It would be hard to find a business dissolution case with messier facts and thornier legal issues than Tal v. Superior Vending, LLC, 2008 NY Slip Op 51205(U) (June 6, 2008). The 28-page decision by Justice Alan D. Scheinkman of the Westchester County Supreme Court’s Commercial Division describes a business relationship between two individuals that arose from friendship and degenerated in bitter acrimony and litigation over the dissolution of a limited liability company that supplied and maintained vending machines. The decision also grapples with a novel remedial problem: After Partner A freezes out Partner B, how does a court equitably liquidate a company whose assets and business have been transferred to another company controlled by Partner A which thereafter acquires additional assets that are commingled with the original assets, thus making it impossible to determine the assets and value of the company being dissolved? Justice Scheinkman’s solution — a money judgment in favor of the frozen-out partner equal to his capital investment plus interest — is equally novel.
Peter Plotkin started a vending machine business in 1997 called Superior Vending Corp. (“SV Corp.”) that reached almost $1 million in gross revenues by 2000 when Arik Tal became his business partner. Tal and his wife had become friends with Plotkin and his wife, and had rented a summer house together. In exchange for a 50% interest in SV Corp., in August 2000 Tal invested $170,000 which was used to acquire the assets of another vending company called Vernon Vending Corp. Tal also guaranteed payment of the $150,000 purchase price balance. In October 2000, Plotkin and Tal formed a new LLC called Superior Vending, LLC (“SV LLC”) to which they informally transferred all the assets of SV Corp. Plotkin and Tal both were active in the business. They had no shareholders agreement for SV Corp. and no operating agreement for SV LLC.
By mid-2001, Plotkin and Tal were disputing distributions, Tal’s time commitment and the business plan. In September 2002, Tal unilaterally took a $10,000 loan from SV LLC which he claimed to have repaid but which the court found he did not. The court also found that Tal removed another $10,000 from a company safe deposit box, even though Tal denied taking the funds. As Justice Scheinkman explained, Tal was
frustrated by the fact that Plotkin was receiving much more money directly from the Corporation than Tal was (Tal’s share being reduced by the payments being made to Vernon Vending), by the fact that Plotkin was rejecting Tal’s attempts to redress the situation, and by the fact that Plotkin was pressing him to work, simply took matters into his own hands by taking $20,000 in corporate cash.
The situated deteriorated further until, in November 2002, Plotkin and Tal had an altercation at the company office. Tal claimed that Plotkin tried to physically drag him out of the office. Plotkin admitted ripping a phone off the wall. The police came. Justice Scheinkman viewed skeptically the combatants’ conflicting testimony, stating that “both parties attempted to skew their testimonies regarding this incident to their best advantage and that neither was entirely candid.”
Tal stayed away from the office for the next two weeks during which their respective lawyers exchanged buyout offers. After Tal discovered that Plotkin removed Tal from the company bank accounts, Tal went to the office only to discover that Plotkin had changed the locks and refused Tal entry.
After December 2002, Plotkin continued to operate the business without Tal. Tal made no more payments of the balance due Vernon Vending. In 2003, Plotkin began depositing company revenues in the account of a newly formed company called PWP Consulting, Inc. which Plotkin formed for the purpose of shielding monies from Tal.
In March 2003, Tal filed suit to dissolve SV LLC, however his lawyer (who later was disbarred for neglecting other legal matters) failed to ask for interim relief and permitted the case to be marked off calendar and eventually dismissed in May 2005 for failure to prosecute. Tal testified that he was unaware of the dismissal until 2006 or 2007 when he retained new counsel, but Justice Scheinkman doubted his testimony and concluded that “the dissolution of the company and the distribution of assets was simply not a priority for Tal, at least until the commencement of the current proceeding in 2007.”
In the meanwhile, after Tal’s first dissolution case was marked off calendar in 2004, Plotkin set up a new company with his wife as 100% shareholder called Superior Vending Services, Inc. (“SVS”). The assets of SV LLC and SVS were commingled and the entities operated as one. In 2005, SVS purchased the assets of another vending business for $700,000, the down payment for which was financed by a home equity loan on Plotkin’s residence.
Tal filed his second dissolution proceeding in June 2007. Plotkin stipulated to SV LLC’s dissolution in accordance with Section 702 of the Limited Liability Law. A trial ensued at which Tal’s expert witness offered valuation testimony on what he regarded as SV LLC’s assets and Tal’s interest therein. Justice Scheinkman found that the expert’s testimony “had some highly irregular and anecdotal aspects,” such as when he testified that he had “firsthand” knowledge of candy prices because he “work[s] in a local liquor store that has a concession, and I review their candy prices.” Tal’s expert arrived at a book value of $1.4 million for SV LLC and $700,000 for Tal’s 50% interest which, however, included the assets and good will associated with SVS’s 2005 acquisition of another vending company. Tal’s expert also valued SV LLC as of December 2002 (when Tal departed) and arrived at a range of $200,000 to $240,000 for Tal’s 50% interest.
Plotkin did not offer expert testimony. In his view, the court could only distribute the assets of SV LLC consisting of vending machines and trucks worth only $32,500.
Justice Scheinkman criticized both sides’ approaches as “plainly inequitable and unfair.” Under Plotkin’s approach,
Tal would be limited to $16,250 . . . despite having invested $170,000 of his own money, which Plotkin had the benefit of for many years. . . . On the other hand, Tal’s approach . . . is that the Court should distribute all of the assets of all of the entities, contending that Plotkin acquired all of his vending machine interests through the use of Superior’s assets. He also, in effect, seeks payment for distributions unpaid to him. . . . Thus, it would not be fair or equitable to grant Tal any interest in a business that was acquired independently, some three years after Tal was out of the venture. Moreover, it is difficult, if not impossible, to ascertain what the interim distributions are that should have been paid to him
Both sides, Justice Scheinkman continued, contributed to the “morass”, Plotkin by “seizing control of the LLC’s assets, attempting to shield them from Tal by moving the assets around different companies, and then adding to the existing assets”; Tal by his “usurpation of some $25,000 in corporate funds in September, 2002” and by not pursuing his first dissolution lawsuit thereby causing “prejudice to Plotkin if now, after all these years, liability would be imposed upon him for assets and profits . . . acquired after Tal’s initial proceeding was dismissed.”
Ultimately, Justice Scheinkman decided that the “fairest and most equitable approach to this situation is to proceed in accordance with Section 704(c) [of the Limited Liability Company Law] and to provide for a return to Tal of his membership contribution and then for a distribution based on his membership interest.” To accomplish this, the court added, the parties must be viewed “as having achieved an effective and permanent parting of the ways in December, 2002.”
The court ordered Plotkin to pay Tal within 45 days the sum of $256,549.43 (Tal’s initial $170,000 investment plus his note payments to Vernon Vending, minus half his unauthorized withdrawals in September 2002) plus 9% interest running from November 2002, for which Tal is obligated to surrender his membership interest in SV LLC. In the event Plotkin fails to pay, a receiver is to be appointed to marshal the assets of all the vending machine entities operated by Plotkin, pay debts and liquidate the business. “Because Plotkin effectively commingled the assets of the LLC with later-acquired assets,” Justice Scheinkman reasoned, “he may not now be heard to complain that Tal should be limited to enforcing his rights to principal in excess of $250,000 against assets now said to be worth $32,500.”
The proceedings and issues inTal became far more convoluted as a result of Tal’s failure to prosecute his initial dissolution petition. Had he done so, SV LLC’s assets and value could have been readily ascertained, and likely the parties would have reached a buyout agreement within a relatively short time. Plotkin likewise did himself a disservice by transferring assets out of SV LLC and commingling them with newly acquired assets. With plenty of fault on both sides, Justice Scheinkman’s equitable resolution finds the practical, middle ground.