Under both New York and Delaware law, members of an LLC may petition for judicial dissolution on the grounds that the management is so hopelessly deadlocked that the LLC can no longer function in accordance with its purpose as defined in its governing documents.

In those cases, courts will consider whether the LLC operating agreement contains some other mechanism to break the deadlock.  If the operating agreement itself provides a fair opportunity for the dissenting member who disfavors the inertial status quo to exit and receive the fair market value of her interest, it is at least arguable that the LLC can still proceed to function, because there exists an equitable way to break the impasse.

Coequal LLC members might agree in their operating agreement to break a deadlock with a shotgun buy-sell agreement.  In the event of a deadlock, the initiating member names a price, and thereby gives the other member the option to either buy the initiating member’s interest or sell his own interest at that price.  “I cut, you choose.”

In theory, because a shotgun buy-sell agreement can equitably break an impasse, a member’s electing to initiate the shotgun buy-sell procedure should foreclose a petition for deadlock-based dissolution.  In practice, disputes over the implementation of that election might make dissolution appropriate after all.  That’s the lesson of Seokoh, Inc. v Lard-PT, LLC, CV 2020-0613-JRS [Del Ch Mar. 30, 2021], in which Vice Chancellor Slights cited the flaws in the parties’ shotgun buy-sell agreement as the basis for his refusal to dismiss a 51% member’s petition for deadlock-based dissolution.

Continue Reading Holes in Shotgun Buy-Sell Agreement Keep Deadlock Dissolution Petition Alive

Now that I’ve got your attention, relax. At least for New York LLCs, a member can be expelled from an LLC only if expressly authorized by the operating agreement.

In my experience, expulsion provisions in LLC agreements are relatively rare, arguably for good reasons. For one, prospective, non-controlling participants in an LLC generally are loathe to subject the certainty of their investment to the discretion of a controlling member or members who have an inherent self-interest when deciding whether an expulsion trigger has occurred. For another, the financial terms of expulsion provisions tend to be punitive, returning to the expelled member substantially less than the fair value of their interest in the LLC as a going concern.

I’ve previously written about cases in which New York courts enforced expulsion provisions in LLC agreements for misappropriation of company funds, for felony conviction, and for material breach of the LLC agreement. Earlier this month I came across another case, one might say, that pushes the envelope to include a member’s statements made to third parties complaining about the LLC managers’ claimed failure to provide information in breach of the operating agreement. The statements allegedly constituted ground for expulsion under an expansive provision covering “any act or omission which, in the reasonable judgment of the Managers, is in bad faith and is detrimental to the interests of the Company, its Members or its Managers.”

Earlier this month, in Jacobowitz v Gutnick, a Brooklyn Supreme Court judge found that the challenged statements were non-actionable opinion and dismissed defamation claims brought by the plaintiff LLC and its managers against the defendant expelled member. The court nevertheless refused to dismiss the plaintiffs’ claim for a declaratory judgment enforcing the expulsion, holding that the non-defamatory nature of the statements is not determinative whether, in the “reasonable judgment of the Managers,” the defendant’s statements constituted bad-faith acts detrimental to the LLC, its managers, or members. Let’s take a closer look. Continue Reading Be Careful What You Say. It May Get You Expelled From Your LLC.

Of late I’ve been ruminating on New York’s membership in the shrinking pool of states that don’t recognize oppression of an LLC minority member by the controlling members or managers as ground for judicial dissolution.

The point indirectly was brought home by Professor Daniel Kleinberger’s recent article for the ABA’s Business Law Section in which he dissects last year’s decision by a Connecticut appellate panel in Manere v Collins interpreting that state’s Revised Uniform LLC Act which expressly includes oppression as one of the grounds for judicial dissolution. As the good professor highlights, the court’s decision freely borrows from the rich body of case law construing the term “oppression” as used in judicial dissolution statutes for closely held corporations in virtually every state save Delaware.

New York continues to buck the nationwide trend toward harmonization of close corporation and LLC law governing judicial dissolution, as made clear in cases such as Doyle v Icon and Barone v Sowers explicitly holding that New York’s LLC Law § 702 neither mentions nor otherwise accommodates oppression as a basis for seeking judicial dissolution.

Coincidentally, a case decided by the Manhattan-based Appellate Division, First Department, just a few days after Professor Kleinberger posted his article, starkly illustrates the disharmony of New York’s statutory schemes and the resulting disadvantageous position of a minority member of a New York LLC as compared to a minority shareholder of a New York close corporation when confronted with similar, allegedly oppressive behavior by the controlling co-owner. Continue Reading The Money’s There But Out of Reach for the Minority LLC Member

Ten months ago, we wrote about an unusual case involving an LLC member who documented two irreconcilable membership interest transfers upon death. In Harris v Harris, 2020 NY Slip Op 31570(U) [Sup Ct, NY County Apr. 23, 2020], the deceased LLC member, Steven, had a written operating agreement conveying a life estate of his membership interest to his wife and, upon her death, to their daughter (hereinafter “Family Number One”).

Symmetrically at odds with the operating agreement (which happened to be unsigned, some provisions internally inconsistent, and loaded from front to back with handwritten comments), the deceased LLC member left an executed last will and testament conveying a life estate of his membership interest to another woman (referred to in the will as his “loving partner”), and upon her death, to their alleged out-of-wedlock daughter (hereinafter “Family Number Two”).

Last week, in Harris v Harris, ___ AD3d ___, 2021 NY Slip Op 02105 [1st Dept Apr. 6, 2021], a Manhattan-based appeals court reversed the lower court’s decision in Harris, which denied both sides’ motions for summary judgment, and granted summary judgment to Family Number One. Harris is a fascinating take on two important legal issues for closely-held business owners. Continue Reading Unsigned, Non-Final Operating Agreement Trumps Conflicting Testamentary Bequest of LLC Interest

Fine dining and business divorce crossed paths in a recently decided case featuring a lengthy battle between co-equal ownership factions of the corporation that operates Delmonico’s, the renowned Manhattan restaurant established in the early 19th century and famous for its signature dish, the Delmonico steak, among other dining firsts.

Delmonico’s can now lay claim to another first, though not of the edible kind. Last month, a New York Supreme Court judge of the Manhattan Commercial Division entered final judgment granting “equitable dissolution” of the restaurant corporation known as Ocinomled Ltd. — Delmonico spelled backwards — and ordering the respondent shareholders who were found to have engaged in oppressive conduct to forfeit their stock holdings.

What is Equitable Dissolution?

The term equitable dissolution can have different meanings in different contexts. In its most generic usage, the emphasis is on the word “equitable,” describing generally the judiciary’s broad discretion sitting as a court of equity without a jury and where legal remedies (i.e., money damages) are inadequate, to fashion a just resolution of a dispute between business co-owners over the continued existence of the firm. Continue Reading On the Menu: Steak and Equitable Dissolution

In 1994, in Friedman v Revenue Management, Inc., the U.S. Court of Appeals for the Second Circuit, covering New York, Connecticut and Vermont, closed federal courthouse doors in those states to petitioners seeking judicial dissolution of close corporations under state law, even where subject matter jurisdiction exists. The court in Friedman applied the so-called “Burford abstention” doctrine to dismiss a complaint seeking statutory dissolution of a New York corporation, without prejudice to its re-commencement in state court.

The doctrine is named after Burford v Sun Oil Co., a 1943 decision in which the U.S. Supreme Court carved out a vaguely defined exception to the federal courts’ duty to exercise their jurisdiction, as one commentator put it, “allow[ing] federal courts to abstain from reviewing certain decisions of state administrative agencies or from otherwise assuming the functions of state courts in the development and implementation of a state’s public policies.”

The Friedman court held that Burford abstention was appropriate in corporate dissolution cases to “avoid needless interference with [the state’s] regulatory scheme governing its corporations” and in deference to the “strong [state] interest in the creation and dissolution of its corporations and in the uniform development and interpretation of the statutory scheme regarding its corporations.”

In 2002, in Caudill v Eubanks Farms, Inc., the Sixth Circuit Court of Appeals, covering Michigan, Ohio, Kentucky, and Tennessee, agreed with the Second Circuit and invoked Burford abstention to dismiss an action seeking statutory dissolution of a Kentucky close corporation. Quoting from one of its prior, non-precedential, unpublished opinions, the court reasoned,

The state should be permitted to exercise control over the internal affairs of its domestic corporations free from interference by federal courts, particularly where the issue is whether the corporation should be permitted to continue in existence or be dissolved. Moreover, the legislature has provided a forum with specialized competence in the areas of internal corporate matters. Jurisdiction over corporate dissolution rests exclusively with the circuit court of the county in which the registered office of the corporation is located.

Of the dozen or so reported corporate dissolution cases in the lower federal courts addressing Burford abstention, including a handful by District Courts outside the Second and Sixth Circuits, all but one dismissed the action without prejudice or remanded it to state court where the case initially was filed but then removed to federal court. In the one exceptional case decided by the Idaho District Court in 2020, entitled Zafer v Spengler, the court found that dissolution “does not present a complex question of state law, nor does it have any significant impact on state public policy, such that this Court needs to relinquish jurisdiction.”

Now, that imbalance may change. Earlier this month, the Eleventh Circuit Court of Appeals, covering Alabama, Florida, and Georgia, explicitly parted ways with Friedman and Caudill in a decision reversing the District Court’s Burford-based dismissal of a claim seeking judicial dissolution of a family-owned Georgia corporation. The case is Deal v Tugalo Gas Co., No. 19-14336 [11th Cir. Mar. 19, 2021].

Continue Reading U.S. Circuit Courts Split on Abstention Doctrine in Dissolution Cases

What do business divorce litigants have in common with the frill-necked lizard? At the outset of confrontation, they both use in terrorem tactics in an attempt to force their adversary into rapid submission. The lizard spreads its frill to appear more threatening in what’s called a deimatic display. The business divorce litigant packs the initial pleading with the most aggressive legal claims available, designed to cause the adversary maximum fear of business and economic disruption, public embarrassment, and, of course, liability.

I’ve frequently preached that most business divorce litigation is tactical, meaning the lawsuit’s ultimate objective, whether styled as one for judicial dissolution and/or asserting direct and/or derivative claims, is to pressure the adverse business partner into a buyout or other agreement achieving a separation of business interests, without having to litigate to the bitter end.

On the pressure-spectrum of claims by and against business co-owners, starting with the least aggressive, there’s breach of the firm’s constitutive documents, i.e., articles of formation, by-laws, shareholder agreements, partnership agreements, LLC operating agreements, and the like. Taking it up a notch, there’s breach of fiduciary duty and a panoply of other fault-based business torts. Taking it up yet another notch, there’s fraud which, depending on the type of business, its customers and vendors, and its public or private reporting requirements, can threaten detrimental external consequences beyond the stigma of the fraudster label. Continue Reading Civil RICO: A Blunt But Elusive Tool in Business Divorce Cases

Oral agreements to form and operate business enterprises are a recurring subject of this blog. We’ve written many times, for example, about the comparative ease vis-a-vis other kinds of entities with which one can sufficiently allege an oral joint venture or partnership agreement.

We’ve also occasionally written about the phenomenon of curiously hybridized partnerships to form or operate a corporation, businesses in which the parties allegedly entered into a partnership agreement, but subsequently operated the business as a corporation (or limited liability company).

In a recent decision from Kings County Commercial Division Justice Leon Ruchelsman, Eikenberry v Lamson, 2021 NY Slip Op 30561(U) [Sup Ct, Kings County Feb. 19, 2021], the Court considered both of these concepts, authoring a scholarly opinion on New York’s legal rules for when an alleged oral partnership can survive the alleged partners’ subsequent decision to operate the business in a different entity form.

Continue Reading The Oral Partnership Operating as a Corporation: Is it a Partnership? A Corporation? Can it be Both?

Section 1007 of the Business Corporation Law (the “BCL”) has a procedure for dissolved corporations to publish “notice requiring all creditors and claimants . . . to present their claims in writing and in detail at a specified place and by a specified day.” Under the statute, a creditor’s failure to make a timely claim results in the claim being “forever barred as against the corporation, its assets, directors, officers and shareholders.” The statute employs the word “may,” not “shall,” indicating that corporation’s provision of notice to creditors is optional, not mandatory. What happens to a corporation’s creditors’ claims where the entity or its controllers fail to publish notice of dissolution under BCL § 1007?

Long before enactment of the BCL, New York’s highest court held in Darcy v Brooklyn & N.Y. Ferry Co. (196 NY 99 [1909]), that where directors of a corporation carry out a “voluntary dissolution of the corporation and the distribution of its assets without taking the steps to that end which are prescribed by law” – specifically, providing prior notice to creditors – the directors may be individually liable for the corporation’s debts based upon the principle that it is a “violation of duty on the part of the directors of a corporation to divest it of all its property without affording a reasonable opportunity to its creditors to present and enforce their claims before the transfer shall become effective.”

A recent decision from Manhattan Commercial Division Justice Robert R. Reed, Morse v LoveLive TV US, Inc., 2020 NY Slip Op 51481(U) [Sup Ct, NY County Dec. 15, 2020], considered Darcy‘s concept of “informal dissolution” and its implications for individual controller liability. Morse is a reminder to owners and controllers of closely-held corporation, and lawyers who advise them, that it is a risky proposition not to comply with the statutory notice provisions of BCL § 1007 (or the analogous creditor notice statute applicable to judicial dissolution, BCL § 1106). Continue Reading “Informal Dissolution” and Individual Liability

In most of the business valuation cases that I’ve litigated, it’s not long before one side accuses the other’s valuation expert of mixing apples and oranges.  And at the risk of endorsing the overused expression, it’s easy to see why.  Inconsistencies in valuation methodologies or applications often are fertile grounds for criticism, and invocation of the apples-to-oranges idiom is an easy hook to argue that almost any inconsistency requires disregarding the expert’s opinion altogether.

That is exactly what happened to the Plaintiff’s valuation expert in Dieckman v. Regency GP, LP, Del Chancery Feb 15, 2021.  In a 129-page post trial opinion, Chancellor Bouchard denied the plaintiff’s bid for $1.6 billion in damages, even after finding that the defendant general partner breached the partnership agreement’s implied duty of good faith and fair dealing.  Chancellor Bouchard’s opinion explores a broad range of complex legal and factual issues, not the least of which is his complete rejection of Plaintiff’s damages calculation because it was akin to “comparing apples to oranges.” Continue Reading General Partner Breached Implied Covenants in Partnership Agreement, but Plaintiff’s “Apples-to-Oranges” Calculation Dooms Bid for Damages