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

Here in the New York metro area, for the first time in years winter is living up to its name. The snow-plowed streets and sub-freezing temperatures are a natural setting for this sixth annual edition of Winter Case Notes in which I highlight a collection 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 three noteworthy decisions by New York courts and one from Iowa:

  • dismissing a rare deadlock dissolution petition involving a not-for-profit corporation;
  • dismissing a petition to dissolve a limited liability company after the company and one of its two 50% members were indicted for tax fraud;
  • dismissing claims for breach of fiduciary duty surrounding the break-up of a law firm; and
  • affirming a post-trial decision dismissing claims by son against father for breaches of fiduciary duty involving a farm property held by an LLC as part of the parents’ estate plan.

Court Dismisses Petition to Dissolve Not-For-Profit Corporation

Judicial dissolution cases triggered by disputes between co-directors of not-for-profit corporations (NFP) — as opposed to dissolution petitions brought by the state’s Attorney General such as the one currently pending against the National Rifle Association — are few and far between. Last year’s decision by Manhattan Supreme Court Justice Carol R. Edmead in Siegel v Eisner is only the second time in this blog’s 13-year history that I’ve had occasion to feature a dissolution case involving an NFP (here’s the first time).

Continue Reading Winter Case Notes: Dissolution of Not-For-Profit Corporation and Other Decisions of Interest

It’s not unusual to find buy-out provisions in shareholder and operating agreements that commit the pricing of the buy-out to the “final and binding” determination of one or more appraisers. The same agreements also may include broad arbitration clauses.

So what happens when a dispute erupts over the appraisal process and the resulting appraisal? Does an arbitrator’s authority begin and end with a determination whether the appraisal process adhered to the agreement? Or can the arbitrator take it a step further, notwithstanding the agreement’s assignment of finality to the appraiser’s determination, by taking valuation evidence and awarding a buy-out price that differs from the one challenged?

These questions may ring a bell for regular readers of this blog. Last year, I wrote about the Yakuel v Gluck case in which Andrew Gluck challenged the $4.7 million appraisal by PricewaterhouseCoopers (PwC) of his 35% membership interest in a digital marketing agency called Agency Within LLC. The 65% member, Joseph Yakuel, engaged PwC under the provisions of a Repurchase Option in an amendment to the LLC agreement mandating “an appraisal of the Fair Market Value by engaging a third party appraisal firm, whose appraisal will be final and binding on all parties.” Gluck essentially claimed that Yakuel rigged the appraisal by feeding PwC false financial projections designed to depress company value while at the same time excluding Gluck from participation in the appraisal process.

In his May 2020 decision that I wrote about last year, Manhattan Commercial Division Justice Joel M. Cohen denied Yakuel’s and Gluck’s dueling petitions, respectively, to confirm and to vacate the PwC appraisal award, finding that “the record is not sufficiently clear at this stage to permit a decision on this question one way or the other” whether Gluck had “a fair opportunity to present his case” to PwC.

My prior post did not mention the broad arbitration provision in the LLC agreement or the arbitration proceeding commenced by Yakuel in November 2018 in which he sought an award enforcing the Repurchase Option. In that proceeding, Gluck counterclaimed to rescind the amendment to the LLC agreement based on allegations of fraudulent inducement and, alternatively, for an award of damages resulting from Yakuel’s allegedly improper exclusion of Gluck from the PwC appraisal process.

We now know the outcome of the arbitration, thanks to another pair of dueling petitions before Justice Cohen to confirm or vacate the arbitrator’s 26-page written award issued last July. Between the award and Justice Cohen’s December 2020 decision confirming in part and vacating in part the award, let’s just say, it’s a doozy. Continue Reading Who Decides Disputed Valuation Under LLC Agreement’s Buy-Out Provision: Arbitrator or Appraiser?

One of the more attractive features of LLCs as a business organization is that they are, in large part, creatures of contract.  Most provisions in the NY LLC Law are default rules, and members are free to adopt those or almost any other rules governing the ownership and management of the LLC.  They can also agree to modify the rules, or they can make new agreements that affect the same interests as those covered by the LLC operating agreement.

With all the freedom of contract available to LLC members, it is not difficult to imagine how things can get messy quickly.  Members sign an LLC operating agreement, then bury it in a file cabinet while they run the business.  Years later and without consulting the operating agreement, they make another deal regarding their respective interests in the LLC.  When a dispute arises, how do the operating agreement and the subsequent deal interact?

A recently filed case in the Manhattan Commercial Division promises to shed some light on the issue.  In the first round—the plaintiff’s application for a preliminary injunction—a subsequent email buyout deal trumped any provisions in the parties’ operating agreement that might have given the defendant an out.  At this stage, therefore, the case reminds us that the LLC operating agreement may give way to a subsequent, less formal agreement when both LLC members manifest their intent to be bound by the latter.

Continue Reading A Shotgun Buy-Sell Agreement and an Email Deal Walk into a Beachside Bar . . .