Years ago, we wrote about the perils of “impromptu” settlements in business divorce cases – settlements eked out at the courthouse, on the fly, under pressure, during conferences, hearings, or trials. The resulting agreements tend to be memorialized in on-the-record, transcribed settlements made verbally between lawyers, clients, and the judge.

In-court settlements are both common and vital to litigation, the ultimate goal of which, of course, is to resolve disputes. But sometimes the parties’ eagerness to resolve a lengthy, difficult litigation can cause them to overlook or ignore subtle (or not-so-subtle) aspects of the deal vital to the overall transaction.

In a recent decision, fissures in the façade of an impromptu settlement began to appear almost from the moment the parties put their agreement on the record. What followed was a series of painful, two-and-a-half year, post-settlement proceedings – a veritable parade of horribles that reached its climax in a decision last month by a Manhattan appeals court in Kadosh v Kadosh, 169 AD3d 439 [1st Dept Feb. 7, 2019]. Continue Reading A Pig in a Poke: The Rollercoaster Kadosh Settlement Litigation

When it comes to business valuation principles in contested appraisal proceedings, I’d say the 50 states have far more in common than separates them. Certainly this is true in cases applying the fair market value standard deriving not from state law but from generally accepted appraisal doctrine as embodied in a number of IRS revenue rulings. But even in cases applying the statutory fair value standard, which is derived purely from state law governing buyouts in dissolution and dissenting shareholder proceedings, there is much to be learned by examining cases from other states.

Below I’ve selected five recent business valuation cases decided by appellate courts in five different states. Not surprisingly, the main area of dissension in four of the five cases concerns the applicability of discounts under both statutorily and contractually imposed standards of value. Each case contributes a little bit to our understanding of how courts and appraisers grapple with the difficulty of placing values on interests in closely held business entities for which no ready market exists.

Louisiana: Court Distinguishes “Fair Value” from “Fair Market Value” in Refusing to Tax-Effect S Corporation’s Accounts Receivable

Last month, in Kolwe v Civil and Structural Engineers, Inc., No. 18-398 [Ct. App. La. Feb. 21, 2019], an intermediate Louisiana appellate court upheld a trial court’s determination of the statutory fair value of a one-third stock interest in a professional engineering firm that elected pass-through taxation as an S corporation. Both sides’ experts used a net asset value approach. The company challenged the lower court’s $871,000 award principally on the ground that the company’s accounts receivable should have been tax-effected to reflect the tax liability that would accrue on their collection. Continue Reading A Cross-Country Tour of Five Recent Stock Appraisal Cases

This week’s post is by Matthew D. Donovan, a commercial litigation partner and member of Farrell Fritz’s business divorce practice group. 

There is a bit of folk wisdom that’s been passed down through my family over the generations that speaks to the rite of passage when one is confronted with the reality that there is more to life than oneself. The familial adage, as usually (and colorfully) pronounced by a superior elder, went something like: “The sun doesn’t rise and set over your own Irish arse!”

I must confess that I’ve often considered this as a kind of vernacular anchor to understanding the concept of fiduciary responsibility in the closely-held business context where officers, directors, and controlling shareholders are obligated under the law to put the interests of their company and business partners before their own. A recent post-trial decision out of Delaware’s Court of Chancery, Personal Touch Holding Corp. v Glaubach, brings home this lesson with similar colloquial color.

Not infrequent is the occasion on which we here at New York Business Divorce report on developments in Delaware law. As we have noted, Delaware has long been the preferred state of incorporation for both public and private companies, and its Court of Chancery is considered by many to be the preeminent business court in the land. Small wonder, then, that the Personal Touch decision serves as a kind of archetypal example of how not to behave in the corporate fiduciary context. Continue Reading Throwing Grenades and Casting Plagues Upon Your Fellow Directors: A Lesson in Fiduciary (Ir)responsibility

nu•cle•ar op•tion (noun): the most drastic or extreme response possible to a particular situation

The litigation arsenal of business divorce lawyers contains weapons of varying firepower. The choice of weapon for any particular assignment will depend on many factors including the type and size of the business; whether the client is a controlling or non-controlling owner; the nature of the dispute; the form of the business entity (LLC, close corporation, partnership); the character and magnitude of the adverse owner’s complained-of actions and whether the claimed injury is to the owner directly or derivatively; the likelihood or not of reconciling the co-owners’ differences; the impact of litigation on the company’s business and employees; the client’s time horizon and ability to finance the litigation; and the client’s ultimate divorce preference, be it selling the company or its assets on the open market, buying out the other owner, being bought out, or dividing the company’s assets when possible.

The Books and Records Proceeding

The basic weapons in the arsenal are threefold, the lowest caliber one being a lawsuit by a non-controlling owner to compel access to company books and records that the controlling owner refuses to make available. This weapon is designed to gather information of managerial and financial abuse by the controlling owner that, in a best case scenario for its wielder, provides ammunition for a negotiated outcome without necessarily having to air, much less prove in a public forum, specific allegations of malfeasance by the controller. When handled properly, it can be a relatively simple, expeditious, and cost-effective exercise. Continue Reading Judicial Dissolution as the Nuclear Option When Other Means Falter

It’s simply in the nature of things that business divorce litigants tend to accuse one another of all manner of heinous, dastardly misdeeds. Phrases like “oppression,” “fraud,” “deceit,” “theft,” “siphoning” of assets, “diversion” of opportunities, etc., are the norm. As a litigant, if you make those kinds of allegations, and they turn out to be unsuccessful, or you withdraw them, can you be sued for defamation? Staten Island Supreme Court Justice Wayne M. Ozzi considered that question in Seneca v Cangro, 2018 NY Slip Op 33404(U) [Sup Ct Richmond County Nov. 27, 2018], a lawsuit pitting an uncle against his nephews over claims they defamed him while suing to dissolve three family-owned entities.

The Family Businesses

In 1962, ancestors of the current antagonists formed C. Seneca Construction, Inc. (the “Corporation”), a real property holding, management, and construction company. In 2004, the family expanded its business with the formation of two additional real property companies organized as LLCs (the “LLCs”). Pursuant to written operating agreements, one of which you can read here, Anthony Seneca was a 25% member of the LLCs, and his nephews, Emil and Carlo Cangro, collectively owned 25%. Anthony, Emil, and Carlo allegedly owned shares of stock in the Corporation in the same percentages. Continue Reading Sue for Dissolution – Get Sued for Defamation?

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

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