Family FeudThe road to a business divorce can be a long and litigious one, strewn with obstacles big and small, limited only by the cleverness of the business owners and their counsel as each side strives to gain superior bargaining leverage against the other in anticipation of the inevitable buyout or other separation agreement.

The jousting can be especially intense in a business divorce between family members. The cost/benefit calculus that normally moderates tactics in and out of court is often warped by the intense emotions characteristic of a litigation pitting parent against child, sibling against sibling, cousin against cousin, and so on.

There’s a case pending in the Suffolk County Commercial Division, Margiotta v Tantillo, Index No. 62839-2013, that exemplifies the extraordinary demands upon the court’s resources as it’s called upon repeatedly to grant various forms of interim relief to one side or the other in a hotly contested family business divorce.  A pair of recent decisions in the case by Justice Emily Pines also highlights the limitations upon the court’s power to grant interim relief when it comes to requests for mandatory injunctive relief, that is, requiring a party to perform some positive act as opposed to restraining them from doing something.

The stakes in Margiotta include a number of auto dealerships and the real properties on which they operate. The business was founded and controlled by the family patriarch, Anthony Tantillo, who died in 2013 at the age of 82. During his lifetime Mr. Tantillo brought into the business and gave minority interests to two children from his first marriage. He also brought into the business a stepson from his third marriage. His will left most of his estate to his two natural children and appointed one of them his executor. Possibly unknown to his two natural children until after his death, he also executed documents or entered into transactions that gifted company shares or otherwise gave majority ownership of several of the operating and realty companies to his stepson.    

Within months of Mr. Tantillo’s death the gloves came off his surviving family members as they battled over ownership and control of the companies. According to the complaint filed by his two natural children (read here), their stepbrother used undue influence and fraud to secure from Mr. Tantillo ownership interests which he then used after his death to assert de facto control of some of the companies and to terminate the plaintiffs’ employment, allegedly in contravention of their father’s testamentary wishes. They also accused their stepbrother of misconduct in his management of the businesses, and of denying them access to company books and records.

The case was filed in September 2013. A year and a half later the case docket has grown to over 4oo entries featuring almost a dozen motions for preliminary injunctions, intervention, dismissal, and discovery sanctions, among others. That’s an extraordinary amount of activity for a case that doesn’t appear anywhere close to trial. And not atypically of family business divorce cases, it also represents a disproportionate demand upon the finite resources of a trial judge who, at any given time, is shepherding hundreds of cases.

In the two, latest decisions by Justice Pines, each side requested an interim, mandatory injunction against the other. The plaintiffs sought to compel four of the limited liability companies under their stepbrother’s control to make distributions to them. The defendant stepbrother simultaneously moved to compel one of the plaintiffs to return a demonstrator vehicle owned by one of the dealerships.

The facts related in Justice Pines’ decision on the distributions motion (read here) reveal a classic, three-part move by a controlling owner to put financial pressure on the minority owners following termination of their employment and commencement of litigation:

  • pay yourself increased compensation;
  • reduce or eliminate shareholder distributions;
  • report undistributed a/k/a “phantom” net income and/or capital gains on the K-1’s of the minority shareholders requiring them to go out of pocket to cover the taxes.

The plaintiffs alleged that these moves by their stepbrother violated fiduciary duty owed to them as members of the LLCs and contravened LLC Law § 507. The stepbrother countered that the LLCs’ operating agreements gave him, as managing member, sole discretion to make distributions and that § 507, entitled “Interim Distributions,” by its terms only comes into play when a member withdraws or the company dissolves. The decision left little doubt that Justice Pines sided with the plaintiffs on the merits of their position:

[T]he Court holds that Raymond Tantillo is a fiduciary of both the entities and minority members, Margiotta and Thomas Tantillo. It is the subject operating agreement that sets forth the rights and duties of the members and managers among themselves, including limits on such potential liability. However, there can be nothing in the operating agreement that limits or an any way eliminates liability for acts that constitute bad faith. LLC Law § 417 (a)(1); § 420; TIC Holdings LLC v HR Software Acquisitions Group Inc., 301 AD2d 414, 415 (1st Dep’t 2003). . . .

Under the subject operating agreements, as the managing member, Raymond Tantillo is given broad authority to determine whether and when to authorize company distributions to a particular company’s members. Thus, to the extent that he determined that, for whatever business reason, distributions would not be forthcoming for the years in question, this Court would not be in a position to question his determination. However, the Plaintiffs have raised an issue, which if properly demonstrated, would demonstrate the kind of self dealing which would, in the Court’s view, interfere with his duty of good faith. They have set forth that in the one year after the death of Anthony Tantillo, when Raymond Tantillo took over the full operation of the four entities, he eliminated all distributions to LLC members and utilized the subject funds to substantially increase his personal income from these entities. . . .

It is the Court’s belief that if Raymond Tantillo acted in the manner described by Plaintiffs, he was acting in violation of his obligations under the LLC Law and would, therefore, ultimately be required to make distributions to the Plaintiffs as requested.

Notice the phrase, “ultimately be required to make distributions” in the last sentence, which led to a far less happy result for the plaintiffs and their request for an interim, mandatory injunction which Justice Pines denied based on settled New York law governing equitable remedies. Here’s what she said:

However, the relief requested at this juncture is in the form of a mandatory injunction. Such relief is rarely granted under New York law, where, as in the case at bar, the movant would be receiving the ultimate relief pendente lite and could ultimately be compensated through monetary damages, Rosa Hair Stylists Inc. v Jaber Food Corp., 218 AD2d 793 (2d Dep’t 1995); see Matos v City of New York, 21 AD3d 936 (2d Dep’t 2005); Neos v Lacey, 291 AD2d 434 (2d Dep’t 2002). Accordingly, the motion to compel the Defendant entities to make distributions to Lori Ann Margiotta and Thomas Tantillo is denied at this juncture. However, the issue raised remains open as part of the ultimate holding in this action.

The defendant’s motion for an interim injunction compelling his stepsister to return her demonstrator vehicle bearing dealership plates met the same fate for the same reason. His motion argued that the dealership agreement and state regulations required her, as a non-employee family member, to return the car. Justice Pines’ decision (read here) indicated her agreement with the defendant’s position based on the dealership agreement, but also noted “the possible arbitrary application of the regulations” by the stepbrother based on evidence of other demonstrator vehicles being used by non-employee relatives of employees. No matter, the court said, based on the inappropriate nature of the interim relief sought:

As with the companion motion, in which Plaintiffs seek to compel payment of LLC distributions, the movant here is seeking mandatory injunctive relief, which is clearly compensable by monetary damages and is inappropriate at this stage of the litigation. . . . Accordingly the motion by Nissan 112 to compel return of what is characterized as a demonstrator vehicle by Lori Ann Margiotta is denied. As with the request for relief by Plaintiff Margiotta in the companion motion, such is preserved for trial . . . [citations omitted].

Tit-for-tat motions for interim injunctive relief. Both denied. Contested ownership no closer to resolution. Just another, typical chapter in the story of a family business divorce.