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

Over the years I’ve blogged about hundreds of court decisions in business divorce cases. Believe it or not, one of the things I like to do is track the cases I’ve written about — or at least those that survive the court’s decision — to see if the decisions lead to settlement as they often do but, more importantly, to see how the decisions shape the subsequent case proceedings and, of course, searching for later court rulings helpful to my business divorce practice and/or of potential interest to readers of this blog.

When I find a later decision that doesn’t deserve its own post usually I’ll just add an update blurb to the original post about the case. But occasionally there are follow-up decisions in distinctive cases whose denouement merits a bit more. Here are three of them:

The Kensington Publishing Case 

Four years ago, in a post entitled Voting Agreement Triggers Fight for Control of Family-Owned Publishing House, I wrote about Zacharius v Kensington Publishing Corp., a high-stakes fight for control of the largest independent publisher of mass-market books in the U.S. The company was founded by Walter Zacharius who died in 2011, leaving his second wife, Suzanne, with 59% of the voting shares and his two children by his first marriage with most of the remaining shares. He also left behind a 2005 Voting Agreement among himself and his two children giving them the power, following Walter’s death, to vote his shares in any election of Kensington’s directors. Continue Reading Business Divorce Epilogues

I’m very pleased to present my 11th annual list of this past year’s ten most significant business divorce cases.

This year’s list includes four important appellate decisions, including one likely to stand as a landmark ruling by the New York Court of Appeals on the issues of wrongful dissolution and valuation of partnerships.

This year’s list also features noteworthy rulings in business divorce cases involving closely held corporations and, of course, limited liability companies on a variety of issues including standing to sue derivatively, the right to defend a suit derivatively, whether an inactive member of a member-managed LLC owes fiduciary duties, and more.

All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are: Continue Reading Top Ten Business Divorce Cases of 2018

Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.

With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.

Three Memorable Decisions from Justice Ramos

For Justice Ramos, we focus on three LLC cases.

In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members. Continue Reading A Fond Adieu to Two Giants of the Manhattan Commercial Division Bench

Raise your hand if you think that a lawsuit for an accounting by the managers of an LLC simply means they have to turn over financial records.

If you raised your hand, read on. If not, you can skip this post.

Soon it will be ten years since the Appellate Division, First Department, in the Gottlieb v Northriver Trading case, recognized the common-law right of an LLC member to seek an equitable accounting by the LLC’s managers. In my post about Gottlieb back then, by way of background I explained:

The “equitable action on account” has a rich legal history in early English and American law, reflecting a time when forms of pleading and the scope of judicial powers made sharp distinctions between actions “at law” and those “in equity.” In modern usage, the accounting action allows a trust beneficiary, partner, etc. to compel a fiduciary entrusted with property to render an account of his or her actions and for the recovery of any balance found to be due. The accounting involves more than simply turning over existing financial records. In New York practice, if the court grants an accounting, it may order the fiduciary to prepare a “long accounting” with detailed schedules of income and expenses over a defined period, followed by the filing of objections to the accounting, followed by proceedings before a court-appointed referee to hear and determine the accounting.

Continue Reading Equitable Accounting vs. Access to Books and Records: Don’t Confuse Them

After two years, 300+ docket entries, and 12 motions, a lawsuit among members of a Delaware LLC that owned a 5-story apartment building on Manhattan’s Upper East Side (the “UES Building”) acquired to provide short-term rentals for international leisure and corporate travelers, and whose business was decimated by anti-Airbnb legislation, is barely past the pleadings stage and likely can look forward to years more litigation.

Manhattan Commercial Division Justice Jennifer G. Schechter’s recent decision in Favourite Ltd. v Cico, 2018 NY Slip Op 32781(U) [Sup Ct NY County Oct. 30, 2018], permitting the LLC and some of its members to file an amended pleading against the LLC’s former managing members, addresses several issues of interest including whether the legislature’s action automatically triggered dissolution under the operating agreement’s arguably conflicting provisions, and whether the former managers’ attempted reinvestment of proceeds from the UES Building’s sale in another property violated the operating agreement’s purpose clause.

According to the Second Amended Complaint ultimately allowed by the court, the two defendants as sole managing members of Upper East Side Suites, LLC, formed in Delaware in 2007, solicited investors from Italy’s business community who contributed $4.75 million to buy the UES Building to operate a short-term rental business. What allegedly followed is a scheme by the defendants of “self-dealing, mismanagement, waste of assets, fraud, and forgery that resulted in the loss of every cent of the $4.75 million invested.” Continue Reading Outlawing of LLC’s Short-Term Rental Business Brings Long-Term Litigation

Last month gave us three noteworthy post-trial decisions in three different cases from three different states, all centering on disputes among business co-owners over the ownership and exploitation of the businesses’s core intellectual property. While each case stems from a unique set of facts, they all have in common failures to allocate IP ownership by means of clear contractual undertakings ex ante and/or failures to exercise due diligence at inception or during the life of the business.

The first highlighted case hails from New York, involving an extremely high stakes financial dispute between family members comprising the minority and controlling shareholders of the famous Palm restaurants located throughout the United States and elsewhere. The second case comes from Delaware, in which the court ordered dissolution of a limited liability company where the 50% member who licensed to the LLC the patented technology on which rested its entire business plan, as it turned out, did not own the rights. In the third case, from Arkansas, the judge dismissed a one-third LLC member’s claims for copyright infringement and dissolution after finding that he was equitably estopped from enforcing his copyrights in the company’s principal software products.

Derivative Suit Over Palm Restaurant IP Yields $120 Million Award

The original Palm Restaurant was founded in Manhattan in 1926 by Pio Bozzi and John Ganzi, who ran it with their wives. Today, despite the ubiquity of Palm-branded restaurants throughout the U.S. and worldwide, the original corporation formed by Pio and John, now owned by third-generation family members, does not operate a single restaurant. Rather, its sole asset consists of the enormously valuable Palm IP consisting of a series of trademarks and service marks, and design elements including its menu and distinctive restaurant décor, all of which is licensed to independent Palm restaurant operators as well as Palm restaurants owned in whole or with other investors by two family members, Bruce Bozzi and Walter Ganzi, who also happen to own 80% of the original Palm corporation that owns the IP, which I’ll called Palm IP Corp. Continue Reading IP Disputes Among Private Business Co-Owners Dominate Three Recent Cases

A basic and well-known principle of partnership law is that, absent an agreement to the contrary, general partners have authority to unilaterally bind the partnership to contracts with third parties.

In New York, the rule is codified in Section 20 (1) of the Partnership Law, which states:

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership . . .

Generally speaking, partners also have the power to unilaterally convey partnership real property, as codified in Section 21 of the Partnership Law which states, “Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name . . .”

Important restrictions exist, though – statutory and potentially contractual – on general partners’ ability to bind the partnership to transactions which may, in effect, cause the dissolution of the business. These restrictions can be a trap for the ill-informed, as emphasized by a recent Brooklyn appeals court decision in Camuso v Brooklyn Portfolio, LLC, 164 AD3d 739 [2d Dept 2018]. Camuso is a reminder that careful due diligence is vital when buying partnership real property. Continue Reading When Dealing in Partnership Owned Real Property, Caveat Emptor

Let me say up front, I don’t claim to know the answer to the question posed in this post’s title, or pretend there’s a simple yes-or-no answer. It very well may be that the answer depends on the unique facts and circumstances in any given case, including the one discussed below.

Having said that, take a look at a Schedule K-1 in the tax return of a limited liability company. I’ll make it easy; click here for the 2017 K-1 form available on the IRS’s website. Now tell me, in the Part II “Information About the Partner” section of the form, do you see a check box for a taxpayer who is a non-member/assignee/holder of an economic interest in an LLC?

That’s right, you don’t. As pertains to LLCs, the only choices are “LLC member-manager” or “other LLC member.”

I’m not a tax expert, but I’m fairly confident it makes no difference whether one or the other of those boxes is checked for a non-member assignee of an LLC interest, at least for tax purposes. But it can make a night-and-day difference for state law purposes to a litigant seeking to enforce rights as the assignee of a membership interest — be it to secure judicial dissolution, to enforce management, voting or inspection rights, or to prosecute derivative claims — and who relies solely on a K-1 as proof of his, her, or its member status.

It makes a difference because, under New York statutory and case law, absent provision in an operating agreement to the contrary, an assignee, non-member holder of an economic interest in an LLC has no standing to assert any of those rights or to obtain any of those remedies.

I’ve encountered the issue a number of times in my business divorce travels, almost always involving LLCs with no written operating agreement and that don’t observe governance formalities. It’s also an issue that surfaced in a recent decision in which the court held that the plaintiff, whose complaint asserts both direct and derivative claims for breach of fiduciary duty, and who was not an original member of the subject LLC and acquired his interest by undocumented assignment, established his member status based on his K-1, apparently in the absence of any written agreement with the other members or other evidence of any formal consent to his admission as a member. Rosin v Schnitzler, 2018 NY Slip Op 32320(U) [Sup Ct Kings County Sept. 4, 2018]. Continue Reading Is a Schedule K-1 By Itself Enough to Prove LLC Membership?

It’s no surprise that the quorum requirements found in close corporation by-laws and LLC operating agreements rarely step into the limelight in business divorce disputes. After all, the typical quorum provision for meetings of shareholders, directors, and LLC members and managers requires attendance by a bare majority of voting shares or membership interests or, at the board or managerial level, a bare majority of the board of directors or managers. In other words, it’s usually not the holding of the meeting that generates the dispute, it’s the action taken at the meeting by the control faction that generates the dispute.

In the case of closely held entities with two owners having equal interests and control, a quorum provision requiring majority attendance effectively requires attendance by both owners. If owner #1 doesn’t attend the meeting, not because of some benign reason but due to a disagreement with owner #2 over the action proposed by the latter to be voted upon at the meeting, that produces a deadlock the same as if both owners attended the meeting and cast conflicting votes. Deadlock is deadlock, meeting or no.

Now imagine a closely held entity that has three or more voting shareholders or members, or three or more members of the board of directors or managers, with a quorum provision requiring the presence at a meeting of all the shareholders or members, or of all the directors or managers. With such an entity, a dissenter with minority voting power who couldn’t otherwise defeat a proposed action requiring majority approval, nonetheless can block the action simply by not showing up at the meeting. So much for majority rule.

Actually, we don’t have to imagine the scenario because that’s what happened in Casilli v Natan, 2018 NY Slip Op 32621(U) [Sup Ct NY County Oct. 12, 2018], recently decided by Manhattan Commercial Division Justice Andrea Masley. In her decision, Justice Masley was invited to substitute the statutory default rule under LLC Law § 404, requiring the presence at meetings of a majority in interest of the members, for an “unworkable” quorum provision in the LLC’s operating agreement requiring the presence of all. Not surprisingly, at least to this writer, Justice Masley declined the invitation. Continue Reading Think Twice Before Putting 100% Quorum Requirement in By-Laws or LLC Agreement