As both a practitioner and a close follower of New York business divorce caselaw, I’ve seen a recent uptick in disputes centered on the breakup of professional services firms and cryptocurrency businesses.  Perhaps the crypto business part is a natural consequence of the industry’s recent rapid expansion.  As for the professional services firms, your guess is as good as mine.    

Whatever the cause of the trend, these disputes present some of the most compelling and difficult valuation questions for lawyers and the valuation experts they rely upon.  How to value an owner’s interest in a professional services firm depends on the nature of the firm’s fee structure.  And the more complex the fee structure of the firm—picture a law firm with contingency-fee and co-counsel engagements in potentially massive, but also wildly uncertain verdicts—the more complicated the valuation.  And the legal world is just beginning to grapple with a basic understanding of blockchain technology, let alone the complex valuation questions that different cryptocurrency assets can raise. 

Based on these complications, a law firm with high-upside contingency-fee cases that accepted payment in cryptocurrency tokens might be one of the most difficult companies to value—a final exam in a business valuation expert’s litigation crash course, so to speak.  For some lawyers and experts, the results are in: Freedman Normand Friedland LLP v Cyrulnik, 21-CV-1746 (JGK) (SDNY May 15, 2024).   

Continue Reading When Law Firms Break Bad: The Valuation Battle Over Contingency Fees and Crypto Tokens

Posts about limited partnerships on this blog are far eclipsed by discussions on just about any other form of business entity because, as we’ve noted in the past, limited partnerships are generally on the decline.

So, I was pleased to debut my appearance here with what seemed to be an interesting case out of the Manhattan Commercial Division—Cline v Grodin, et al., Index No. 654095/2022—concerning an action commenced by a limited partner of a Delaware limited partnership alleging that the general partner (an LLC whose membership consists of the other two individual limited partners in the partnership) improperly distributed profits to those two limited partners, disguised as salaries for managerial duties the limited partners were never supposed to be paid for, without corresponding pro rata distributions to the aggrieved limited partner.

In Delaware (as in New York), a limited partnership is comprised of two classes of partner. General partners typically manage the business and affairs of the partnership. Limited partners, on the other hand, have limited liability (hence the name) because they are typically silent investors without a managerial role. A limited partner risks losing the benefit of limited liability if they participate in the control of the business (6 Del. C. § 17-303 [a]).

General partners may delegate management and control of the partnership’s business and affairs to agents, officers, and employees of the general partner or the partnership (6 Del. C. § 17-403 [c]).

What happens when the general partner delegates management and control of the partnership’s business and affairs to one or more of the limited partners? Can a “fee” paid to limited partners hired by the general partner (who is, itself, controlled by the same limited partners receiving the fee) be viewed as circumventing distributions to the other limited partners?

As it turned out, those are questions for another case on another day, because today’s case was resolved with the following finishing-blow delivered by Justice Jennifer G. Schecter, as recently affirmed by the First Department: “[T]he signed, amended, and restated limited partnership agreement that is dated as of October 1 of 2016 [] does utterly refute the claims that are in this complaint in every regard.” Ouch.

Let’s see what went wrong for our aggrieved limited partner, Cline.

Continue Reading You Get What You Get, and You Don’t Get Upset: First Department Boots Limited Partner’s Claims Based on Plain Terms of Limited Partnership Agreement

Closely-held business entities come in all shapes and sizes. By definition, under Partnership Law § 10, it takes “two or more” owners to form a general partnership. But corporations and LLCs have no such impediment, ranging in size from just one owner to hundreds.

For close entities with many owners, legal fights can and often do break out between a small group or faction of owners or controllers, leaving other interested stakeholders on the sidelines. Sometimes, owners who are not invited to the litigation may want to participate nonetheless, whether to directly influence the direction or outcome of the case, or perhaps just to feel their voices have been heard.

How is a spurned partner, shareholder, or LLC member of a close business entity not named as a party litigant able to participate in the case? In New York, there’s a statute for that. Two, actually.

Continue Reading Limo Company Shareholders Can’t Hitch a Ride in Derivative Litigation

One of the best parts of being a business litigator is the frequent opportunity it affords to work with (and against) expert witnesses of all stripes. And perhaps because there are so many ways that a business divorce can turn into a special proceeding in which the sole question before the court is the appraised value of the business, the business appraiser often is the most important expert witness. 

So when the chance comes along to blog about a noteworthy motion to exclude a business appraiser in a New York valuation proceeding, I can hardly resist.  And there’s some pride of authorship here—Peter Mahler and I represented the prevailing party in the motion. 

The motion to preclude was the final chapter in the LMEG Wireless saga—a business divorce instant classic.  Lessons abound for both lawyers and appraisers, from the criticality of scrutinizing evidentiary foundations to the perennial reminder: “Garbage In; Garbage Out.” 

Continue Reading Your Business Appraiser Relied on What!?  Lessons from a Mostly-Decided Motion to Preclude

In my 700+ posts on this blog since 2007, the vast majority of which focus on a particular court case, my goal is not to regurgitate the facts and issues decided by the court, but to provide legal context and to draw larger lessons and offer takeaways that readers, be they business owners or lawyers, will find helpful in their own business planning and dispute resolution.

I can draw no insightful legal lesson or offer any truly helpful takeaways from the case I’m writing about in this post. In my world, advising business owners not to engage in “old-fashioned forgery,” or telling business divorce lawyers not to disregard “what the law is or what the evidence shows,” is like reminding someone not to stop breathing.

The quoted phrases come from a recent decision by U.S. District Court Judge Arun Subramanian (S.D.N.Y.) in a case ostensibly about trademark infringement, but really about company control. You can read the decision here. I’m purposefully not using the case name, the company name, or the individual parties’ names so as to avoid requests from so-called “reputation management” firms hired by the parties involved in the case, asking me to take down or “anonymize” my post showing up in Google searches.

“This case (and its many state-court siblings) has a tortured history,” is the opening line in Judge Subramanian’s decision. The “siblings” are five or so related lawsuits filed in New York State Supreme Court beginning in 2017 — the federal court lawsuit was filed some five years later — involving essentially the same parties, none of which according to the court dockets have been resolved as yet.

I won’t torture myself or readers with laying out the convoluted history of the state court cases run amok. I can only guess that the dispute landed in the federal forum in an effort by one side to bypass the state court logjam.

Continue Reading Battle for Company Control Turns on Conflicting Copies of Operating Agreement Amid Accusations of “Old-Fashioned Forgery”

Does the outside accountant of a closely-held business and its individual owners owe a legal duty to disclose to one owner the suspected financial improprieties of another?

Does the accountant’s failure to make such disclosure expose the accountant to liability for malpractice and aiding and abetting the unscrupulous business owner’s tortious activity?

Until recently, I would have said no to both questions.

But earlier this month, a Manhattan-based appeals court issued 1650 Broadway Assoc., Inc. v Sturm, ___ AD3d ___, 2024 NY Slip Op 01864 [1st Dept Apr. 4, 2024]), a bombshell decision for already anxious accountants at the height of tax season.

1650 Broadway is a warning to accountants of closely-held businesses that where they allegedly acquire knowledge or information of an owner’s financial improprieties, New York common law may now impose upon them an affirmative duty to make disclosure to a co-owner with whom the accountant has an accountant-client relationship, failure of which may be considered participation or aid in the tort, exposing the accountant to individual liability for professional negligence, aiding and abetting, or both.

Continue Reading Business Divorce and Accountant Liability

There are plenty of advantages to practicing business divorce litigation in New York.  The diversity of businesses and clients, complexity of agreements and transactions, and excellence of judges and attorneys make New York, in my view, the place to be for commercial litigators of all stripes.

One downside is the reality that crowded dockets and busy judges sometimes results in too terse decisions from the trial and appellate courts.  At the appellate level, hundreds of pages of evidence, and nuanced, extensively briefed legal theories are sometimes reduced to a one-line decision.  Not only do those one-liners inevitably leave the parties dissatisfied, but they also miss an opportunity to lend reasoned, precedential analysis to complex and unsettled questions of law.

But in some sense, that’s where the lawyers come in.  New cases can be won or lost in the grey areas created by brief appellate authority, and the sharpest lawyers will find the precedential value in even the shortest appellate decisions.

These few paragraphs are already much longer than the Fourth Department’s recent decision affirming dismissal of a shareholder’s claim for dissolution pursuant to BCL 1104-a in Kavanaugh v Consumers Beverages, Inc., 205 NYS3d 637 (4th Dept 2024).  But in a few words, the Fourth Department packs a punch in corporate dissolution jurisprudence.

Continue Reading Termination, Adequate Alternative Remedies Sends Dissolution Proceeding Packing

Folks who’ve been following this blog for years know that periodically I like to venture beyond New York’s borders to find and report on interesting decisions from other states in business divorce cases.

Historically there have been significant differences in the statutory and case law of the 50 states that limit the utility of cross-border research and citation in disputes between co-owners of partnerships, close corporations, and LLCs. Delaware law, for example, does not authorize a claim for judicial dissolution of a close corporation based on shareholder oppression.

On the other hand, the growing proportion nationwide of business divorce cases involving LLCs, which by their nature lend themselves to a contract-centric mode of jurisprudence, have had something of an interstate leveling effect which encourages business divorce practitioners to keep abreast of out-of-state case law developments.

In that vein, following are summaries of five noteworthy, recent court decisions from five different states — two involving LLCs, one involving a limited partnership, and two involving close corporations.

Delaware: Chancery Court Invalidates LLC Manager’s Removal Based on Unauthorized Amendment of Operating Agreement

In DiDonato v Campus Eye Management, LLC, decided earlier this year by Vice Chancellor Will, the plaintiff sued under Section 18-110 of the Delaware LLC Act for a declaration that the majority member of the parent company of the defendant management services organization (MSO) improperly removed him as the MSO’s sole manager pursuant to an invalid amendment of its operating agreement adopted without the plaintiff’s consent.

Continue Reading Crossing the Hudson: Recent Business Divorce Decisions from Yonder States

Under a common-law doctrine successful litigants love to hate – the “American Rule” – a party to litigation cannot recover its legal fees unless a contract, statute, or court rule expressly authorizes fee-shifting to the prevailing party.

For many clients, it’s a bitter pill to swallow to learn they cannot recover their legal fees from the other side, even if they win. But in business divorce litigation, as we’ve previously written, there are many exceptions.

A pair of brand-new Manhattan appeals court decisions highlight two exceptions to the general rule against fee-shifting, and some key differences between them.

In O’Mahony v Whiston (224 AD3d 609 [1st Dept Feb. 27, 2024]), the Court considered the propriety of a $1.8 million post-trial attorneys’ fee award to a successful plaintiff under the shareholder derivative statute, Section 626 of the Business Corporation Law (the “BCL”).

Under BCL § 626 (e), where a shareholder derivative plaintiff is “successful, in whole or in part, or if anything was received by the plaintiff” on behalf of the entity, “the court may award the plaintiff . . . including reasonable attorney’s fees . . . .”

In Seibel v Ramsay (___ AD3d ___, 2024 NY Slip Op 01617 [1st Dept Mar. 21, 2024]), the Court considered the propriety of a $4 million post-trial attorneys’ fee award to celebrity chef Gordon Ramsay under a contractual indemnification provision. As we shall see, though, Ramsay was not even a party to the contract.

I wrote about both of these exceptionally interesting cases previously (you can read my articles about the events preceding the recent appeals here and here).

I’m pleased to write about the two cases again at the finale of their ten-year-long merits litigation odysseys (except in the unlikely event one or more losing defendant obtains leave to reargue or leave to appeal to the New York State Court of Appeals).

The message of both these cases is clear. Where fee-shifting is on the table because of a statute or contract, do not underestimate the awesome (for plaintiff) and terrifying (for defendant) potential for a massive fee award if the case goes the distance to a final adjudication on the merits. In fact, as we shall see below, the Appellate Division made clear that there is nothing inherently reversible about an attorneys’ fee award far exceeding the amount of the actual damages award.

But whether the fee award is collectible, however, is an entirely different question. We’ll consider that problem at the end of this article.

Continue Reading Two Cases. Two Mammoth Fee Awards. Coup de Grâce or Pyrrhic Victory?

The last time we featured a notable decision on a claim for dissolution of a restaurant-operating LLC was in 2017, with a post by Frank McRoberts titled, “LLC’s Purpose Being Achieved?  Business Doing Fine?  Good Luck Getting Judicial Dissolution.”  The title summarizes the takeaway: If the LLC is achieving its contractually-stated purpose and remains a financially viable operation, the odds of success on a contested dissolution claim are low.

In the years since that post, I’ve related that message to clients, courts, and colleagues.  The relatively high standard for judicial dissolution of an LLC (here is a primer on the “unable or unwilling to promote the stated purpose” standard of 1545 Ocean Avenue), combined with the fact that many operating agreements contain a broad “purpose clause,” combined with the potential for a bad faith defense (discussed here) has produced a considerable number of cases where a minority owner’s bid to dissolve a financially viable LLC is rejected. 

That background makes this week’s case all the more interesting.  A New York LLC with a broad, “purposeless” purpose clause and demonstrated financial sustainability is dissolved over . . . the minority owner’s disagreement with the menu? 

Continue Reading The Legal Ramen-ifications of Dissolving a New York LLC Over Noodle Choices