Douglas K. Moll, Professor of Law at the University of Houston Law Center, is well known to business divorce aficionados for his many scholarly articles examining minority oppression and fiduciary duty in close corporations and LLCs, and as co-author with Robert Ragazzo of one of the leading treatises on closely held business organizations. He’s also familiar to regular readers of this blog, having been featured previously in an online interview and in Episode #8 of the Business Divorce Roundtable podcast.

Professor Moll recently published yet another, terrific article entitled Judicial Dissolution of the Limited Liability Company: A Statutory Analysis (19 Tennessee Journal of Business Law 81 [2017]) in which he brings some much-needed perspective to the statutory landscape of the diverse grounds for judicial dissolution of LLCs found among the fifty states, the District of Columbia, and the several uniform and model acts promulgated since the 1990s. From the article’s abstract:

This article, prepared for the Business Law Prof Blog 2017 Symposium, examines the statutory grounds available to members who seek judicial dissolution of an LLC in all fifty states plus the District of Columbia. I also examined the judicial dissolution grounds in five model statutes: the 1992 Prototype LLC Act, the 2011 Revised Prototype LLC Act, the 1996 Uniform LLC Act, the 2006 Revised Uniform LLC Act, and the 2013 Revised Uniform LLC Act. Two charts are provided – one that provides the judicial dissolution grounds for each statute, and one that tabulates the different approaches.

Part I summarizes the methodology used and highlights the frequency of various statutory provisions. Part II analyzes two particular provisions—dissolution if it is not reasonably practicable to carry on the LLC’s business in conformity with its governing documents, and dissolution as a result of oppressive conduct by those in control. With respect to the “not reasonably practicable” language, the article argues that the impracticability of carrying on the business in conformity with either the certificate or the operating agreement should result in dissolution, but there is confusion over which statutory articulation is consistent with this result. With respect to the oppressive conduct ground, this article provides some possible explanations for why oppression-related dissolution statutes are less common in the LLC setting than in the corporation context.

Happily, Professor Moll accepted my return invitation to the podcast to discuss his findings. In the interview, a link to which appears below, Professor Moll highlights some surprising variations among the statutory expression of the prevailing not-reasonably-practicable dissolution standard. He also discusses some of the reasons for the relative scarcity — compared to close corporation statutes — of minority oppression as ground for judicial dissolution of LLCs, and the competing forces of freedom of contract and judicial paternalism that continue to shape the evolving statutory and common-law jurisprudence governing internal relations among LLC members.

Give it a listen. I guarantee you’ll be glad you did.

 

The dog days of August are upon us, a perfect time as I do each year to offer vacationing readers some lighter fare consisting of summaries of a few recent decisions of interest involving disputes between business co-owners.

This year’s summaries include a partnership appraisal case from Nebraska in which the usual “battle of the experts” turned into a romp for one side, a New York case in which one side insisted that a written “Shareholder Agreement” was not really a shareholder agreement, and a federal court decision from Illinois in which the court rejected the argument that it should abstain from hearing a statutory dissolution claim.

A Train Wreck of a Valuation Case

If you want a lesson in how not to litigate an appraisal proceeding, look no further than Fredericks Peebles & Morgan LLP v Assam, 300 Neb. 670 [Sup Ct Aug. 3, 2018], in which the Nebraska Supreme Court recently affirmed the appraisal court’s determination, pursuant to the buy-out provisions of a law firm partnership agreement, of the $590,000 fair market value of a withdrawn partner’s 23.25% partnership interest. Continue Reading Summer Shorts: Partnership Appraisal and Other Recent Decisions of Interest

A few weeks ago, this blog – in the first of a three-part series about business valuation proceedings – addressed the various statutory triggers by which owners of New York partnerships, corporations, and limited liability companies can wind up in a contested business appraisal proceeding.

So you, or your client, have found yourself in an appraisal proceeding. The question then becomes: What are the legal rules, principles, and standards that apply in the valuation proceeding itself? That is the subject of today’s article.

“Value” Versus “Fair Value”

The ultimate purpose and objective of an appraisal proceeding is to determine the correct “value,” the term found in the Partnership Law (i.e. Sections 69 and 73), or “fair value,” the term used in both the Business Corporation Law (i.e. Sections 623 and 1118) and Limited Liability Company Law (i.e. Sections 509, 1002, and 1005), of an owner’s interest in a business for the purpose of a buyout of liquidation of that ownership interest.

The interplay of the “value” and “fair value” standards raises a trio of threshold questions. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 2

Shareholders A and B are the sole shareholders of a real estate holding corporation. Their shareholders’ agreement includes provisions that:

  • guarantee each of them a seat on the two-member board of directors and appoint each as co-president;
  • prohibit their removal from the board with or without cause;
  • in the event of death, disability, or resignation, authorize the vacant board seat to be filled by the departing shareholder’s child;
  • require majority (i.e., effectively unanimous) board consent for all board actions;
  • require 55% (i.e., effectively unanimous) shareholder consent for all actions needing shareholder approval.

Under these provisions, neither A nor B can take any action at the board or shareholder level without the other’s consent. Sounds like a perfect set-up for a deadlock dissolution petition in the event A and B reach impasse on some critical issue jeopardizing the corporation’s viability, doesn’t it?

What if I now add that Shareholders A and B own 49% and 51%, respectively, of the corporation’s common shares? Can Shareholder A still bring a deadlock dissolution petition?

Not according to a recent decision by Manhattan Commercial Division Justice Saliann Scarpulla in Balkind v Nickel, 2018 NY Slip Op 31703(U) [Sup Ct NY County July 16, 2018], in which she dismissed a deadlock dissolution petition filed under Section 1104 of the Business Corporation Law brought by a 49% shareholder, despite his co-equal board and shareholder control. Continue Reading 49% Shareholder Can’t Seek Deadlock Dissolution Despite Shareholders’ Agreement Granting Co-Equal Control

When you think about protecting a business firm’s intellectual property (IP), usually you think about protecting it from infringement by external actors.

But there also are internal threats — even mortal ones — to the business when the owners don’t take adequate steps to allocate and memorialize ownership rights in the business-related IP as between the company and those responsible for its creation.

Two recent cases illustrate the point.

What’s In a Name?

The first, from New York, involves a popular Manhattan restaurant serving Southern cuisine, called Root & Bone, operated by the eponymously named Root & Bone LLC. The company was formed in October 2013 by its three members, the plaintiff Freedman and defendants McInnis and Booth, each holding a one-third membership interest. Continue Reading Dissension Follows When Business Owners Don’t Put Their IP House in Order

When three gentlemen in their mid-eighties, one of whom is in a nursing home with failing health and onset dementia, are the key players in a disputed shareholder buy-out transaction, what are the odds they’ll all be around to give evidence in a lawsuit brought four years later?

If you answered slim or none, you’d be right in the case of Gourary v Laster, 2016 NY Slip Op 04287 [1st Dept June 12, 2018], where the absence of testimony by the two deceased principals and the deceased lawyer for one of them doomed a lawsuit on behalf of the estate of an enfeebled 50% shareholder who, about six months before he died, sold for $5.75 million his 50% stake in a realty holding company to the other 50% shareholder’s son-in-law who, less than a year later, sold the company’s realty to a third party for $32 million.

The case involves a corporation named 121-131 West 25th St. Corp. that was co-owned equally by Paul Gourary and Oliver Laster since the 1940’s when the corporation acquired a 12-story commercial building in Manhattan’s Chelsea district. In 2005, after the ailing Gourary was admitted to a nursing home, Laster’s son-in-law, Scott Macomber, expressed an interest in acquiring either a 50% interest in the realty or buying Gourary’s 50% stock interest. Continue Reading Dead Men Tell No Tales of Shareholder Buy-Outs Gone Sour

Last month, seasoned business appraiser Andy Ross of Getty Marcus CPA, P.C., and I made a presentation at the Nassau County Bar Association about appraisal proceedings in business divorce cases. With the subject of business valuations front of mind, this article – the first in a three-part series – is a treetops summary of the rules governing how business owners may wind up in an appraisal proceeding. Later articles will address the legal and accounting principles that apply in the valuation proceedings.

But before we get started, some context. What exactly is a valuation proceeding? A valuation proceeding is a special kind of lawsuit in which the owners of a business litigate the “value” (the relevant standard under New York’s Partnership Law) or “fair value” (the standard under the New York Business Corporation Law and Limited Liability Company Law) of a partnership, stock, or membership interest in a business for the purpose of a potential buyout or liquidation of that owner’s interest. Appraisal proceedings may be forced, or they may be voluntary. They may involve a variety of different accounting approaches or methodologies to value an ownership interest. They are always heavily dependent upon expert testimony of accountants. For that reason, the “determination of a fact-finder as to the value of a business, if it is within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” (Matter of Wright v Irish, 156 AD3d 803 [2d Dept 2017]).

What are the ways in which a business owner can wind up in a valuation proceeding? The statutory paths, or routes, to a litigated appraisal depend on the kind of entity involved. This article discusses three basic entity forms: partnerships, corporations, and LLCs, and provides a non-exhaustive list of the most common ways to get to a valuation proceeding. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 1

Three recent court decisions from three different states — New York, Pennsylvania, and Alabama — add to the rogue’s gallery of valuation cases stemming from poorly conceived and/or poorly implemented buy-sell agreements among shareholders or LLC members.

Each one, in its own way, teaches a valuable lesson for lawyers charged with drafting such agreements, and also highlights the wisdom of consulting with appraisal experts at the time of drafting.

New York: The Nimkoff Case

The Nimkoff case is an old friend of this blog, and I do mean old. I first wrote about the case in its infancy, in 2010 (read here). Eight years later, following discovery and a dozen or so motions, the case has yet to be tried.

Nimkoff is a fight over the value of a 3.6% membership interest in a single-asset realty holding LLC owned by a group of medical doctors. The plaintiff is the wife-executrix of one of the doctors, whose death in 2004 triggered the LLC’s obligation to purchase the deceased member’s interest for a “Stated Value” in accordance with the operating agreement which also required that the Stated Value be updated annually. Continue Reading Lessons From a Trio of Dysfunctional Buy-Sell Agreements

The hard-fought business divorce litigation between Nissim Kassab and his brother Avraham has provided plenty of fodder for this blog over the last several years (here, here, here, and here) with more to come, as evidenced by Queens County Supreme Court Justice Timothy J. Dufficy’s decision earlier this month dismissing Nissim’s second attempt to plead a claim for judicial dissolution of the brothers’ realty-holding company known as Mall 92-30 Associates LLC (“Mall”), which owns an unimproved lot in a prime development location in downtown Jamaica, Queens, valued around $10 million.

Justice Dufficy’s ruling in Matter of Kassab v Kasab, 2018 NY Slip Op 50934(U) [Sup Ct Queens County June 11, 2018], comes on the heels of a post-trial decision last year in a related case brought by Nissim in which Justice Dufficy conditionally ordered dissolution of their corporation known as Corner 160 Associates, Inc. (“Corner”) which owned two unimproved lots adjoining Mall’s lot. Justice Dufficy’s order gave Avraham the option to buy out Nissim’s 25% interests in both Corner and Mall at fair values determined by the court, but Avraham took a pass and subsequently failed to obtain an appellate stay of the dissolution order, leading to a public auction sale of Corner’s realty two weeks ago by the court-appointed receiver for $18 million.

Nissim’s second shot at dissolving Mall, like the first unsuccessful one, illustrates anew the hurdles faced by a minority member of a solvent, realty-holding LLC, particularly when there’s no operating agreement giving the minority member additional management rights, in satisfying the prevailing standard for judicial dissolution of LLCs as articulated in the 1545 Ocean Avenue case, namely, the LLC’s management “is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved” or that “continuing the entity is financially unfeasible.” Continue Reading Court Denies Second Bite at Dissolution Cherry in Kassab Brothers Business Divorce

Article 11 of the Business Corporation Law features multiple provisions giving judges broad authority and discretion to impose interim remedies designed to preserve corporate assets and otherwise to protect the petitioning minority shareholder’s interests pending judicial dissolution and buy-out proceedings involving closely held New York corporations. They include appointment of a temporary receiver, injunction, setting aside certain conveyances, and bonding the eventual buy-out award.

As in any type of civil litigation, an application for one or more of Article 11’s interim remedies can be motivated by tactical as well as strategic goals, namely, to paint the adverse party as the “bad guy” and to gain leverage for settlement purposes.

Matter of Hammad v Al-Lid Food Corp., Decision and Order, Index No. 518406/17 [Sup Ct Kings County May 29, 2018], decided last month by Brooklyn Commercial Division Justice Sylvia G. Ash, looks like one of those cases in which tactical ambitions overshadowed strategic merit, resulting in the court’s denial of the minority shareholder-petitioner’s motion to impose multi-faceted interim, coercive remedies against the controlling shareholders, well after the corporation elected to purchase the petitioner’s shares for fair value. Continue Reading You Sued for Dissolution, They Elected to Buy You Out, What Else Do You Want?