Over 100 years ago, in Lord v Hull, 178 NY 9 , the New York Court of Appeals — the state’s highest court — drew upon English common law to establish what has become a bedrock principle of American partnership law, that courts generally will not entertain lawsuits between partners except in the setting of a dissolution or final accounting. As the court wrote:
If the members of a firm cannot agree as to the method of conducting their business, the courts will not attempt to conduct it for them. Aside from the inconvenience of constant interference, as litigation is apt to breed hard feelings, easy appeals to the courts to settle the differences of a going concern would tend to do away with mutual forbearance, foment discord and lead to dissolution. It is to the interest of the law of partnership that frequent resort to the courts by copartners should not be encouraged and they should realize that, as a rule, they must settle their own differences or go out of business. [Emphasis added.]
Many decades later, in another partnership case called Gramercy Equities Corp. v Dumont, 72 NY2d 560 , the same court expressed the same sentiment thusly:
[C]ourts are generally loath to intercede in squabbles between partners that result in piecemeal adjudications, preferring that partners either settle their own differences amicably or dissolve and finally conclude their affairs by a full accounting.
In the modern era, partnerships have been eclipsed by other forms of business associations including close corporations and, more recently, limited liability companies. Each form has fundamentally different characteristics and is governed by a fundamentally different statutory scheme. Yet, if we focus on the internal dynamics and turmoil that can afflict shareholders of a close corporation or members of an LLC — especially the smaller, owner-operated firms — the above-quoted partnership rationale, expressed so long ago in Lord v Hull and more recently in Gramercy Equities, seems equally apropos of these modern forms.
One judge who both has made that connection and put it into practice is Nassau County Commercial Division Justice Stephen A. Bucaria (pictured). Over the years this blog has featured many decisions by Justice Bucaria demonstrating, as described here, his willingness to think outside the box when it comes to devising practical and sometimes novel solutions to intractable problems in business divorce cases.
About a year ago I began noticing a steady stream of Justice Bucaria decisions quoting the squabbling-partners passage from Gramercy Equities. Some of them denied relief in partnership cases, as you would expect. But others involved litigation among co-owners of close corporations or LLCs.
Last December I wrote about one of those cases, DiGirolomo v Sugar LI, LLC, involving a dispute between LLC members over a capital call, in which he granted interim injunctive relief conditioned upon the plaintiff amending his complaint to seek dissolution within 30 days. “Since a limited liability company is operated with the flexibility of a partnership,” Justice Bucaria wrote on that occasion, “a court is similarly reluctant to intercede in a dispute between the members, absent dissolution of the company.”
In two cases decided about a week before DiGirolomo, Justice Bucaria likewise withheld relief in the absence of a request for dissolution. In both Goldstein v Goldstein and Schrier Fiscella & Sussman, LLC v Fiscella, he quoted the Gramercy Equities squabbling-partners passage in denying preliminary injunctive relief in the absence of requests for dissolution of a close corporation (Goldstein) and an LLC (Fiscella).
In 2014, Justice Bucaria invoked Gramercy Equities to deny relief in at least four other cases involving litigation among stockholders of close corporations:
- Casaccio v American Recycling Management, LLC (dismissing complaint asserting claims for breach of fiduciary duty and accounting, and granting leave to file an amended complaint seeking dissolution)
- Ancona v Zara (in proceeding for judicial dissolution of close corporation, holding that the respondent shareholder’s demand for an accounting by the petitioner was dependent on the granting of dissolution relief)
- Tobaly v SAE Holdings, Inc. (dismissing minority shareholder’s complaint asserting claims for breach of fiduciary duty in the absence of a claim for dissolution of close corporation)
- Carrillos v Gomez (in action for declaratory judgment as to plaintiff’s ownership interest in close corporation, holding that plaintiff’s request for an accounting “must be incident to the dissolution of [the corporation] or a buyout of plaintiff’s interest”)
Why the spillover into close corporations and LLCs of the partnership rule against piecemeal, pre-dissolution litigation?
I suppose it’s because of the same frustration judges must experience dealing with a series of ancillary disputes over alleged financial or other misdeeds, effectively requiring the court to micromanage the business, when all concerned realize that the parties are headed toward a business divorce. After all, in typical cases of close corporations or LLCs with a handful of owners working side by side in the business, rare is the occasion when the business entity survives intact following any kind of litigation brought by one co-owner against another. The psychic wounds inflicted in such litigation almost never heal, and the severed bonds of trust almost never repair. Either the business will be dissolved, or sold, or split up, or more likely there’ll be a buy-out. Better to get to the endgame, I imagine a judge thinking, than waste time and judicial resources adjudicating what in essence are tactical skirmishes.
Of course, in any particular case there may be considerations that give pause to this approach. Perhaps, despite the manifest hostilities, there exists no genuine grounds for dissolution. Or the shareholder or operating agreement may have a provision that treats the filing of a dissolution petition as an offer to sell the petitioner’s shares at book value and/or on highly unfavorable terms. Or dissolution may place the company’s credit facility at immediate risk.
Regardless, it’s always important and helpful for the parties and their counsel to be frank and upfront with the court about their clients’ ultimate goal and, if it’s apparent that all parties desire to end an irreconcilably broken relationship, to focus on achieving that end.
Update January 2, 2015: Last month, in Zaccherio v Lavalle, Index No. 15919/07, Justice Bucaria issued another decision dismissing the complaint in an action brought by a minority shareholder for breach of the shareholders’ agreement without prejudice to the commencement of a proceeding to dissolve the corporation.
Update July 12, 2015: AJG Parkview Corp. v Parkview at Salisbury, LLC, Index No. 603044/15, is the most recent decision in which Justice Bucaria applied the “squabbling partners” rule to a two member, 50/50 LLC to deny interim relief without prejudice to the plaintiff’s commencement of a judicial dissolution proceeding.
Update June 17, 2016: Here’s another one: Schrier Fiscella & Sussman, LLC v Fiscella, Index No. 10451/13, decided May 25, 2016, in which Justice Bucaria dismissed a complaint asserting derivative and other claims in a dispute among LLC members with leave to commence a dissolution proceeding.