs a punch in corporate dissolution jurisprudence.

Continue Reading Termination, Adequate Alternative Remedies Sends Dissolution Proceeding Packing

Folks who’ve been following this blog for years know that periodically I like to venture beyond New York’s borders to find and report on interesting decisions from other states in business divorce cases.

Historically there have been significant differences in the statutory and case law of the 50 states that limit the utility of cross-border research and citation in disputes between co-owners of partnerships, close corporations, and LLCs. Delaware law, for example, does not authorize a claim for judicial dissolution of a close corporation based on shareholder oppression.

On the other hand, the growing proportion nationwide of business divorce cases involving LLCs, which by their nature lend themselves to a contract-centric mode of jurisprudence, have had something of an interstate leveling effect which encourages business divorce practitioners to keep abreast of out-of-state case law developments.

In that vein, following are summaries of five noteworthy, recent court decisions from five different states — two involving LLCs, one involving a limited partnership, and two involving close corporations.

Delaware: Chancery Court Invalidates LLC Manager’s Removal Based on Unauthorized Amendment of Operating Agreement

In DiDonato v Campus Eye Management, LLC, decided earlier this year by Vice Chancellor Will, the plaintiff sued under Section 18-110 of the Delaware LLC Act for a declaration that the majority member of the parent company of the defendant management services organization (MSO) improperly removed him as the MSO’s sole manager pursuant to an invalid amendment of its operating agreement adopted without the plaintiff’s consent.

Continue Reading Crossing the Hudson: Recent Business Divorce Decisions from Yonder States

Under a common-law doctrine successful litigants love to hate – the “American Rule” – a party to litigation cannot recover its legal fees unless a contract, statute, or court rule expressly authorizes fee-shifting to the prevailing party.

For many clients, it’s a bitter pill to swallow to learn they cannot recover their legal fees from the other side, even if they win. But in business divorce litigation, as we’ve previously written, there are many exceptions.

A pair of brand-new Manhattan appeals court decisions highlight two exceptions to the general rule against fee-shifting, and some key differences between them.

In O’Mahony v Whiston (224 AD3d 609 [1st Dept Feb. 27, 2024]), the Court considered the propriety of a $1.8 million post-trial attorneys’ fee award to a successful plaintiff under the shareholder derivative statute, Section 626 of the Business Corporation Law (the “BCL”).

Under BCL § 626 (e), where a shareholder derivative plaintiff is “successful, in whole or in part, or if anything was received by the plaintiff” on behalf of the entity, “the court may award the plaintiff . . . including reasonable attorney’s fees . . . .”

In Seibel v Ramsay (___ AD3d ___, 2024 NY Slip Op 01617 [1st Dept Mar. 21, 2024]), the Court considered the propriety of a $4 million post-trial attorneys’ fee award to celebrity chef Gordon Ramsay under a contractual indemnification provision. As we shall see, though, Ramsay was not even a party to the contract.

I wrote about both of these exceptionally interesting cases previously (you can read my articles about the events preceding the recent appeals here and here).

I’m pleased to write about the two cases again at the finale of their ten-year-long merits litigation odysseys (except in the unlikely event one or more losing defendant obtains leave to reargue or leave to appeal to the New York State Court of Appeals).

The message of both these cases is clear. Where fee-shifting is on the table because of a statute or contract, do not underestimate the awesome (for plaintiff) and terrifying (for defendant) potential for a massive fee award if the case goes the distance to a final adjudication on the merits. In fact, as we shall see below, the Appellate Division made clear that there is nothing inherently reversible about an attorneys’ fee award far exceeding the amount of the actual damages award.

But whether the fee award is collectible, however, is an entirely different question. We’ll consider that problem at the end of this article.

Continue Reading Two Cases. Two Mammoth Fee Awards. Coup de Grâce or Pyrrhic Victory?

The last time we featured a notable decision on a claim for dissolution of a restaurant-operating LLC was in 2017, with a post by Frank McRoberts titled, “LLC’s Purpose Being Achieved?  Business Doing Fine?  Good Luck Getting Judicial Dissolution.”  The title summarizes the takeaway: If the LLC is achieving its contractually-stated purpose and remains a financially viable operation, the odds of success on a contested dissolution claim are low.

In the years since that post, I’ve related that message to clients, courts, and colleagues.  The relatively high standard for judicial dissolution of an LLC (here is a primer on the “unable or unwilling to promote the stated purpose” standard of 1545 Ocean Avenue), combined with the fact that many operating agreements contain a broad “purpose clause,” combined with the potential for a bad faith defense (discussed here) has produced a considerable number of cases where a minority owner’s bid to dissolve a financially viable LLC is rejected. 

That background makes this week’s case all the more interesting.  A New York LLC with a broad, “purposeless” purpose clause and demonstrated financial sustainability is dissolved over . . . the minority owner’s disagreement with the menu? 

Continue Reading The Legal Ramen-ifications of Dissolving a New York LLC Over Noodle Choices

Last week, the Manhattan-based Appellate Division, First Department, handed down one of the more intriguing decisions by a New York court I’ve seen in a long time involving a dispute between LLC members.

The central issue in the case, brought by an investor in a Delaware LLC against the LLC’s controller, is whether an oral agreement between two sophisticated entrepreneurs, in which the controller allegedly induced the investment by guaranteeing to cash out the plaintiff’s position under either of two scenarios, is barred by the generic merger clause in a subsequent amended operating agreement that the investor never signed.

The lower court granted the defendant’s pre-answer dismissal motion following which the plaintiff appealed. The Appellate Division last week in Behler v Tao (read here) affirmed the order below in a 3-2 decision featuring a majority opinion authored by Presiding Justice Sallie Manzanet-Daniels, applying what she labels “explicitly contractarian” Delaware LLC law “sometimes leading to harsh results,” and a dissenting opinion authored by Justice Ellen Gesmer exalting “basic principles of contract law and fundamental fairness.”

Background

The case was decided on a pre-answer dismissal motion, hence most of the facts you’ll read in the court’s decision and here are the plaintiff Behler’s version of the events as laid out in his complaint which you can read here.

Continue Reading New York Appellate Court’s Split Decision Involving Delaware LLC Pits “Harsh” Contractarianism Against “Fundamental Fairness”

Jury trials in business divorce litigation are uncommon. Bifurcated business divorce jury trials are all but nonexistent.

But in Aronov v Khavinson (81 Misc3d 1242(A) [Sup Ct, Kings County Feb. 9, 2024]), we encounter the elusive specimen in the wild: a successful jury verdict on liability on a slew of business tort, quasi-contract, and equitable claims in the first phase of a bifurcated jury trial by an LLC owner against the entity’s three managers, including a lawyer.

Basic Principles of Bifurcation

For those not familiar, “bifurcation” refers to the practice of trying a case in two parts: a liability phase, followed, if the jury renders a plaintiff’s verdict on liability, by a separate damages phase.

Our readers who happen to be lawyers may associate trial bifurcation generally with the Appellate Division – Second Department, and with bodily injury or death claims specifically, not business divorce cases (see e.g. Castro v Malia Realty, LLC, 177 AD3d 58 [2d Dept 2019] [“For decades, trial courts in the Second Judicial Department have, as a general rule, conducted trials in personal injury actions in a bifurcated manner”]). In cases for “personal injury,” judges are “encouraged” to “direct a bifurcated trial of the issues of liability and damages” (Marisova v Collins-Brewster, 223 AD3d 891 [2d Dept 2024]).

One of the theories of bifurcation is that the jury should not reach the question of damages without first finding a viable case for liability. If a plaintiff’s damages case is strong, but liability weak, a unified trial of both liability and damages may unfairly incline a jury to sympathize with the plaintiff, disfavor the defendant, or otherwise permit its view of damages to influence its perception of liability. Or so the thinking goes. Hence, the bifurcated trial, where a plaintiff must prove liability in one trial before the jury may reach the question of damages in another.

But sometimes damages overlap with liability to such a degree that bifurcation may be impractical or unfair to the plaintiff. Where damages have “an important bearing upon the question of the liability,” a unified trial is warranted (Matthew H. v County of Nassau, 131 AD3d 135 [2d Dept 2015]).

In the end, bifurcation is “not an absolute given,” but a matter of discretion: it is the “responsibility of the trial judge to exercise discretion in determining whether bifurcation is appropriate in light of all relevant facts and circumstances presented by the individual case” (Rueda v Elmhurst Woodside, LLC, 187 AD3d 955 [2d Dept 2020]).

How did the trial judge – Kings County Supreme Court Justice Patria Frias-Colon – arrive at that exercise of discretion in Aronov? Let’s take a look.

Continue Reading Rare as a Dodo: Bifurcation in Business Divorce Trials

“Under any standard of value, the true economic value of a business enterprise will equal the company’s accounting book value only by coincidence . . .” says the late business valuation expert and author Shannon Pratt.  So why do so many shareholder buy-sell agreements require that the shares be purchased for book value? 

While I can think of a few likely answers to that question (e.g., ease of calculation, agreements modeled on BCL 1510, and the likelihood that for operating businesses fair value will exceed book value), the near certainty of a disparity between book value and fair value increases the odds for litigation.  Inevitably, one party to a book value buy-sell agreement is getting a bad deal. 

As a result, New York caselaw is filled with cases covering all sorts of attempts to evade the sometimes economically harsh consequences of a book value buyout, to varying degrees of success.  Neville, Rodie and Shaw, Inc. v LeGard, 3:23-CV-266 (D Conn Feb. 16, 2024) is the latest.

Continue Reading And the Award for Most Creative Attempt to Evade a Book Value Buy-Sell Provision Goes To . . .

In my business divorce practice I deal with many closely held corporations that have only a few or perhaps just two shareholders, each of whom is actively involved in running the business. Within that category are many companies whose owners essentially ignore some if not all the corporate formalities mandated by New York’s Business Corporation Law.

Foremost among the neglected formalities is a functioning board of directors as required by BCL 701 (“the business of a corporation shall be managed under the direction of its board of directors”), the members of which “shall be elected” at “each annual meeting of shareholders” as required by BCL 703. At least while relations among the owners are copacetic, I’m sure I’d be met with incredulous looks if I were to recommend annual board elections and regular board meetings complete with meeting minutes to a small group of operating owners who are in regular if not daily contact with one another.

Relations among co-owners can sour for many reasons. One of the more common reasons for dissension is a co-owner’s self-interested transaction with the company. Apart from whether the transaction breaches a common-law fiduciary duty, when the actor is a director — even if only nominally so — enter the “Interested Directors” statute, BCL 713, which imposes a series of guardrails on the ability of a director to engage the corporation in a contract or other transaction with any other entity in which the director has a substantial financial interest.

Continue Reading Enforcing the Guardrails on Transactions Involving Interested Directors of Close Corporations

Sections 706 (d) and 716 (c) of the Business Corporation Law (the “BCL”) both contain a “for cause” standard for judicial removal of corporate directors and officers. Complaints with claims for judicial corporate director and officer removal are common. Decisions actually ordering removal are rare. Very rare. Over the past two decades, there have been less than a dozen appeals court decisions to even cite BCL 706 or 716, and not one involved actual removal on the merits of an officer or director.

The closest to reach the merits of a removal claim, Colucci v Canastra (130 AD3d 1268 [3d Dept 2015]), ruled that four shareholders of a corporation that owned and operated a golf course “submitted prima facie evidence” warranting a trial whether “there was cause for defendant’s removal due to his use of Hillcrest’s profits to pay for clubhouse operations that only benefitted him.”

Last month, in Gam v Dvir (___ AD3d ___, 2024 NY Slip Op 00181 [2d Dept Jan. 17, 2024]), a Brooklyn-based appeals court became the first in a generation to consider the merits of a lower court’s decision ordering judicial removal of a corporate officer or director.

Continue Reading The Flexible “For Cause” Standard for Director and Officer Removal

More often than not, the centerpiece of an intra-owner business dispute is a claim that those in control of the business breached their fiduciary duties to the company or the minority owners.  While often easy to assert, the breach of fiduciary duty claim is subject to incredibly nuanced legal theories, including those surrounding agreed-upon conduct, safe harbors, conflicts of interest, business judgment, reasonable means, and different standards of review.  Litigants often agree that a majority shareholder or director owes fiduciary duties to the company, then sharply disagree on what those duties are and how their conduct should be adjudged.  

This week’s post takes us to the halls of Delaware Chancery Court, where a recent decision from Vice Chancellor Laster, In re Sears Hometown and Outlet Stores, Inc. Stockholder Litig., 2019-0798-JTL [Del Ch Jan. 24, 2024], offers a first-of-its-kind roadmap for assessing the fiduciary duties owed by a majority shareholder.

Continue Reading The First State Defines the Scope of Majority Shareholder Fiduciary Duties