Most folks associate beer with pleasure. Beer brings the happy, and many craft brewers will tell you they went into business for that very reason. But an investor in a Bushwick, Brooklyn beer brewing company and taproom startup was anything but happy after his co-members began taking steps to dilute his membership interest in the limited liability company, resulting in fast and furious litigation and an immediate injunction motion to halt the alleged “freeze out.”

According to his complaint, Peter Lengyel-Fushimi (“Peter”) was a molecular biologist by training who decided to pursue his passion for craft beer making and “dedicate his life to beer.” Peter “committed himself to his new goal of opening a brewery,” took a series of apprenticeships in local breweries to learn the trade, and ultimately partnered with Anthony Bellis (“Anthony”) and Zachary Kinney (“Zachary”) to form Kings County Brewers Collective, LLC (the “Brewery”).

In 2014, Peter, Anthony, and Zachary entered into an Operating and Subscription Agreement, according to which each became a manager and 25.33% “Class A” membership interest holder, collectively owning 76% of the Brewery. The remaining 24% membership interests were sold to investors denominated “Class B” and “Class C” interests, the Class B member having limited voting rights, and the Class C members no voting rights only an economic interest. Peter held the title of Head of Beer Production / Operating Manager.

Important for his later injunction application, a standard merger and no-oral-modification provision in Section 10.1 of the Operating Agreement provided, “This agreement constitutes the whole and entire agreement of the parties with respect to the subject matter of this agreement, and it shall not be modified or amended in any respect except by a written instrument executed by all of the Members.”

Continue Reading Court Enjoins Dilution of Brewing Company LLC Membership Interest

It’s not surprising that Vice Chancellor Zurn’s recent, first-impression decision in In re Coinmint, LLC, aligning itself with rulings in many other states including New York, found that Delaware courts lack subject matter jurisdiction over petitions to dissolve non-Delaware business entities — in this case, a Puerto Rico limited liability company. It’s also not surprising that the Delaware Chancery Court, better known for leading rather than following the pack when it comes to business law, is addressing the issue for the first time decades after New York and other state courts have done so. After all, Delaware is famous as an exporter of Delaware entities operating in other states, not as an importer of non-Delaware entities operating in Delaware.

Delaware’s lopsided trade imbalance as an entity exporter explains the highly unusual path Coinmint took to VC Zurn’s jurisdictional ruling. The company, which operates a data center in upstate New York and reputedly is among the largest bitcoin mining firms in the world, began its life in 2016 as a Delaware limited liability company owned 50/50 by two childhood friends, Prieur Leary and Ashton Soniat. Leary contributed “sweat equity” by running Coinmint’s day-to-day operations while Soniat provided the necessary funding. In October 2017, the two owners reached a compromise agreement on an adjusted equity split of 81.8%-18.2% in Soniat’s favor reflecting his tens of millions in additional capital contributions as the company expanded operations.

In early 2018, looking to reap certain tax benefits, the company filed a Certificate of Conversion with the Delaware Secretary of State, redomesticated in Puerto Rico, and thereafter operated as a Puerto Rican entity.

In 2019, as the owners’ relationship deteriorated due to disagreements over the company’s management, Soniat exercised his majority voting power (gained from the dilution of Leary’s interest) as a member and on the board of managers by amending Coinmint’s operating agreement, removing Leary from the board, and designating Soniat’s holding company as sole manager.

In late 2019, Leary filed suit in Delaware Chancery Court. Leary’s amended complaint sought to nullify Coinmint’s conversion to a Puerto Rican entity on the grounds that it was done without Leary’s knowledge or consent, and did not comply with the operating agreement’s formalities. His complaint also asserted that Soniat’s amendment of the operating agreement, removal of Leary from the board, and dilution of Leary’s membership interest and voting rights underlying those actions did not comply with the formal requirements of the operating agreement governing additional capital contributions. Soniat’s millions in cash infusions, Leary contended, therefore should be treated as loans. Leary also sought judicial dissolution of Coinmint under Section 802 of the Delaware LLC Act. Continue Reading Delaware Declines Subject Matter Jurisdiction Over Judicial Dissolution of Foreign Entities

Welcome to this 11th annual edition of Summer Shorts! This year’s edition features brief commentary on half a dozen business divorce cases of interest from across the country. Four of the cases involve disputes among LLC members, one among shareholders of a family-owned corporation, and one among partners in limited partnerships. Two of the cases involve buyout appraisal proceedings. Click on the case names to read the decisions.

Maine: Authority to Appoint LLC Manager (Zelman v Zelman)

Ask yourself, does the following provision in an LLC agreement — “The Manager has authority, without the vote or consent of the Members, to amend the Company Agreement to reflect the addition or substitution of Members or the Manager” — give the LLC’s manager the authority to appoint his or her replacement without member consent? Not according to the Maine Supreme Judicial Court’s ruling late last year in which it affirmed a lower court’s judgment dismissing the putative replacement manager’s claim seeking a declaration validating his status as manager of a family-owned, realty holding LLC. The previous manager appointed him manager at the same time he sold his interest in the LLC to the appointee who was one of the LLC’s existing members and a former manager. The Supreme Court looked to the dictionary, defining “amend” as to “make minor changes in (a text) in order to make it fairer, more accurate, or more up-to-date.” Ruling against the appellant, the court wrote:

Given this definition, the plain language of section 13.20(A) [the provision quoted above] permits a manager to modify the operating agreement to update it based on decisions made in accordance with other sections of the operating agreement, e.g., section 2.7, which grants the members the ability to elect a manager by a two-thirds majority, or section 10.10, which grants the members the ability to remove a manager for cause by a two-thirds majority. Section 13.20(A) is not ambiguous, and the plain language of the contract clearly reflects a purely clerical role by a manager to alter the operating agreement to reflect decisions undertaken by the authority granted in other sections of the operating agreement. The court therefore did not err in determining that section 13.20(A) did not give William the authority to appoint Andrew as a manager of the LLC.

Continue Reading Summer Shorts: Business Divorce Cases From Across the Country

In an article from a little over a month ago, we summarized New York’s LLC judicial dissolution statute with the comment, “Breaking up can be hard to do.”

Our remark was meant to encapsulate the frequency with which trial level courts dismiss – and appeals courts affirm dismissal and reverse denial of dismissal – of LLC judicial dissolution petitions / complaints at the pleadings stage for failure to plead, and inability to show, the two-pronged standard for judicial LLC dissolution.

A Decision and Order issued last week by Brooklyn Commercial Division Justice Reginald A. Boddie provides an added twist on that phrase: “Even if it’s unopposed, breaking up can be hard to do.” Continue Reading Swing and a Miss: Unopposed LLC Dissolution Claim Denied

Of all the factors considered by business divorce lawyers and appraisers when valuing an owner’s interest in a closely-held company, the calculation and applicability of a discount for lack of marketability (“DLOM”) is among the most fertile grounds for sharp disagreement.

It’s easy to imagine why. For one, in cases where parties offer competing appraisals of an interest in a closely-held company (such as fair value proceedings under New York Business Corporation Law Sections 623 or 1118), the DLOM often is the largest driver of the differences between the two appraisals, and the parties naturally focus their efforts on the issues producing the largest swings in value.  Second, application and calculation of the DLOM involves—perhaps more than anywhere else in the business appraisal process—a considerable amount of judgment.  The appraiser’s judgment calls in applying a DLOM are frequent targets for attorneys seeking to undercut or enhance the final number.

One need not look far to find disputes over DLOMs playing out in courts across the country.  Consider for example, Peter Mahler’s encapsulation of the DLOM debate in New York here, the apparent divergence between the First and Second Departments regarding the DLOM in real estate holding companies under the statutory fair value standard (explained here), or the Indiana Court of Appeals’ refusal just weeks ago to apply any DLOM whatsoever under the fair market value (FMV) standard to a wife’s share of a dental practice because, as that court observed, “dental practices are easily tradeable as they have a ready market of purchasers (new dentists) graduating each year.” (Kakollu v Vadlamudi, 21A-DC-96 [Ind Ct App July 26, 2021]).

Putting hard numbers to the extent of professionals’ disagreement concerning the DLOM, Business Valuation Resources recently released its annual survey regarding calculation and application of the DLOM.  Gathering responses from more than 200 valuation professionals, the BVR Survey on Methods Used for Estimating a Discount for Lack of Marketability demonstrates that, with respect to almost all matters DLOM, a general consensus is rare.  For example, to the question, “Would you apply a DLOM to a 100% interest in a private company?,” 33% of those surveyed indicated that they would, 27% indicated that they would not, and 40% indicated “maybe.”

In the wild west of DLOM calculation and application, I recently came across a novel issue that, in my view, merits serious consideration from business owners, litigators, and appraisers: how should contractual restrictions on a controlling owner’s ability to transfer his or her control factor into the calculation of the DLOM?

Continue Reading Fueling the DLOM Debate: Control Transfer Restrictions and the Discount for Lack of Marketability

My partner Frank McRoberts recently posted about two New York cases, one involving an LLC and the other a close corporation, in which the courts resolved conflicts between, on the one hand, provision in the operating/shareholder agreement dictating or otherwise restricting the identity of transferees of an owner’s interest upon death and, on the other hand, testamentary bequests of the same interests in the wills of the deceased owner. In both cases, the courts ruled that the transfer provisions in the operating/shareholder agreements prevailed over the inconsistent testamentary bequests.

A recent appellate ruling by a Florida appellate court in Finlaw v Finlaw, resolving a dispute over the ownership of a partnership interest that a deceased partner devised by will to her grandson, presented an interesting twist on the same issue. It also provides a reminder of the need for careful drafting of transfer restrictions in the owners’ agreement as a means of eliminating or at least reducing the likelihood of litigation when the deceased owner’s will bequeaths an interest to someone other than a permitted transferee under the owners’ agreement.

The case involves an Ohio partnership formed in 1986 by two married couples, the Finlaws and the Palmers. In the following decades, three of the four original partners died. After both Palmers died, their interests transferred to their son as expressly permitted by the partnership agreement. When Mr. Finlaw died, his partnership interest passed to his wife, Twila, also as expressly permitted by the partnership agreement. At that point, Twila and the Palmers’ son each held 50% partnership interests. Continue Reading When It Comes to Transfers of Ownership Interests, Where There’s a Will There’s Not Always a Way

As I wrote here, in 2016 the Manhattan-based Appellate Division, First Department decided Raharney Capital LLC v Capital Stack LLC, overruling its own precedent and joining appellate rulings by the other Departments holding that New York courts lack subject matter jurisdiction over petitions to dissolve foreign business entities.

New York courts are not the only ones to come to that conclusion, albeit not necessarily expressed in terms of subject matter jurisdiction. For those interested in the topic, I highly recommend a 2015 article in The Business Lawyer by Peter B. Ladig and Kyle Evans Gay entitled Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out? The article examines doctrinal underpinnings and highlights court rulings from a number of states holding that the power to judicially dissolve a business entity belongs exclusively to courts in the state of its formation.

You’d think we’d seen the last of the issue, at least in New York, after Raharney closed the door five years ago. But there’s one wrinkle that Raharney and its kindred decisions didn’t address: Where should a business owner seeking judicial dissolution of a New York-based foreign business entity bring suit when the governing shareholder, partnership, or operating agreement includes a broad forum selection clause consenting to the exclusive jurisdiction and venue of New York courts in any litigation among the signatories?

Manhattan Commercial Division Justice Jennifer G. Schecter gave the answer in her decision last month in Durst Buildings Corp. v Edelman Family Co. Continue Reading Business Divorce Alert: Forum Selection Clauses Do Not Confer Subject Matter Jurisdiction in Foreign Entity Dissolution Cases

The right of shareholders to elect a corporation’s directors is one of the most valuable rights attendant to share ownership.  Election of directors is where shareholders can directly exert their influence on the corporation, and few matters are more central to a corporation’s governance than its ability hold valid elections of directors.

Because the fair election of directors—especially in closely-held corporations—is critical to their orderly functioning, New York’s BCL § 619 authorizes the courts to entertain challenges to board elections, hear proofs, and confirm or deny them.  Under BCL § 619, any “shareholder aggrieved by an election” may bring a proceeding in Supreme Court to challenge the election, and the court “shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require.”

New York courts, I suspect due to both their deference to shareholder voting rights and the existence of an after-the-fact remedy in BCL § 619, historically have been reluctant to enjoin duly-called shareholders meetings for the purpose of electing directors.  Why interfere by injunction with a bedrock right of shareholders when the court can hear a fuller challenge to the election under BCL § 619 after the results, or so conventional wisdom goes.  Plus, given the existence of BCL § 619, it is the rare case where an election itself will constitute irreparable harm of the type necessary for injunctive relief.

Despite these factors, in a decision of apparent first impression last month, Justice Nancy Bannon of the Manhattan Supreme Court issued an injunction against the holding of a corporate election under BCL § 619. The case is ALP, Inc. et ano. v Moskowitz, et al., Index No. 652326/2019 [Sup Ct NY County, June 14, 2021].

Continue Reading Stop the Vote: Injunction Halts Shareholders Meeting Pursuant to Courts’ Broad Power to Review Corporate Elections

Recently, we’ve written two articles focusing on the brewing dispute over whether New York law recognizes a viable cause of action for “common-law” or “equitable” dissolution of a limited liability company.

In October 2020, I blogged about a pre-answer dismissal decision in Pachter v Winiarsky, in which a New York court for the first time upheld a claim for common-law LLC dissolution, even where the court in the same decision held that the petition failed to state a claim for statutory dissolution under Section 702 of the Limited Liability Company Law.

In May 2021, Peter Mahler blogged about a second pre-answer dismissal decision in the Pachter case, in which the court considered the sufficiency of an amended petition / complaint filed after issuance of the original dismissal decision. In the second Pachter decision, the court essentially reversed itself, dismissed the common-law / equitable dissolution claim, but reinstated the Section 702 dissolution claim.

On July 12, 2021, Brooklyn Commercial Division Justice Leon Ruchelsman issued the third decision in the knock-down-drag-out Pachter litigation addressing whether common-law / equitable dissolution of an LLC exists as a viable cause of action in New York. This decision came via a motion by Pachter for leave to reargue the prior dismissal. Continue Reading Common-Law and Equitable LLC Dissolution: Going, Going, . . .

The Cummins Nursery in upstate New York grows, harvests, plants, and grafts fruit trees — mainly apple trees — which along with scions and rootstocks it sells by the tens of thousands each year. There’s also a farm stand and apple picking during the harvest season. According to its website, owner Steve Cummins acquired the 40 acre farm and nursery in the 1990’s to carry on the work of his father, an apple breeder and rootstock scientist affiliated with Cornell University who, in the 1960s and ’70s, made major strides in the development and propagation of disease-resistant apple trees.

According to Alan Leonard and the complaint he filed in the Tompkins County Supreme Court, Steve Cummins does not own Cummins Nursery. Rather, Leonard contends that the tree farm business and the property on which it operates is owned by a 50/50 partnership between him and Cummins formed in 2004 pursuant to an oral partnership agreement. Leonard now wants the partnership dissolved and a receiver appointed to sell the business and realty, and to distribute the net proceeds equally to himself and Cummins.

Last week, the Albany-based Appellate Division, Third Department, handed down a ruling in Leonard v Cummins reversing the lower court’s partial dismissal of Leonard’s claims. While court decisions involving disputes over the validity of oral partnership agreements are a dime a dozen, the Leonard case being no exception, the Leonard case also raised two atypical issues of interest:

  • Leonard’s complaint alleged that he demanded as early as 2009 that Cummins reduce to writing their partnership agreement and transfer the realty to the partnership, and that Cummins demurred. Is Leonard’s lawsuit filed in 2019 for enforcement of the agreement and dissolution of the partnership barred by the statute of limitations?
  • Cummins raised a statute of frauds defense to Leonard’s claim that the farm property belongs to the alleged partnership. Does Leonard’s partial performance of the alleged oral partnership agreement get around the statute of frauds governing conveyances of realty?

Continue Reading Betting the Farm On An Oral Partnership Agreement