Almost exactly one year ago, we wrote about the go-to line of New York case law for business divorce litigants hoping to secure injunctions: a substantial and ever growing body of authority holding that involuntary loss or deprivation of equity ownership, management, or control rights in a closely-held business typically qualifies as “irreparable” harm, for which money damages are insufficient and injunctive relief appropriate (see e.g. Yemini v Goldberg, 60 AD3d 935 [2d Dept 2009] [“because control and management . . . were at stake, money damages were not sufficient. Thus, the defendants established the element of irreparable injury”] [citation omitted]).

A far less frequently invoked line of case law originating not from business divorce law, but the law of lottery, holds that an injunction movant may demonstrate “irreparable” harm where a “substantial amount of money may be dissipated or otherwise unavailable for recovery” without an injunction (Ma v Lien, 198 AD2d 186 [1st Dept 1993]).

Albany County Commercial Division Justice Richard Platkin relied upon both lines of case law in a recent decision resolving a closely-held business owner’s injunction application over her co-owner’s sale of a solar power business and dissemination of the sale proceeds.

Burt v Jerez (2024 NY Slip Op 51613(U) [Sup Ct, Albany County Nov. 20, 2024]), is a fascinating example of how commercial judges resolve sharply conflicting factual accounts in injunction motion papers.

Burt features not one, but two rarities: a full-blown evidentiary hearing complete with post-trial briefing; and a thorough, exceptionally thoughtful, written Decision and Order chock full of legal analysis and credibility determinations.

In a world where injunction motions more and more often seem to get resolved in a transcript with little or no value to anyone but those involved in the case itself, Burt is a delightful breath of fresh air.

Continue Reading Fact Issues and Credibility Determinations on Injunction Motions
Fall NYC Roundup

November was a whirlwind month for New York LLC litigation.  It featured disputes over how to wind up a judicially dissolved LLC, a bitter intra-family emergency indemnification/advancement injunction, and the finale of a decade-long battle over the enforceability of a partially baked operating agreement.  Some of these recent cases add clarity to the growing body of New York LLC caselaw. Others add confusion.  But all add precedential footholds for future arguments in disputes between members of New York LLCs. Members and their counsel take note.

Continue Reading A Leaf Through a Busy November in New York LLC Litigation

There’s a ton of Delaware caselaw enforcing Section 18-1101 (c) of that state’s LLC Act as amended in 2004, authorizing LLC agreements to eliminate the members’ and managers’ liability for breach of fiduciary duty, the only specified carve-out being the narrowly construed implied contractual covenant of good faith and fair dealing.

In New York, which at least superficially offers the same contractual shield, not so much.

New York’s analog to the Delaware statute is found in Section 417 of the LLC Law. Section 417 (a) (1), like the Delaware statute, authorizes members to adopt an operating agreement “eliminating or limiting the personal liability of managers to the limited liability company or its members for damages for any breach of duty in such capacity.”

Unlike Delaware’s statute, however, an expansive proviso immediately follows the quoted language, stating that no such provision shall eliminate or limit

the liability of any manager if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that with respect to a distribution the subject of subdivision (a) of section five hundred eight of this chapter his or her acts were not performed in accordance with section four hundred nine of this article.

The cross-referenced Section 508 (a) preserves member liability for knowing receipt of distributions which, in so many words, render the LLC technically insolvent — not of interest for present purposes.

Of greater interest is the other cross-referenced statute, Section 409. It provides that a manager “shall perform his or her duties as a manager . . . in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances.” As I’ve previously written, Section 409’s language is lifted almost verbatim from the standard for director conduct in Section 717 of the Business Corporation Law, and the courts have construed both statutes as imposing traditional fiduciary duties of loyalty and care.

Between Section 417 (a) (1)’s express carve-out for bad faith acts or omissions, intentional misconduct, etc., plus the cross reference to Section 409 which looks like nothing so much as the exception swallowing the rule, what efficacy does the statute retain as a means of insulating LLC managers and members from having to litigate through discovery and trial their personal liability for alleged managerial misconduct?

As it turns out, very little if any.

Continue Reading Diving Into the Shallow Waters of New York Law Permitting Elimination of LLC Managers’ Liability for Breach of Fiduciary Duty

Is a limited liability company a party to and bound by its own operating agreement?

Many folks would say, “Yes, of course.” But it turns out the answer varies depending upon the law of the company’s state of incorporation.

In Delaware, an LLC is bound by its operating agreement regardless of whether the company itself executed the contract. 6 Del. Code § 18-101 (9) provides than an LLC is “not required to execute its limited liability company agreement,” and that it is “bound” by the contract “whether or not” it “executes the limited liability company agreement.”

In a recent decision about the binding effect – or lack thereof – of an arbitration provision in an operating agreement upon the LLC itself, Manhattan’s Appellate Division – First Department announced that New York follows the opposite rule: an LLC is not bound by its operating agreement unless it signs the agreement separately from the members themselves.

Wythe Berry LLC v Goldman (230 AD3d 1081 [1st Dept 2024]), offers an unambiguous lesson to corporate transactional lawyers: in New York, if you wish to bind the LLC to its own operating agreement, including an arbitration provision, the LLC must sign the contract. If it does not, the members will be bound by the arbitration agreement, but the LLC will not, leading to potential litigation before two separate tribunals, undermining the conventional rationales favoring alternative dispute resolution – efficiency, speed, and reduced legal cost.

Continue Reading Is an LLC Bound by its Own Operating Agreement?

The limited liability company is relatively young.  Though origin research is always a dubious task, my efforts tell me that the first LLC was created in 1977 in Wyoming, followed by other LLCs in Florida in 1982.  The years since then have witnessed the LLC’s rise to the closely held entity of choice among business owners.

One benefit of the LLC’s youthful age is that many of the minds that were most influential in its early-stage development are still teaching, practicing, and studying, all while continuing to lend their expertise on LLC formation, regulation, and litigation.  And your best chance of catching all those prominent minds in one place is at the American Bar Association’s annual LLC Institute.

For those interested in learning the intricacies of the LLC laws directly from the experts, I highly recommend attending the two-day conference.  While a single-post recap inevitably won’t do justice to the many presentations, panels, and discussions at the Institute, this week’s post attempts to sample some of the best business divorce topics highlighted in the 2024 LLC Institute.

Continue Reading Greetings from the American Bar Association’s 2024 LLC Institute

It wasn’t long ago that my partner, Peter Sluka, posted about the Andris case where the Appellate Division, Second Department, reinstated an LLC judicial dissolution proceeding brought by the estate of a deceased member.

Andris was a enigmatic ruling that raised as many questions as it answered, not least of all because, notwithstanding a number of prior lower court rulings denying non-economic member rights to estates of deceased members, such as the right to sue derivatively on the LLC’s behalf, the respondent never contested the estate’s standing to seek judicial dissolution under LLC Law 702, which can only be brought by a member.

Adding to the uncertainty, the decision failed to clarify or even address how the right to seek dissolution meshes with the language of LLC Law 608, which gives the estate of a deceased member the right to exercise “all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member” (italics added).

Whatever doubts Andris left behind, are no more. Last week, in a case called Weinstein v Wallace, the Second Department squarely held that the rights granted to the estate of a deceased LLC member by LLC Law 608 “include a member’s voting rights.”

Continue Reading Appellate Division Construes LLC Law 608 as Giving Voting Rights to a Deceased Member’s Estate

A general principle of business valuation is that courts may consider “known or knowable” events as of the “valuation date” – the date as of which the court values the entity – but not post-valuation date events or financial performance.

In Matter of Murphy v U.S. Dredging Corp. (74 AD3d 815 [2d Dept 2010]), a valuation proceeding resulting from a judicial-dissolution-provoked buyout election under Section 1118 of the Business Corporation Law (the “BCL”), the Court reversed a trial court for considering a multi-million-dollar pension liability substantially diminishing the entity’s value because the liability arose shortly after the valuation date, even though the liability was contemplated pre-valuation date.

The Murphy Court wrote, “Contrary to the Corporation’s contention, notwithstanding that the pension obligation . . . was discussed prior to the valuation date, it did not constitute a future event which was known or susceptible of proof as of the valuation date” (id. [quotations omitted]).

In Miller Bros. Indus., Inc. v Lazy Riv. Inv. Co. (272 AD2d 166 [1st Dept 2000]), a valuation proceeding under BCL § 623 resulting from a merger from which shareholders dissented, the Court affirmed a trial court’s rejection of the shareholders’ attempt to rely upon the entity’s actual financial performance in the immediate aftermath of the valuation date.

The Miller Court wrote, “We reject the dissenting shareholders’ argument that investment value as of the valuation date may be computed retrospectively based on the corporation’s reported actual earnings for the fiscal year ending eleven months after the valuation date, since fair value may include elements of future value only if known or susceptible of proof as of the date of the merger” (id. [quotations omitted]).

Notwithstanding these authorities, litigants hoping to either increase or decrease an entity’s valuation often ask courts to consider post-valuation date events or financial performance as affirmatory or disaffirmatory of financial projections or assumptions made before or as of the valuation date. And sometimes, litigants succeed in that endeavor.

Earlier this month, the same court which in Murphy forbade courts from considering post-valuation date events in BCL § 1118 appraisal proceedings issued Magarik v Kraus USA, Inc. (___ AD3d ___, 2024 NY Slip Op 04964 [2d Dept Oct. 9, 2024]).

In Magarik, contrarily to Murphy, the Court rejected a dissenting shareholder’s challenge to a trial court’s consideration of the corporation’s actual financial performance post-valuation date as a basis to completely reject his expert’s would-be reliance upon pre-valuation date financial projections prepared by the entity itself and submitted to a lender as part of a $10 million loan application.

Continue Reading Can Post-Valuation Date Historical Performance Trump Pre-Valuation Date Financial Projections?

Some years ago, the question whether New York courts have subject matter jurisdiction over petitions to dissolve foreign business entities garnered much interest amongst business divorce lawyers and on this blog. The debate was resolved against subject matter jurisdiction following an inter-departmental split that the Appellate Division, First Department, patched up in its 2016 Raharney decision.

The same cannot be said for petitions seeking inspection of the books and records of foreign business entities. Decisions addressing subject matter jurisdiction in such cases have been few and far between, with minimal appellate guidance.

In two decisions of interest handed down earlier this month by two different Manhattan judges in two separate cases involving New York-based foreign entities — one a Delaware corporation and the other a Nevada LLC — the courts addressed two very different approaches by plaintiffs to access books and records, with mixed results.

Continue Reading Foreign Affairs of the Books and Records Kind
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The shareholder oppression claim under BCL 1104-a has a unique relationship with claims for money damages.

A minority shareholder petitioning for dissolution under BCL 1104-a must establish that the majority shareholders have engaged in “illegal, fraudulent or oppressive actions,” or that the “property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.”

Based on that standard, it’s easy to imagine conduct by the majority that both meets the criteria for dissolution and constitutes a separate tort compensable with money damages (for instance, a claim for the majority’s breach of fiduciary duty).  For that reason, it’s very common to see a dissolution petition coupled with money damages claims, all arising out of the same conduct. 

But where the money damages claims are filed before the dissolution petition, a plaintiff might be forced to litigate those to completion prior to pursuing their dissolution petition.  That’s the tough lesson learned by the petitioner of a dissolution proceeding brought under BCL 1104-a, in Ramirez v Issa, 2024 N.Y. Slip Op. 33488[U] [NY County 2024], the subject of this week’s post.

Continue Reading Corporate Dissolution Petition Hits Back Burner in Favor of Earlier Filed Claims for Money Damages

Accountants are professionals. They carry malpractice insurance. They are potential deep pockets. For these reasons, accountants sometimes find themselves defending against liability claims in business divorce lawsuits. The theories of accountant liability vary. Accountants owe their clients a duty of reasonable care, breach of which exposes the accountant to a claim of professional negligence / accounting malpractice. Alternatively, or in addition, accountants can face liability for “aiding and abetting” another person’s torts, like aiding and abetting another’s breach of fiduciary duty, fraud, or conversion, including failure to report fraud an accountant discovers while performing its services. Our blog about 1650 Broadway addressed these principles.

But, “[a]s a general rule, accountants are not fiduciaries as to their clients,” except where they are “directly involved in managing the client’s investments” (Caprer v Nussbaum, 36 AD3d 176 [2d Dept 2006] [citations omitted]).

What about bookkeepers? Unlike accountants, who generally have their own accounting firm or practice, bookkeepers often (though not always) work in-house, either as an employee or independent contractor. Is a bookkeeper a fiduciary to a business entity where an accountant is not?

A recent appeals court decision, Schiano v Harsanyi (230 AD3d 820 [2d Dept 2024]), considered this interesting question along with whether courts may hold bookkeepers liable for “aiding and abetting” a business owner’s fraud. The answer: bookkeepers beware.

Continue Reading Bookkeeper Liability? It’s a Real Thing