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

Like business divorce, New York trusts and estates litigation (“T&E”) is a highly specialized niche of the law. T&E litigators have their own universe of substantive law, their own set of procedural rules – the Surrogate’s Court Procedure Act, and their own courts – the Surrogate’s Court. Each and every one of the 62 counties in the State of New York has a Surrogate’s Court. So specialized is New York T&E litigation that, at our firm, we have an entire group of lawyers devoted to it exclusively, with their very own sister blog, New York Trusts & Estates Litigation.

The point of all this is not to fluff our T&E lawyers or their blog, but rather, to set the stage for this week’s post, emanating from a recent decision by Manhattan Surrogate Nora S. Anderson addressing an important recurring issue: the jurisdictional power of Surrogate’s Court to resolve seemingly-quintessential business divorce disputes typically resolved in Supreme Court.

Business Interest Ownership Claims in Surrogate’s Court 

Business divorce cases most often find their way into Surrogate’s Court because the owner of a business – be it a general or limited partner, corporate shareholder, or LLC member – has died, and his or her former ownership interest must be litigated as part of the settlement of his or her affairs after death. Occasionally the outcome of a business divorce case will depend heavily, or even exclusively, upon the outcome of litigation in Surrogate’s Court. Continue Reading Business Divorce in the Surrogate’s Court

What makes someone a member of an LLC?

It’s a question that frequently arises in business divorce cases involving LLCs that have no written operating agreement much less certificated membership interests. On the answer hangs the fate of the complainant’s standing to seek judicial dissolution, or to demand access to LLC books and records, or to assert derivative claims, or to enforce any other rights arising from member status.

It’s also a question the answer to which turns on an endless array of case-specific facts and circumstances, which may be why I haven’t seen any New York case law purporting to establish a uniform test for establishing one’s undocumented membership in an LLC.

In a recent decision by a Brooklyn judge involving a petition for judicial dissolution of an LLC, however, the court borrowed from partnership law its multi-factor test for determining the existence of a partnership in concluding that the petitioner was not a member of the subject LLC and therefore lacked standing to seek dissolution.

The case is Matter of Shiel (CoolFrames, LLC), in which I represented the prevailing company and the respondent members.

Continue Reading Court Looks to Partnership Law in Ruling Against Petitioner’s Status as LLC Member

LLC enabling statutes authorize two types of management structures. The default structure is member-managed in which all members participate in the management of the company’s business affairs. Member-managed LLCs usually have a relatively small number of members who are actively involved in the company’s business and who owe default fiduciary duties.

Then there’s the manager-managed LLC, more akin to a corporation-style management structure and sometimes featuring a Board of Managers and designated officers, in which one or more persons or entities (who may be, but need not be, members of the LLC) are responsible for managing the LLC’s business affairs. Manager-managed LLCs typically have a number (which could be large) of non-managing members who owe no fiduciary duties and essentially serve as passive investors, not unlike limited partners.

The manager-managed LLC offers flexibility and efficiencies not available with a member-managed structure. But, as with any agency relationship, care must be taken in the operating agreement to spell out not only the scope of the managers’ authority, but also the voting requirements and circumstances under which the managers can be removed or replaced by the members.

A California intermediate appellate court’s ruling earlier this month involving a manager-managed LLC, in Hillsborough Development Co., LLC v Annen, illustrates what can go wrong when the operating agreement names one of its members as sole manager but fails to include any provision addressing manager removal.

Continue Reading Statute Trumps LLC Agreement’s Voting Rights Provision in Dispute Over Manager’s Removal

It’s that time of year again, when I offer some lighter fare for poolside consumption consisting of summaries of a few recent decisions of interest involving disputes between business co-owners.

This year’s summaries include:

  • a New York case in which a minority member of a Delaware LLC asserted an ill-fated claim for minority “shareholder” oppression;
  • a California case in which the court disqualified a lawyer hired by one of two 50/50 partners to represent the partnership in a partition action;
  • a Delaware case in which the court dissolved a limited partnership going through a business meltdown exacerbated by the controlling general partner’s refusal to cooperate with the court-appointed receiver;
  • and an Illinois case in which an appellate court revived a minority shareholder’s suit to set aside a zero-dollar buyout settlement agreement based on an alleged pre-agreement misrepresentation by the buyer’s counsel that the company was in debt.

New York Court Dismisses Minority “Shareholder” Oppression Claim by Delaware LLC Member

Does Delaware law recognize a non-dissolution cause of action for “minority shareholder oppression” of an LLC member? In 3P-733, LLC v Davis, 2019 NY Slip Op 30946(U) [Sup Ct NY County Apr. 2, 2019], Manhattan Commercial Division Justice Andrea Masley dismissed such a claim on other grounds, namely, because the claim was duplicative of the plaintiff LLC member’s separate claim for breach of fiduciary duty. Continue Reading Summer Shorts: LLC Minority Member Oppression and Other Decisions of Interest