The statutes and judge-made law governing dissolution and other claims among co-owners of closely held business entities can vary significantly from state to state. Depending on the states, there also can be much in common, which is why I like to keep an eye on developments outside New York, and not just Delaware which tends to have the most advanced business-law jurisprudence.
Below are five business divorce cases decided by appellate courts outside New York that made a splash in 2014. As you might expect, four of the five involve that relatively new business entity form, the limited liability company. The one involving a traditional business corporation, however, likely made the biggest splash.
Ritchie v Rupe, 2014 WL 2788335 [Tex. Sup Ct June 20, 2014]. The Lone Star State takes the prize for the most controversial business divorce decision in 2014, thanks to the Texas Supreme Court’s decision in Ritchie which, as one commentator put it, effectively “gutted the cause of action for shareholder oppression in Texas.” A Texas intermediate appellate court ruling in 1988, which had been followed ever since, recognized a compulsory buyout remedy for oppressed minority shareholders under a broad test for oppression mirroring New York’s reasonable-expectations standard. No more. The Ritchie court, in a 6-3 decision, narrowly defined oppressive conduct by majority shareholders as “when they abuse their authority over the corporation with the intent to harm the interests of one or more of the shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.” The Ritchie majority then applied the coup de grâce by construing the applicable Texas statute as limiting the remedy for oppressive conduct to the appointment of a “rehabilitative receiver.” Bye bye buyout. For a more detailed analysis of Ritchie‘s impact on Texas business divorce litigation, check out my friend Ladd Hirsch’s posts here, here, and here on his Texas Business Divorce blog.
Staiger v Holohan, 100 A.3d 622 [Pa. Super. 2014]. Staiger, decided last year by a Pennsylvania intermediate appellate court, presents a recurring fact pattern in business divorce cases involving two, 50/50, co-managing members of an LLC that is operating profitably but one of the two members has been frozen out while the other continues to make unilateral decisions. The trial court dismissed the frozen-out member’s dissolution complaint, finding that the “mere disagreement” between the two members did not warrant dissolution of the profitable LLC. The appellate court reversed and reinstated the complaint, holding that the “not reasonably practicable” language in Pennsylvania’s LLC dissolution statute is “the same standard applicable to the dissolution of limited partnerships and is one of the grounds for dissolving a general partnership,” and that in the partnership context the “exclusion of one partner by another from the management of the partnership business or possession of the partnership property is undoubtedly ground for dissolution.” The two members in Staiger, the court wrote, “are each fifty-percent owners, such that when they disagree, the result is a deadlock and decisions cannot be made pursuant to the operating agreement.” What’s interesting about the court’s formulation is its focus, not on whether there is some critical decision that can’t be made because of deadlock or that the decisions being made unilaterally are harmful to the LLC but, rather, on the failure of the decision-making process to comply with the joint authority embodied in the LLC agreement.
Moore v Pioneer Estates, L.C., 843 N.W.2d 476 [Iowa Ct App 2014]. The novel issue decided by the Iowa intermediate appellate court in Moore was whether a member who withdraws from an LLC has standing to bring a subsequent dissolution proceeding. The trial court held, and the appellate court agreed, that under Iowa’s statutes governing member withdrawal and dissolution, a member who withdraws from the LLC is entitled to be paid fair value for the membership interest but has no standing to apply for dissolution. Iowa’s dissolution statute, like New York’s, authorizes dissolution “on application by or for a member.” Iowa’s withdrawal statute, also like New York’s, was amended in the late 1990’s to provide for the right of withdrawal (triggering a fair-value buyout) only if permitted in the articles of organization or LLC agreement. The plaintiff in Moore fell under the old statute’s default rule allowing withdrawal unless provided otherwise in the articles of LLC agreement.
Gagne v Gagne, 2014 COA 127 [Co. 2014]. Colorado’s LLC dissolution statute, like New York’s, authorizes judicial dissolution when “it is not reasonably practicable to carry on the business . . . in conformity with the operating agreement.” The Colorado intermediate appellate court in Gagne, in a decision of first impression in that state, construed the statute as requiring the party seeking dissolution to show that “the managers and members of the company are unable to pursue the purposes for which the company was formed in a reasonable, sensible, and feasible manner.” The court stated that the standard was consistent with decisions in other states, including the New York Appellate Division, Second Department’s 1545 Ocean Avenue decision, and it cited with approval the seven-factor test articulated in the Delaware Chancery Court’s Lola Cars decision. The Gagne court rejected the plaintiff’s argument for “a more liberal standard” that would allow judicial dissolution “based solely on oppressive conduct (like corporations) or on substantial misconduct (like partnerships).”
Rowlett v Fagan, 262 Or. App. 667, 327 P.3d 1 . Rowlett is a legal malpractice case concerning an underlying business divorce case, in which the Oregon intermediate appellate court was required to determine whether the plaintiff, who accused his lawyer in the underlying case of negligently failing to timely assert an “equitable claim” on his behalf as an “oppressed” LLC member, had a viable claim. The defendant lawyers contended that oppression claims are “statutory based” and that the LLC statutes do not allow a claim for oppression to be brought by an LLC member. The appellate court held that, even if the defendant’s view of the law were to turn out to be correct, and that Oregon law does not recognize “an equitable claim for oppression in the LLC context,” defendants “still could have breached their duty of care by failing to assert a colorable claim for oppression” in the underlying litigation. The court reviewed the legislative history of Oregon’s LLC law in support of its opinion that “the legislature recognized and anticipated both the applicability of prior-existing common-law doctrines as well as the prospect of judicial development of the statute” and it “did not specifically foreclose equitable remedies in the event of a squeeze-out or oppression of a minority member of an LLC.” The oppression claim therefore “had teeth” and, had it been timely asserted, “could have altered the outcome . . . by giving [plaintiff] increased leverage to secure a settlement on much more favorable terms than what he obtained.”