It’s not every day that New York’s highest court considers a question impacting the business divorce cases that we typically litigate.  And even when an interesting business divorce issue does make its way up to Albany, it’s even more rare to see the Court of Appeals, in a case of first impression, fashion a new framework for addressing a complex question.  We recently were treated to both.

When the directors of a foreign corporation headquartered in New York negotiate and consummate (in New York), a merger of the corporation (which derives millions in revenue from New York), which law governs suits arising from that merger?  On this question, we now have Court of Appeals guidance. 

According to Eccles v Shamrock Capital Advisors, LLC, the internal affairs doctrine, by which “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders” are governed by the law of the state of incorporation, the foreign law applies (2024 NY Slip Op 02841 [Ct App May 23, 2024]).  The Court’s analysis and decision require careful consideration by any owner of a foreign-incorporated entity considering New York litigation. 

Continue Reading Court of Appeals Bolsters the Internal Affairs Doctrine, Takes a Stroll Through Scottish Fiduciary Law

Count ’em: At the time A sued B for judicial dissolution of one of their several jointly owned companies, there are not one, not two, not three, but eight pending lawsuits between the two 50/50 business partners who first teamed up over 20 years ago.

I would guess most people hearing that would think a judge hearing the dissolution case wouldn’t hesitate to grant the petition and appoint a receiver to wind down and liquidate the business. I also would guess a great many lawyers hearing that would think the same, reasoning that a practical-minded judge would find no good reason to perpetuate a badly fractured relationship between two deadlocked, hostile, highly litigious business owners who no longer communicate except through their lawyers.

As evidenced by Manhattan Commercial Division Justice Andrew Borrok’s ruling last month in Matter of Ruham dismissing a petition for judicial dissolution, those guesses would be wrong if the entity is a functioning, viable, single-asset real estate holding company organized as a New York LLC governed by boilerplate articles of organization and without a written operating agreement.

A Decades-Long Business Relationship Goes Kablooey

The antagonists in Ruham went into business together in the mid-1990’s. Their co-owned ventures include a high-end flooring business and restaurants. In 2000, they formed a company called Hoham 932 Grand Street LLC to purchase the property at that Brooklyn address, initially used for the flooring business and later for a restaurant.

Continue Reading It Takes More Than a Litigation Tsunami Between Hostile Members to Obtain Judicial Dissolution of a Realty-Holding LLC

The lion’s share of cases we write about on New York Business Divorce involve consummated business relationships where the warring parties have clearly chosen the particular entity form governing their relations, whether it be partnership, corporation, or limited liability company.

But a sizable minority of cases on our blog are less about consummated business relationships, and more about whether the parties actually formed an enforceable business relationship to begin with, and if so, in what form.

In Kefalas v Pappas (___ AD3d ___, 2024 NY Slip Op 01912 [2d Dept Apr. 10, 2024]), the Court considered both of these questions, including the intriguing question of whether one can form an enforceable joint venture even though the alleged venture’s affairs are handled in separate entities acting as alleged “mere conduits.”

Continue Reading Oral Joint Ventures: The Wild West of Business Associations

As both a practitioner and a close follower of New York business divorce caselaw, I’ve seen a recent uptick in disputes centered on the breakup of professional services firms and cryptocurrency businesses.  Perhaps the crypto business part is a natural consequence of the industry’s recent rapid expansion.  As for the professional services firms, your guess is as good as mine.    

Whatever the cause of the trend, these disputes present some of the most compelling and difficult valuation questions for lawyers and the valuation experts they rely upon.  How to value an owner’s interest in a professional services firm depends on the nature of the firm’s fee structure.  And the more complex the fee structure of the firm—picture a law firm with contingency-fee and co-counsel engagements in potentially massive, but also wildly uncertain verdicts—the more complicated the valuation.  And the legal world is just beginning to grapple with a basic understanding of blockchain technology, let alone the complex valuation questions that different cryptocurrency assets can raise. 

Based on these complications, a law firm with high-upside contingency-fee cases that accepted payment in cryptocurrency tokens might be one of the most difficult companies to value—a final exam in a business valuation expert’s litigation crash course, so to speak.  For some lawyers and experts, the results are in: Freedman Normand Friedland LLP v Cyrulnik, 21-CV-1746 (JGK) (SDNY May 15, 2024).   

Continue Reading When Law Firms Break Bad: The Valuation Battle Over Contingency Fees and Crypto Tokens

Posts about limited partnerships on this blog are far eclipsed by discussions on just about any other form of business entity because, as we’ve noted in the past, limited partnerships are generally on the decline.

So, I was pleased to debut my appearance here with what seemed to be an interesting case out of the Manhattan Commercial Division—Cline v Grodin, et al., Index No. 654095/2022—concerning an action commenced by a limited partner of a Delaware limited partnership alleging that the general partner (an LLC whose membership consists of the other two individual limited partners in the partnership) improperly distributed profits to those two limited partners, disguised as salaries for managerial duties the limited partners were never supposed to be paid for, without corresponding pro rata distributions to the aggrieved limited partner.

In Delaware (as in New York), a limited partnership is comprised of two classes of partner. General partners typically manage the business and affairs of the partnership. Limited partners, on the other hand, have limited liability (hence the name) because they are typically silent investors without a managerial role. A limited partner risks losing the benefit of limited liability if they participate in the control of the business (6 Del. C. § 17-303 [a]).

General partners may delegate management and control of the partnership’s business and affairs to agents, officers, and employees of the general partner or the partnership (6 Del. C. § 17-403 [c]).

What happens when the general partner delegates management and control of the partnership’s business and affairs to one or more of the limited partners? Can a “fee” paid to limited partners hired by the general partner (who is, itself, controlled by the same limited partners receiving the fee) be viewed as circumventing distributions to the other limited partners?

As it turned out, those are questions for another case on another day, because today’s case was resolved with the following finishing-blow delivered by Justice Jennifer G. Schecter, as recently affirmed by the First Department: “[T]he signed, amended, and restated limited partnership agreement that is dated as of October 1 of 2016 [] does utterly refute the claims that are in this complaint in every regard.” Ouch.

Let’s see what went wrong for our aggrieved limited partner, Cline.

Continue Reading You Get What You Get, and You Don’t Get Upset: First Department Boots Limited Partner’s Claims Based on Plain Terms of Limited Partnership Agreement

Closely-held business entities come in all shapes and sizes. By definition, under Partnership Law § 10, it takes “two or more” owners to form a general partnership. But corporations and LLCs have no such impediment, ranging in size from just one owner to hundreds.

For close entities with many owners, legal fights can and often do break out between a small group or faction of owners or controllers, leaving other interested stakeholders on the sidelines. Sometimes, owners who are not invited to the litigation may want to participate nonetheless, whether to directly influence the direction or outcome of the case, or perhaps just to feel their voices have been heard.

How is a spurned partner, shareholder, or LLC member of a close business entity not named as a party litigant able to participate in the case? In New York, there’s a statute for that. Two, actually.

Continue Reading Limo Company Shareholders Can’t Hitch a Ride in Derivative Litigation

One of the best parts of being a business litigator is the frequent opportunity it affords to work with (and against) expert witnesses of all stripes. And perhaps because there are so many ways that a business divorce can turn into a special proceeding in which the sole question before the court is the appraised value of the business, the business appraiser often is the most important expert witness. 

So when the chance comes along to blog about a noteworthy motion to exclude a business appraiser in a New York valuation proceeding, I can hardly resist.  And there’s some pride of authorship here—Peter Mahler and I represented the prevailing party in the motion. 

The motion to preclude was the final chapter in the LMEG Wireless saga—a business divorce instant classic.  Lessons abound for both lawyers and appraisers, from the criticality of scrutinizing evidentiary foundations to the perennial reminder: “Garbage In; Garbage Out.” 

Continue Reading Your Business Appraiser Relied on What!?  Lessons from a Mostly-Decided Motion to Preclude

In my 700+ posts on this blog since 2007, the vast majority of which focus on a particular court case, my goal is not to regurgitate the facts and issues decided by the court, but to provide legal context and to draw larger lessons and offer takeaways that readers, be they business owners or lawyers, will find helpful in their own business planning and dispute resolution.

I can draw no insightful legal lesson or offer any truly helpful takeaways from the case I’m writing about in this post. In my world, advising business owners not to engage in “old-fashioned forgery,” or telling business divorce lawyers not to disregard “what the law is or what the evidence shows,” is like reminding someone not to stop breathing.

The quoted phrases come from a recent decision by U.S. District Court Judge Arun Subramanian (S.D.N.Y.) in a case ostensibly about trademark infringement, but really about company control. You can read the decision here. I’m purposefully not using the case name, the company name, or the individual parties’ names so as to avoid requests from so-called “reputation management” firms hired by the parties involved in the case, asking me to take down or “anonymize” my post showing up in Google searches.

“This case (and its many state-court siblings) has a tortured history,” is the opening line in Judge Subramanian’s decision. The “siblings” are five or so related lawsuits filed in New York State Supreme Court beginning in 2017 — the federal court lawsuit was filed some five years later — involving essentially the same parties, none of which according to the court dockets have been resolved as yet.

I won’t torture myself or readers with laying out the convoluted history of the state court cases run amok. I can only guess that the dispute landed in the federal forum in an effort by one side to bypass the state court logjam.

Continue Reading Battle for Company Control Turns on Conflicting Copies of Operating Agreement Amid Accusations of “Old-Fashioned Forgery”

Does the outside accountant of a closely-held business and its individual owners owe a legal duty to disclose to one owner the suspected financial improprieties of another?

Does the accountant’s failure to make such disclosure expose the accountant to liability for malpractice and aiding and abetting the unscrupulous business owner’s tortious activity?

Until recently, I would have said no to both questions.

But earlier this month, a Manhattan-based appeals court issued 1650 Broadway Assoc., Inc. v Sturm, ___ AD3d ___, 2024 NY Slip Op 01864 [1st Dept Apr. 4, 2024]), a bombshell decision for already anxious accountants at the height of tax season.

1650 Broadway is a warning to accountants of closely-held businesses that where they allegedly acquire knowledge or information of an owner’s financial improprieties, New York common law may now impose upon them an affirmative duty to make disclosure to a co-owner with whom the accountant has an accountant-client relationship, failure of which may be considered participation or aid in the tort, exposing the accountant to individual liability for professional negligence, aiding and abetting, or both.

Continue Reading Business Divorce and Accountant Liability

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