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This blog frequently covers cases considering a shareholder’s request to dissolve a corporation under New York’s oppression-based corporate dissolution statute, BCL 1104-a.  That statute allows a shareholder to petition for dissolution of a corporation on the grounds that those in control of the corporation have engaged in “illegal, fraudulent or oppressive actions,” (BCL 1104-a[a][1]), or that the “property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation” (BCL 1104-a[a][2]).

But even upon a showing of oppression or other misconduct satisfying the requirements of BCL 1104-a, dissolution is not a given.  That is because BCL 1104-a(b) requires the court to consider “whether liquidation is the only feasible means whereby the petitioners may reasonably expect to obtain a fair return on their investment.”  Dissolution should be a remedy of last resort, and a court has broad discretion to fashion a less-drastic, alternative remedy to dissolution.  Consider, for example, this post about a case ordering a compelled buyout of the complaining shareholder (Zulkofske v Zulkofske, 2012 NY Slip Op 51210(U) [Suffolk Co., 2012]), or this post about a case finding money damages sufficient to remedy the oppressive conduct (Hammad v Jamal Kamal Corp., 68 Misc 3d 1227(A) [Queens Co., 2020]). 

Based on the principle that dissolution should be a remedy of last resort, the Court of Appeals in Matter of Kemp & Beatley introduced another layer into the “available remedies” analysis of BCL 1104-a(b).  Even when dissolution is an appropriate remedy, the court must give the shareholders the option to save the corporation by buying out the complaining shareholder: “[e]very order of dissolution . . . must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder’s stock at fair value” (64 NY2d 63 [1984]).

Against this backdrop, consider the Second Department’s recent decision in Marum v Graffeo, which affirmed an order of dissolution of a closely-held corporation entered without a hearing, despite contested allegations and apparent non-consideration of alternative remedies (179 NYS3d 621 [2d Dept 2023]).

Continue Reading Dueling Dissolution Petitions Beget Dissolution Without Consideration of Alternate Remedies

This important question of whether non-manager, minority limited liability company owners owe fiduciary duties continues to bedevil New York litigants and courts.

The prevailing state of the law remains unsettled, with no explicit appeals court guidance to be found. Peter Mahler has written about this unresolved legal question a number of times, with three articles on the subject available here.

In Doeblin v MacArthur (2023 NY Slip Op 30133(U) [Sup Ct, NY County 2023]), Manhattan Commercial Division Justice Andrea J. Masley considered a variation of the question. Do minority LLC owners owe fiduciary duties to their co-members and to the company, at least for purposes of surviving a pre-answer motion to dismiss, where the complaint alleges that the defendant, although not an official manager, in some respects “acted in a ‘managerial capacity?’”

Continue Reading Do Non-Manager, Minority LLC Owners Owe Fiduciary Duties?

Since its legislative birthing in New York in 1994, the limited liability company has become the preferred choice of entity in New York and across the country. Over the ensuing 15 years or so, New York’s lower courts struggled to arrive at a consistent interpretation of LLC Law § 702’s enigmatic provision, patterned on that found in New York’s Revised Limited Partnership Act, authorizing judicial dissolution of LLCs “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”

As I wrote in a NYSBA Journal article many years ago, in those early days, with no meaningful appellate guidance, some courts explicitly or implicitly treated LLCs as business corporations subject to the same judicial dissolution standards and remedies specified in Business Corporation Law Article 11.

A uniform standard under § 702 didn’t appear until 2010, when the Appellate Division, Second Department, issued its landmark decision authored by former Associate Justice Leonard B. Austin in Matter of 1545 Ocean Avenue, LLC.

In the court’s lengthy opinion, Justice Austin articulated a contract-centric approach under which a § 702 petitioner must establish, “in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.”

Continue Reading Has the Time Come for New York to Follow Delaware and Officially Pronounce Deadlock as Ground for LLC Dissolution?
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The dissolution of a company—and the winddown and liquidation that usually follow—often impacts a broad range of stakeholders beyond just the owners of the company, including creditors and potential creditors, who often are stuck awaiting the outcome of the dissolution process before they get paid.

The waiting can be doubly painful when a corporation is the subject of an involuntary dissolution proceeding under BCL 1104 or BCL 1104-a, since those proceedings can drag on seemingly indefinitely.

Last year, my co-blogger Frank McRoberts offered a construction of the Business Corporation Law that gave creditors and potential creditors an alternative: a path to insert themselves (and their claims) into a contested dissolution proceeding. It went like this:

  • BCL 1117 (a) provides that in a judicial dissolution proceeding under Article 11 (such as 1104 or 1104-a), the provisions of BCL 1005 through 1008 “shall apply.” 
  • BCL 1008 states that creditors of the to-be-dissolved corporation may petition the court for various relief, including: (a)(3) the determination of the creditor’s claims against the corporation, (a)(5) the determination of the creditor’s claims to hold the shareholders personally liable, and (a)(8) for the appointment of a receiver over the corporation.
  • Based on the above, creditor could rely upon the BCL 1117 / 1008 combination to intervene in a judicial dissolution proceeding and ask the court with jurisdiction over the dissolution proceeding for the relief specified in BCL 1008(a)(1 – 11).

Despite this apparent statutory authorization, requests from creditors to intervene in involuntary dissolution proceedings are relatively rare. I had not seen it done until a recent decision from New York County Justice Arlene P. Bluth, In re Golan Floors, Inc., Index No. 655063/2019 (Sup Ct, New York County 2023), which grants a potential creditor’s application to have a receiver appointed in a dissolution proceeding. And, as we’ll see below, it took a staggering fact pattern to get there.

Continue Reading Potential Creditor Drags Corporation in Stalled Dissolution Proceeding into Receivership

Folks hearing the phrase “business divorce” for the first time tend to focus unconsciously on the word “divorce,” tuning out the word “business.” The irony is that most business divorce cases have nothing to do with matrimonial disputes.

But that’s not always the case. From time to time, we write about matrimonial disputes that spill over into the commercial courts, and vice versa. Last fall, I wrote about a matrimonial-turned-business dispute simultaneously playing out in Delaware Chancery Court and Manhattan’s Matrimonial Division between reality television personality Julia Haart and her former paramour, billionaire Silvio Scaglia, over ownership of modeling agency Elite World Group, Inc.

It’s not common at all, though, to see business dissolution proceedings play out in matrimonial court, which is why a recent decision from Manhattan Supreme Court Justice Kathleen Waterman-Marshall is so fascinating.

The Issues

In a wonderfully-written decision, N.F. v J.D. (2022 NY Slip Op 51294[U] [Sup Ct, NY County Dec. 21, 2022]), Justice Waterman-Marshall considered several intriguing questions:

  • The power of New York’s matrimonial courts to judicially dissolve closely-held business entities considered “marital assets”
  • The power of matrimonial courts to order a spouse to non-judicially dissolve an entity
  • The power of matrimonial courts to appoint temporary receivers of business entities, including receiverships over non-party controllers of marital asset business entities
  • The power of matrimonial courts to order a temporary receiver to decide whether to seek dissolution
Continue Reading Business Divorce in the Divorce Courts

I’m delighted to present our 15th annual list of the past year’s ten most significant business divorce cases.

This year’s list includes decisions by New York’s trial and appellate courts concerning a smorgasbord of interesting issues involving limited liability companies, closely held and not-for-profit corporations, and partnerships. All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

McCormack v Kuras In this case, Manhattan Commercial Division Justice Joel Cohen rejected attempts by majority members of a realty-holding LLC to remove the minority member as the LLC’s designated, sole managing member where the operating agreement (a) was silent on manager removal and (b) required unanimous member consent to amend the operating agreement. The dispute erupted when the managing member, to whom the operating agreement gave sole authority to sell the LLC’s realty, began exploring a sale. The key legal issue in the decision was whether the majority members could remove the managing member under LLC Law 414’s default rule allowing a majority in interest to remove or replace a manager with or without cause. Justice Cohen held that the default rule did not apply in the absence of any reference to removal in the operating agreement naming a specific person as manager. Recognizing the paucity of case authority, he also commented “it would be helpful” to have appellate guidance surrounding the applicability of the LLC Law’s default rules. And how!

Continue Reading Top 10 Business Divorce Cases of 2022
Capture

Pictured right is the Nite Cap, a 42’ sailboat known to cruise the New York area waters.  As we return to our desks after the coldest Christmas in recent memory, it’s tempting to daydream about a summer day on her deck: drink in hand, wind filling the sails, and an easy heel giving way to weary legs and sea-tossed hair….

The members of Nite Cap’s owner, Bull-Poet, LLC, recently traded the full sheets and gentle seas of the Hudson for the strum and drang of litigation in New York’s Supreme Court.  But the squall has passed; thanks to New York County Justice Gerald Lebovits’ conclusion that Bull-Poet’s operating agreement contains a scrivener’s error, Nite Cap will sail again under Bull-Poet’s ownership. 

Continue Reading Scrivener’s Error Keeps Sailboat-Owning LLC Afloat

If there’s anything more contentious than a business divorce between co-owners of closely held firms, it’s a business divorce between a couple also going through or following a marital divorce.

Case in point: the litigation in New York Supreme Court between William P. Stewart, the founding owner of an asset management firm, and his former wife Barbara Stewart, who have been embroiled for many years in lawsuits in Surrogate’s Court over control of family trusts beginning in 2005 and who finalized a marital divorce around a decade later.

What’s the business divorce angle? They’ve also spent the last four years in litigation over a one-time jointly controlled LLC’s right to possess four works of art culminating with a recent trial court decision in Stewart Family LLC v Barbara Stewart, 76 Misc 3d 1228(A) [Sup Ct NY County 2022]. The trial court’s decision, in the wake of an interim appellate ruling that narrowed the issues, upheld William’s removal of Barbara as co-manager of the LLC that owns the artwork consisting of four impressionist paintings including the one pictured above titled Le Quintette by Raoul Dufy (1877-1953).

Continue Reading The Art of Manager Removal

One of the pleasures of being a litigator is that we constantly learn. The pleasure multiplies as a law blogger, where articles we write inspire litigation arguments, and litigations we fight inspire articles. Recently, my blogging and litigation worlds merged, cross-inspiring one another in some interesting ways.

A client who came across one of my articles about her case engaged our firm to represent her and her late husband’s estate when the outlook seemed dire.

Then, an article from earlier this year by my co-blogger, Peter Sluka, germinated a legal argument in the case challenging enforceability of a stock transfer restriction in a shareholder’s agreement our opponent argued caused a 50% stock interest worth millions of dollars to be “forfeited” because the deceased shareholder attempted to bequeath the shares to his widow in violation of a transfer restriction limiting permissible bequests only to one’s “issue.”

Coming full circle, as I researched more about this niche area, the things I learned for the litigation are now the inspiration for this week’s article.

Continue Reading Stock Transfer Restrictions and “Annihilation of Property”

Let’s see how good you are at predicting the outcome and its rationale in a recently decided case involving the following facts:

  • The controller of a Delaware LLC has supermajority voting rights under the initial LLC agreement to remove members for any or no reason.
  • The initial LLC agreement lacks any provision addressing redemption and payment rights upon removal.
  • The initial LLC agreement gives the controller the right to amend the agreement so long as the amendment does not “reduce any Member’s share of the Company’s distributions, income or gains, increase any Member’s share of the Company’s losses, or otherwise reduce the rights granted to any Member or increase the obligations of any Member if such reduction or increase would adversely affect such Member, without the consent of each Member to be adversely affected by the amendment.”
  • Came a time when the controller removed two minority members and simultaneously amended the LLC agreement by adding a “Member Repurchase Option” giving the controller the right to purchase “the Interest of any or all other Members” and deeming “any member whose interest is repurchased” a “Dissociated Member.”
  • The Repurchase Option uses a formula-based Repurchase Price based on a market-derived multiple of 8X EBITDA and other adjustments, less a 20% minority interest discount a/k/a discount for lack of control (DLOC) and a 20% discount for lack of marketability (DLOM).
  • The amendment also gives the controller the right to appoint an appraiser to “determine” the repurchase price which “shall be final and binding on all parties.”
  • The appraiser engaged by the controller to determine the Repurchase Price reviewed for accuracy the controller’s calculations pursuant to the formula and opined that the methodology and assumptions reflected in the formula were “reasonable.” The appraiser did not perform an independent valuation.
  • The controller gave written notice to the removed members enclosing a check for 100% of the determined repurchase price of approximately $550,000 each.
  • The removed members contested the repurchase formula and resulting price determined by the controller, raising among other objections that the application of DLOC and DLOM violated the adverse-affect restriction on the controller’s right to amend the LLC agreement by using a fair market value (FMV) standard that allows discounts instead of the fair value (FV) standard that disallows discounts.
  • The removed members hired their own valuation expert who determined the FV of their interests at approximately $18.3 million each without DLOC and DLOM, i.e., about thirty-three times greater than the $550,000 calculated by the controller using the Repurchase Price formula.

Keeping in mind that the Delaware LLC Act has no default provision governing the redemption of membership interests of an expelled member, is your answer:

  1. Controller wins: Delaware law prioritizes freedom of contract. The operating agreement gives the controller removal rights and the right to amend the operating agreement to set terms and conditions of buy-out upon removal. The purchased membership interests are akin to limited partnership interests to be valued under the FMV standard as provided in Delaware’s Revised Limited Partnership Act. The FMV repurchase formula with discounts did not adversely affect any pre-amendment rights of the removed members.
  2. Removed members win: The compelled repurchase violated the operating agreement and breached the controller’s fiduciary duties. The controller did not exercise pre-existing removal rights but, instead, breached fiduciary duty by adopting by amendment and implementing without member consent the Repurchase Option in violation of the initial LLC agreement’s adverse-affect rule. The removed members are entitled to the fair value of their interests plus rescissory damages for wrongful removal.
  3. Removed members win partial victory: The controller properly exercised removal rights but the Repurchase Option using FMV with discounts violated the adverse-affect limitation on the right to amend by diminishing the removed members’ right to receive fair value for their membership interests by analogy to cases decided under Delaware’s Revised Uniform Partnership Act, given the subject LLC’s management structure that more closely resembles a partnership than a corporation.
  4. None of the above.
Continue Reading LLC Forced Buy-Out Pits Fair Value Against Fair Market Value Against Power to Amend Operating Agreement