Notwithstanding we’ve had no more than a dusting of snow thus far in my downstate New York neck of the woods, welcome to another edition of Winter Case Notes in which I visit my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

This year’s synopses feature cases involving minority shareholder oppression claims in a father-daughter dispute previously reported on this blog; an appellate decision affirming the dismissal of a books and records action involving Delaware LLCs; one case granting and another denying claims for advancement and indemnification of legal expenses; the dismissal of claims alleging wrongful transfer of the plaintiff’s LLC membership interest; and a decision compelling arbitration of a claim for wrongful removal of the plaintiff as a manager and member of an LLC.

Oppression of the “Gifted” Minority Shareholder

By “gifted” I’m referring not to the natural talents or intellect of a minority shareholder, but to her ownership of shares by way of a gift from a family member. Under the governing reasonable-expectations standard, can such a shareholder, who made no investment and has no involvement in the company’s business affairs, successfully petition for dissolution based on a claim of oppression by a majority shareholder based on the latter’s denial of her shareholder status? Continue Reading Winter Case Notes: Oppression of the “Gifted” Minority Shareholder and Other Recent Decisions of Interest

DRAFTING ERRORS, ANYONE? A MESSAGE FROM PROFESSOR KLEINBERGER

At the Spring meeting of the ABA Business Law Section in Vancouver, on Thursday, March 28, 2019 from 2:30pm – 4:30pm, the Committee on Limited Liability Companies, Partnerships, and Unincorporated Entities is sponsoring a panel entitled, “Lessons from the Trenches for Transactional Lawyers.”  Here is a brief description:

Avoiding errors in transactional documents — insights from attorneys who have seen errors play out in litigation:  two litigators (including one who defends attorney malpractice claims), a transactional lawyer who often plays clean up, and an expert witness who frequently testifies in cases arising from problematic language in deal documents.

If you have some examples of problematic language, favorite (or disfavored) cases, or “occasions of sin” to share in, the panel would be grateful.  The presentation will not be merely war stories.  Instead, the panelists will present various categories of errors and occasions for error, as well as practical suggestions for avoiding error.  However, the more examples the panel has from which to work, the more useful the categorizations will be.

Redact as you see fit or transform examples into illustrations.  Please send info to:  daniel.kleinberger@mitchellhamline.edu .  We will not identify the sources of examples unless you ask for attribution.

What’s become known as the bad-faith petitioner defense in judicial dissolution proceedings first emerged in Matter of Kemp & Beatley, 64 NY2d 63 [1984], where the Court of Appeals in a minority stockholder oppression case wrote that “the minority shareholder whose own acts, made in bad faith and undertaken with a view toward forcing an involuntary dissolution, give rise to the complained-of oppression should be given no quarter in the statutory protection.”

It took several decades, but eventually the bad-faith petitioner defense made a salutary species jump to deadlock dissolution cases involving 50/50 shareholders as a result of Justice Vito DeStefano’s thoughtful analysis in Feinberg v Silverberg.

Kemp and Feinberg both involved judicial dissolution of closely held corporations governed by Article 11 of the Business Corporation Law. As I noted in a post a couple of years ago describing a Tennessee case in which the court found that the petitioner seeking dissolution of a Delaware LLC had “manufactured” the alleged impasse between 50/50 members, I’ve patiently been awaiting another species jump to dissolution proceedings under Section 702 of New York’s LLC Law.

My patience was rewarded last month, when Manhattan Commercial Division Justice Saliann Scarpulla confirmed a special referee’s report and dismissed a Section 702 dissolution petition by a 50% co-managing member of a realty holding LLC based on his own conduct in breach of the operating agreement designed to “force dissolution” and “push” the other husband-and-wife members “out of the building.” Advanced 23, LLC v Chambers House Partners, LLC, 2019 NY Slip Op 30173(U) [Sup Ct NY County Jan. 22, 2019]. Continue Reading The Bad-Faith Petitioner Defense Makes Successful Debut in LLC Dissolution Case

In the last two years, fueled by a series of high profile cases involving media executives, entertainers, and other public figures, #MeToo has gained worldwide recognition as a symbol of the burgeoning movement against sexual harassment and assault, especially in the workplace.

In our country, we have federal, state, and local statutes designed to protect employees against gender discrimination including sexual harassment and hostile workplace environment. Such laws generally do not extend protection to owners of closely held business entities against conduct of the sort by their co-owners.

Perhaps it was inevitable that the heightened consciousness of the #MeToo movement, and the willingness of female complainants to come forward, should find its way into the arena of minority shareholder oppression, leading to a ruling earlier this month in Matter of Straka v Arcara Zucarelli Lenda & Assoc. CPAs P.C., 2019 NY Slip Op 29017 [Sup Ct Erie County Jan. 9, 2019], in which, following an evidentiary hearing, the court upheld oppression allegations by a female minority shareholder of an accounting firm based in large part on her male co-owners’ toleration of offensive, demeaning, and condescending comments made primarily by a senior accountant-employee at the firm. Continue Reading Minority Shareholder Oppression in the #MeToo Era

After 35 years, Matter of Kemp & Beatley, Inc. (64 NY2d 63 [1984]), remains the leading authority in New York on oppression-based corporate dissolution. In Kemp & Beatley, the Court of Appeals announced a now-venerable legal rule: “Assuming the petitioner has set forth a prima facie case of oppressive conduct,” a shareholder wishing to “forestall dissolution” must “demonstrate to the court the existence of an adequate, alternative remedy.” In practice, what this means is that courts must consider whether a buyout will provide the petitioning shareholder a “reasonable means of withdrawing his or her investment.”

A recent decision by a Manhattan-based appeals court, Campbell v McCall’s Bronxwood Funeral Home, Inc., 2019 NY Slip Op 00182 [1st Dept Jan. 10, 2019], presents a number of interesting questions about how courts should apply Kemp & Beatley’s pronouncement that courts must consider an “adequate, alternative remedy” to dissolution in the face of a written shareholder’s agreement that provides a formula and method for buying out a shareholder’s stock. Campbell is an epic 12-year litigation with seemingly no end in sight. Continue Reading A Fresh Take on an Old Doctrine – The “Adequate, Alternative Remedy” to Dissolution

As if we need another case illustrating why fixed price buy-sell agreements should be avoided like the plague.

Before we get to the case: A fixed price buy-sell agreement is one in which co-owners of a business select a specific dollar amount, expressed either as enterprise or per-share value, for calculation of the future buyout price to be paid an exiting owner or his or her estate upon the happening of specified trigger events such as death, disability, retirement, or termination of employment. Such agreements can take the form of a stand-alone buy-sell agreement or may be included in a more comprehensive shareholders, operating, or partnership agreement.

Fixed price buy-sell agreements in theory offer two main advantages over pricing mechanisms that utilize formulas or appraisals at the time of the trigger event. One is certainty; everyone knows in advance the amount to be paid upon a trigger event. The other is avoidance of transactional costs; there’s no need to hire accounting or valuation professionals at the time of the trigger event and no need to hire lawyers to litigate differences that can arise with indeterminate pricing mechanisms such as those requiring business appraisals.

But when theory meets reality, reality usually triumphs. Company values can and often do change dramatically over time, for better or worse. And even though the typical fixed price buy-sell calls for periodic updates of the so-called certificate of value, it’s rarely done for any number of reasons ranging from benign neglect to inability to reach agreement on a new value among co-owners of different ages whose interests and exit horizons diverge over time. So when a buyout occurs long after a last agreed value has become out of sync with the company’s significantly higher value as of the trigger date, there’s a powerful financial and emotional incentive for the exiting owner or his or her estate representative to challenge the buyout in court, thereby defeating one of the main reasons to have a fixed price agreement in the first place.

I’ve previously featured on this blog several illustrative fixed price buy-sell lawsuits precipitated by stale or absent certificates of value, including Sullivan v Troser Management, Nimkoff v Central Park Plaza Associates, and DeMatteo v DeMatteo Salvage Co. The latest addition to this ill-fated family of cases is entitled Namerow v PediatriCare Associates, LLC, decided last November by a New Jersey Superior Court judge, in which the court enforced a fixed price buy-sell agreement among members of a medical practice where the original certificate of value hadn’t been updated for 16 years at the time of the plaintiff doctor’s retirement from the practice. Continue Reading Another Reason Not to Use Fixed Price Buy-Sell Agreements

Over the years I’ve blogged about hundreds of court decisions in business divorce cases. Believe it or not, one of the things I like to do is track the cases I’ve written about — or at least those that survive the court’s decision — to see if the decisions lead to settlement as they often do but, more importantly, to see how the decisions shape the subsequent case proceedings and, of course, searching for later court rulings helpful to my business divorce practice and/or of potential interest to readers of this blog.

When I find a later decision that doesn’t deserve its own post usually I’ll just add an update blurb to the original post about the case. But occasionally there are follow-up decisions in distinctive cases whose denouement merits a bit more. Here are three of them:

The Kensington Publishing Case 

Four years ago, in a post entitled Voting Agreement Triggers Fight for Control of Family-Owned Publishing House, I wrote about Zacharius v Kensington Publishing Corp., a high-stakes fight for control of the largest independent publisher of mass-market books in the U.S. The company was founded by Walter Zacharius who died in 2011, leaving his second wife, Suzanne, with 59% of the voting shares and his two children by his first marriage with most of the remaining shares. He also left behind a 2005 Voting Agreement among himself and his two children giving them the power, following Walter’s death, to vote his shares in any election of Kensington’s directors. Continue Reading Business Divorce Epilogues

I’m very pleased to present my 11th annual list of this past year’s ten most significant business divorce cases.

This year’s list includes four important appellate decisions, including one likely to stand as a landmark ruling by the New York Court of Appeals on the issues of wrongful dissolution and valuation of partnerships.

This year’s list also features noteworthy rulings in business divorce cases involving closely held corporations and, of course, limited liability companies on a variety of issues including standing to sue derivatively, the right to defend a suit derivatively, whether an inactive member of a member-managed LLC owes fiduciary duties, and more.

All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are: Continue Reading Top Ten Business Divorce Cases of 2018

Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.

With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.

Three Memorable Decisions from Justice Ramos

For Justice Ramos, we focus on three LLC cases.

In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members. Continue Reading A Fond Adieu to Two Giants of the Manhattan Commercial Division Bench

Raise your hand if you think that a lawsuit for an accounting by the managers of an LLC simply means they have to turn over financial records.

If you raised your hand, read on. If not, you can skip this post.

Soon it will be ten years since the Appellate Division, First Department, in the Gottlieb v Northriver Trading case, recognized the common-law right of an LLC member to seek an equitable accounting by the LLC’s managers. In my post about Gottlieb back then, by way of background I explained:

The “equitable action on account” has a rich legal history in early English and American law, reflecting a time when forms of pleading and the scope of judicial powers made sharp distinctions between actions “at law” and those “in equity.” In modern usage, the accounting action allows a trust beneficiary, partner, etc. to compel a fiduciary entrusted with property to render an account of his or her actions and for the recovery of any balance found to be due. The accounting involves more than simply turning over existing financial records. In New York practice, if the court grants an accounting, it may order the fiduciary to prepare a “long accounting” with detailed schedules of income and expenses over a defined period, followed by the filing of objections to the accounting, followed by proceedings before a court-appointed referee to hear and determine the accounting.

Continue Reading Equitable Accounting vs. Access to Books and Records: Don’t Confuse Them

After two years, 300+ docket entries, and 12 motions, a lawsuit among members of a Delaware LLC that owned a 5-story apartment building on Manhattan’s Upper East Side (the “UES Building”) acquired to provide short-term rentals for international leisure and corporate travelers, and whose business was decimated by anti-Airbnb legislation, is barely past the pleadings stage and likely can look forward to years more litigation.

Manhattan Commercial Division Justice Jennifer G. Schechter’s recent decision in Favourite Ltd. v Cico, 2018 NY Slip Op 32781(U) [Sup Ct NY County Oct. 30, 2018], permitting the LLC and some of its members to file an amended pleading against the LLC’s former managing members, addresses several issues of interest including whether the legislature’s action automatically triggered dissolution under the operating agreement’s arguably conflicting provisions, and whether the former managers’ attempted reinvestment of proceeds from the UES Building’s sale in another property violated the operating agreement’s purpose clause.

According to the Second Amended Complaint ultimately allowed by the court, the two defendants as sole managing members of Upper East Side Suites, LLC, formed in Delaware in 2007, solicited investors from Italy’s business community who contributed $4.75 million to buy the UES Building to operate a short-term rental business. What allegedly followed is a scheme by the defendants of “self-dealing, mismanagement, waste of assets, fraud, and forgery that resulted in the loss of every cent of the $4.75 million invested.” Continue Reading Outlawing of LLC’s Short-Term Rental Business Brings Long-Term Litigation