One of the great ironies of New York business divorce litigation is that so much of it involves the breakup of law firms. Perhaps it’s because New York is the center of the legal universe and the home state of thousands of law firms. Maybe it’s because lawyers are litigious by nature. Another, less obvious reason: law firms often imprecisely use the term “partner” to describe their lawyers.

Under Section 10 of the Partnership Law, the term “partnership” means an association of two or more people to carry on a business for profit “as co-owners.” By definition, “partner” means an owner who shares in profits and losses. But the archetypal law firm general partnership long ago gave way to other business forms, and even law firms that still adhere to the partnership form adopt agreements opting out of the default rules to provide for a wide variety of so-called “partners” –  “equity partner,” “non-equity partner,” “income partner,” “profits partner,” “contract partner,” “general partner,” “limited partner.” The use of the term “partner” to describe folks who are not equity “partners” creates the potential for ambiguity, and ambiguity begets litigation.

If there is apparent ambiguity, to what extent must courts rely on the entity’s tax returns to decide the issue of ownership? In Mahoney-Buntzman v Buntzman, 12 NY3d 415 [2009], New York State’s highest court wrote a seemingly hard-and-fast rule: “A party to litigation may not take a position contrary to a position taken in an income tax return.” Business divorce lawyers love to cite this rule when they believe it helps their position to prove or disprove ownership status in a business. A few months ago, we wrote about precisely such a case, Rosin v Schnitzler, 2018 NY Slip Op 32320(U) [Sup Ct, Kings County Sept. 4, 2018], in which Commercial Division Justice Lawrence S. Knipel, relying on Mahoney-Buntzman, held that an LLC’s filing of Schedule K-1s identifying the plaintiff as a member proved his membership status in the business. Continue Reading The Law Firm “Partner”- A Rose by Any Other Name . . .

Most judicial dissolution cases in New York courts involve a single entity. When the target of dissolution is structured as a holding company for one or more operating or asset-based companies with asymmetric management, the issues can get hairier.

Case in point: Brooklyn Commercial Division Justice Lawrence Knipel’s recent decision in Matter of Lev v Rosenberg, 2019 NY Slip Op 30824(U) [Sup Ct Kings County Mar. 13, 2019].

I’ll get to the mulligan in a bit.

The Lev case pits two co-owners against a third. The two petitioned under § 121-803 (a) of the Revised Limited Partnership Act for judicial supervision of the winding up of a real estate limited partnership of which the third owner was the sole managing 1% general partner. They also sought the appointment under LLC Law § 703 (a) of a liquidating trustee for an LLC formed by the three of them as co-equal one-third members to hold a 98.9% limited partner interest and a 0.25% general partner interest in the partnership. The partnership’s realty consists of a low-income residential apartment building in Brooklyn apparently valued north of $30 million. Continue Reading No Mulligan But No Matter for LLC’s Majority Members After Voluntary Dissolution

The discoverability of materials in civil litigation in general resists any hard and fast rules, other than that the scope of discovery is broadly defined and liberally applied under the rules of civil procedure in both state and federal cases, and that judges are afforded broad discretion in deciding what’s “material and necessary” (NY CPLR 3101 (a)) or “relevant” (Fed.R.Civ.P. 26 (b) (1)) based on the specific facts and issues in each case.

In contested stock valuations triggered by elections to purchase in statutory dissolution or dissenting shareholder cases, it’s only natural that purchaser and seller both are motivated to obtain discovery from the other for possible use at trial of any pre-litigation appraisals of the corporation’s equity, whether or not obtained in contemplation of litigation, in the hope that the appraisal will undermine the valuation performed by the other’s expert witness at trial.

Business and real estate appraisals may be secured in the ordinary course for a host of different reasons having nothing to do with shareholder disputes. The probative value of the appraisal in any subsequent litigation over stock value may depend on its proximity in time to the valuation date in the case, its purpose, the standard and premise of value employed, and other variables.

Occasionally, a stock valuation contest is triggered by the death of a shareholder under the terms of a shareholder agreement requiring a buy-out of the estate’s shares, or involves a statutory buy-out of shares owned by a living shareholder who acquired the shares by inheritance from a former, deceased shareholder. In such cases, the purchaser may seek discovery of any stock appraisal done for purposes of reporting the stock’s value on the Form 706 tax return that must be filed on behalf of the deceased shareholder’s estate. Continue Reading Disclosure of Estate Tax Stock Appraisals in Shareholder Disputes

When 50/50 co-owners of a business are deadlocked on a major business decision, unless they have a written agreement in which a declared deadlock triggers a buy-sell process or appointment of a specific third person to cast a deciding vote, the unresolved deadlock may lead to litigation or even dissolution of the business entity.

In many instances deadlock is not the cause of a dysfunctional relationship between the 50/50 owners but, rather, is symptomatic of an irreconcilable breakdown of their personal relationship and/or divergence of interests. In those cases, either the owners will negotiate an amicable separation or they will end up in court litigating claims for dissolution, breach of fiduciary duty, accounting, etc. Or, if the owners have an agreement with an arbitration clause, their legal claims will be litigated privately before an arbitrator.

But what if the deadlock isn’t just a signpost on the road to dissolution? What if co-owners who otherwise have a healthy working relationship simply can’t agree on a particular business issue of importance, such as fixing an annual budget or opening or closing a business location or expanding a product line? If their agreement has no mechanism for breaking it, how can the deadlock be resolved without allowing the disagreement to fester into something bigger and potentially more disruptive?

It’s a question arbitrator/mediator Erica Garay of Garay ADR Services tackles in a recent article published in the Nassau Lawyer called Using an Arbitration Clause to Break Corporate Deadlock. Her solution is addressed to transactional lawyers: broaden the scope of the arbitration clause in the shareholder or operating agreement, beyond the standard references to disputes and claims, to mandate binding arbitration of deadlock if good faith negotiations don’t do the trick.

I was both intrigued and puzzled by Erica’s proposal. On the one hand, I’m a big believer in alternative dispute resolution in most if not all business divorce matters, particularly mediation. On the other hand, unless the clause names as arbitrator someone known to the owners and who’s familiar with the business, the idea of putting a pure business decision (as opposed to resolution of a legal claim) in the hands of a law-trained arbitrator who’s a stranger to the business struck me as a hard sell to business owners.

My own solution was to invite Erica onto my Business Divorce Roundtable podcast for what turned out to be a lively and thought-provoking interview on the subject of arbitrating deadlock. I came away from the interview more convinced, at least for certain types of deadlock where an arbitrator who doesn’t know the business can decide the issue based largely on objective criteria, that Erica’s idea has validity, although it would require forethought and definition in the agreement of the specific types of deadlock that would trigger a duty to arbitrate.

You can listen to the interview with Erica by clicking on the link that follows. You also can subscribe to the podcast on iTunes, SoundCloud, Stitcher, or wherever you listen to podcasts. If you’re a lawyer, business appraiser or business owner with a business divorce story you’d like to share for a future podcast, drop me a line at

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