330 West 85th Street is a prime location on Manhattan’s Upper West Side. At that address sits an elegant, pre-war, 48-unit rental apartment building known as The Rexmere. A 4th floor one-bedroom apartment currently is available for $2,950 per month, if you’re interested. I get no commission.

330 West 85 also is the name of the limited liability company that owns the building. The LLC in turn is owned by two gentlemen, Harvey Rubin and James Baumann. Rubin and Baumann’s father acquired the building in the late 1970’s as partners in a general partnership.

Baumann subsequently succeeded to his father’s partnership interest. In 1996, he and Rubin converted the partnership to a manager-managed LLC in which each holds a 50% membership interest and each is a designated manager. The building today undoubtedly is worth exponentially more than its 1978 purchase price.

The business relationship between the two owners apparently went smoothly until around 2014 when Rubin, by then a widower in his 80s, decided to “retire” and approached the younger Baumann about a buy-out. Thus began a chain of events that ruptured their relationship and sees them currently entering their fifth year of litigation marked by two round trips to the appellate court.

The first appellate decision in 2017 pronounced Baumann the winner in a dispute over the construction of the operating agreement’s provisions governing the lifetime sale of a member’s interest.

The second appellate decision last week pronounced Rubin the winner in a dispute centering on the application of LLC Law § 408(b)’s default rule for manager decision-making, to the parties’ dispute over Baumann’s refusal to give up his longtime position as the building’s managing agent.

In both appeals, it’s fair to say that shortsighted drafting of the operating agreement sowed the seeds of dispute. I’ll offer some more thoughts about that at the bottom of this post. Continue Reading Operating Agreement Spawns Multiple Disputes Between 50/50 Members of Realty Holding LLC

The title of this post describes not an army maneuver, but the outcome of a recent lawsuit in Delaware Chancery Court for advancement of litigation expenses in which:

  1. A company sued its ex-CEO in New Jersey federal court for pre-termination breach of fiduciary duty and post-termination breach of the non-compete and non-solicitation clauses of his employment agreement, in the process allegedly using purloined confidential information.
  2. The ex-CEO sued in Delaware Chancery Court for contractual indemnification and advancement of his defense costs in the federal court action.
  3. Chancery Court ordered advancement.
  4. The company amended its federal court complaint by removing all allegations of post-termination misuse of confidential information, following which it moved in Chancery Court to modify the advancement order.
  5. Chancery Court modified its prior order to eliminate advancement for the post-termination contract breach claim.

Vice Chancellor Glasscock’s ruling last week in Carr v Global Payments Inc. underscores important lessons both for both public and private companies about the interpretive interplay between statutory and contractual provisions governing rights to officer and director indemnity and advancement, the breadth of advancement doctrine, the need for company counsel to analyze closely the impact of proposed pleadings on advancement rights, and, most importantly, the company’s need to anticipate and choose between the benefits of bringing claims that trigger advancement rights versus the strategic and financial costs of advancement.

Continue Reading Advance! Amend! Retreat!

Under the so-called “American Rule,” litigants usually must pay their own lawyer fees. But in business divorce and other private company disputes between business co-owners, there are a variety of ways for individual defendants to have the business assume payment of their legal fees in defense of a lawsuit. How? The answer depends on several factors – what kind of entity; what kind of claim; in what capacity is one being sued. In this article, we take a close look at the basics of New York’s law of indemnification and advancement.

Advancement Versus Indemnification

“Indemnification and advancement of legal fees are two distinct corporate obligations” (Crossroads ABL LLC v Canaras Capital Mgt., LLC, 105 AD3d 645 [1st Dept 2013]).

“Advancement is a species of loan—essentially simply a decision to advance credit—to a [corporate official] pending later determination of that person’s right to receive and retain indemnification. The corporation maintains the right to be repaid all sums advanced, if the individual is ultimately shown not to be entitled to indemnification” (In re Adelphia Comms. Corp., 323 BR 345 [Bankr SD NY 2005]). Continue Reading Can the Company Pay My Legal Fees?

In general, federal courts have subject matter jurisdiction to hear cases in which the opposing litigants have diverse citizenship or the suit involves claims arising under federal law.

Lawsuits seeking judicial dissolution of incorporated and unincorporated business entities arise under state law, leaving diversity jurisdiction as the only possible entrée to federal court in such cases.

The rules dictating the citizenship of incorporated and unincorporated entities differ. A corporation is deemed a citizen of its state of formation and its principal place of business. An unincorporated entity, including a limited liability company, is deemed a citizen of every state of which a member of the entity is a citizen.

Thus, if the shareholder-petitioner seeking judicial dissolution of a corporation is a citizen of State X, the corporation is a citizen of State Y, and a named respondent shareholder is a citizen of State Z (or any state other than X), there is complete diversity of citizenship and the federal court has subject matter jurisdiction.

At that point, even with jurisdiction secured, a possible, further impediment to a federal venue in dissolution cases is the so-called Burford abstention doctrine. Some but not all federal courts have applied Burford abstention to dismiss the case without prejudice to re-filing in state court, in deference to state court primacy in an area of comprehensive state regulation. (Read here,  here, and here prior posts about Burford abstention in dissolution cases.) Continue Reading LLCs as Nominal Parties in Dissolution Cases: An Uncertain Portal to Federal Court Jurisdiction

Here we go again — and again and again.

On numerous prior occasions I’ve written about judicial dissolution cases and other infighting among LLC members featuring disputes over membership percentages. The disputes may involve voting rights, management rights, profit shares, buyout, or distributions upon liquidation.

In some cases, the parties fail to document properly — or at all — their respective membership interests. In others, the operating agreements state initial membership percentages but make them subject to future adjustment based on changes in the members’ capital accounts.

In the latter instance of indeterminate or floating interests, the operating agreement can become a curse if eligible capital contributions aren’t adequately defined and/or it establishes no reliable mechanism for recording them, especially non-cash contributions such as services or property. It becomes a double curse when the parties opt to forego legal counsel and use one of the notoriously unreliable, free or cheap, one-size-fits-all, online operating agreements.

The double curse was at work in Roy Food and Wine LLC v Meregalli, 2019 NY Slip Op 32875(U) [Sup Ct NY County Sept. 25, 2019], decided last month by Manhattan Commercial Division Justice O. Peter Sherwood, in which the parties litigated among other issues their respective membership interests, including a claim that the managing member misrepresented his capital contributions. Continue Reading The Perils of Indeterminate LLC Membership Interests

In my business divorce travels occasionally I encounter instances in which shareholder distributions are made in the period between the valuation date for an elective buyout of a minority shareholder who sued for dissolution and the consummation of the buyout following a contested fair value appraisal proceeding.

With that setup, there are two questions you might ask yourself:

  • Why would the controllers of a closely held corporation voluntarily make shareholder distributions benefitting the soon-to-be-removed minority shareholder whose petition accuses them of oppression, looting, or other misdeeds?
  • Since the petitioner’s shares are to be valued based essentially on the risk-adjusted value of future cash flows, do such post-valuation date distributions constitute double dipping and thus should they be credited against the fair value award?

There’s no single answer to the first question. It can happen where the company’s owners for whatever reasons historically have distributed substantially all profits as dividends rather than as salary or bonus, and feel compelled to continue the practice out of economic necessity. It also can happen where a company with a longstanding dividend policy has a number of non-petitioning minority shareholders who likely would object loudly if their dividends were suspended indefinitely by reason of  a dissolution and valuation proceeding brought by another shareholder.

As for the second question, I’ve not seen any appraisal literature that addresses the double-dipping issue. Nor does the sparse case authority provide a clear answer. Continue Reading Post-Valuation Date Distributions: Should They Be Credited Against Fair Value Awards?

Earlier this year, we wrote about a partnership dispute involving a prominent insurance litigation firm, D’Amato & Lynch, LLP. In that case, a lawyer who enjoyed the title and certain trappings of “partner” tried, but failed, to persuade a court that he was an “equity partner” with the power to sue for dissolution of the firm.

D’Amato & Lynch involved a recurrent source of litigation among lawyers: the term “partner” is frequently overused or loosely used to describe many different roles – “general partner,” “equity partner,” “non-equity partner,” “income partner,” “profits partner,” “contract partner,” etc.

Two weeks ago, in Capizzi v Brown Chiari LLP, 2019 NY Slip Op 51471(U) [Sup Ct, Erie County Sept. 13, 2019], a dispute between a law firm partner and his former colleagues, raising the identical issue as D’Amato & Lynch, reached its climax in a highly-interesting, post-trial decision by Erie County Commercial Division Justice Timothy J. Walker. The sole question presented in a lengthy, framed-issue bench trial was whether Capizzi was an equity partner at the time he resigned from the firm and, therefore, caused dissolution of the partnership when he withdrew. Did the withdrawing partner in Brown Chiari fare any better than his counterpart in D’Amato & Lynch? Let’s take a look. Continue Reading Lawyer Says, “I’m Not a Partner, No Wait, I am a Partner!” Which is It?

In a moment I’ll explain why you’re looking at a picture of “chicken shit bingo,” but first . . .

The nationwide landscape of statutes and case law governing judicial dissolution of limited liability companies exhibits more state-to-state similarity than dissimilarity.

On the statutory side, this is due in large part to the use of the same model acts in the initial wave of LLC enabling legislation that swept the country in the late 1980s and early 1990s and, of course, the more recent adoption by many states of the Revised Uniform LLC Act.

On the case law side, because all LLC laws share a fundamental deference to the members’ contractual preferences as expressed in the operating agreement, and because the LLC statutes almost invariably include as ground for dissolution the impracticability of the LLC’s continued operation in conformity with the members’ agreement, to a very large extent court decisions in LLC dissolution cases turn on common-law principles of contract interpretation which also tend to uniformity among the states.

All of which is to make the point that, while a steadily increasing focus in my practice and of this blog is New York’s experience with judicial dissolution of LLCs as the newly dominant form of closely held business entity, business divorce practitioners in all states can benefit greatly from staying abreast with LLC case law developments from across the country — and not just Delaware!

Along those lines, two weeks ago I wrote about a recent Kentucky appellate ruling affirming the dismissal of a minority member’s petition to dissolve a single-asset realty holding LLC. That case turned wholly on the court’s reading of the operating agreement’s purpose clause.

In this post, we look at a South Dakota Supreme Court decision issued earlier this month in another LLC dissolution case also involving a single-asset realty holding company with the fanciful name, Dragpipe Saloon, LLC, in which the court reversed the lower court’s order granting a dissolution petition alleging deadlock. In that case, the operating agreement’s purpose clause was one of several interesting issues addressed in the court’s opinion. Continue Reading Chicken Sh*t Bingo Fans Rejoice: The Dragpipe Saloon Survives a Dissolution Scare

Meet Steve Robinson. He’s a 1982 Harvard Law grad who spent the formative years of his legal career practicing corporate securities law at large law firms in Fort Worth, Texas. In 1994 he started his own, small firm where he continues to practice corporate law. He is not a litigator.

If you think that doesn’t sound like the typical profile of a business divorce lawyer, you’re right. But in recent years Steve has leveraged his knowledge and experience helping clients form, finance, and operate business partnerships into a sub-specialty advising owners of closely held firms facing the prospect of a contentious split with their co-owners.

Steve appeared on my radar screen earlier this year when I came across a series of articles he highlighted on LinkedIn addressing various business divorce topics. Steve’s articles, with titles like “The People Problem” and “The Importance of BATNA,” have a decidedly different slant from the kinds of articles you read on this blog which focus on substantive and procedural law in business divorce litigation. Rather, Steve writes from the perspective of a transactional lawyer shepherding clients whenever possible away from the courtroom to the negotiating table.

I recently interviewed Steve for my Business Divorce Roundtable podcast which is linked below. Steve and I had a lively conversation centering on the win-win versus win-lose approaches of transactional lawyers versus litigators. When I started the interview I assumed we’d end up agreeing to disagree on which approach can best resolve business divorce disputes but, as you’ll hear, by the finish Steve and I were on common ground in the belief that skilled business divorce professionals must be able to strategically employ both approaches to achieve the best results for their clients.

Parking lots breed partnership disputes. I’ve litigated them and I’ve written about them, most notably the Kassab saga.

I suppose it’s the untapped development potential of parking lots, especially in flourishing downtown urban areas, that creates conditions ripe for dissension among co-owners with different investment goals and time horizons.

Such was the case in Blue Equity Holdings Kentucky, LLC v Cobalt Riverfront Properties, LLC, No. 2018-CA-001092-MR [Ky Ct App Aug. 30, 2019], in which a parking lot in downtown Louisville, Kentucky was the setting for a ruling by that state’s Court of Appeals in a judicial dissolution proceeding requiring it to construe the purpose clause of an LLC agreement. Continue Reading Pave Paradise, Put Up a Purposeful Parking Lot