We’re two-thirds of the way through the official winter season, which thus far has dumped a lot of snow on the Northeast making it a good one for skiers. It’s also been a good season for business divorce aficionados with plenty of interesting decisions in judicial dissolution cases and contested buy-outs.
Each August for the last five years, I’ve published a Summer Shorts edition offering several bite-sized case synopses highlighting decisions that, while not meriting extended analysis, nonetheless offer valuable insights for business owners, transactional lawyers involved in business formation and, of course, business divorce lawyers. I figured it’s time to start the hibernal version, so welcome to the inaugural edition of Winter Case Notes.
First up is a decision by Justice Richard Platkin in which the validity under the operating agreement of an LLC manager’s removal hinged on the parties’ relative capital contributions. Next is Justice Stephen Bucaria’s latest of many rulings in a decade-long litigation saga, dissolving a holding company with an indirect ownership interest in a Massachusetts operating company. Last is a decision by Justice Cynthia Kern in which she denied dismissal of a claim for the belated sale of a LLC membership interest.
Court Denies Preliminary Injunction Sought by Removed LLC Manager
Concord Development Co. LLC v Amedore Concord, LLC, 2016 NY Slip Op 50152(U) [Sup Ct Albany County Jan. 21, 2016]. This case illustrates the impact on member rights when voting percentages are tied to proportionate capital contributions. The case involves a real estate development joint venture (JV) formed as an LLC with two members also organized as LLCs. Under the JV’s operating agreement, each member designated one of the two managers. The operating agreement defined member voting rights by the proportion of capital contributed by the member to the aggregate value of all capital contributions by members; authorized removal of a manager without cause by the vote or written consent of at least a majority of the membership interests; and authorized a change in the number of managers by the vote or written consent of at least two-thirds of the membership interests.
The plaintiff member brought suit for declaratory and injunctive relief after its designated manager was removed by the defendant member who also reduced the number of managers from two to one. The plaintiff alleged that it had contributed about $211,000 in capital and the defendant no more than $229,000. In his decision denying the plaintiff’s motion for a preliminary injunction, Albany Commercial Division Justice Richard M. Platkin found that the plaintiff had failed to substantiate its own, claimed capital contribution and that, even if it could do so, the defendant “nonetheless would hold a majority of the membership interests, thereby implicating the provisions of the Operating Agreement that permit a majority holder to remove a manager and fill the resulting vacancy,” thereby entitling the defendant to manage the JV even by the plaintiff’s own calculations.
Court Orders Dissolution of Holding Company Ending Ten-Year Fight for Control
Matter of Ano, Inc. v Goldberg, Short Form Order, Index No. 601079/15 [Sup Ct Nassau County Feb. 2, 2016]. After ten years of litigation, the message sent by this decision is, enough is enough. I’ve twice before written about earlier legal skirmishes between the two antagonists (here and here), 50/50 shareholders of a New York close corporation that holds two-thirds of the shares in another New York corporation that, in turn, holds a 90% stock interest in a Massachusetts corporation that owns and operates a car wash/service station in that state. The petitioning shareholder in this deadlock dissolution proceeding alleged that the business of the car wash/service station was declining and that he wanted to sell the property, which the other shareholder opposed.
In his decision granting dissolution, Nassau Commercial Division Justice Stephen A. Bucaria likened the “passive” real estate corporation to an LLC for purposes of judicial dissolution, noting that the corporation’s organic documents contain no statement of the corporation’s purpose; that “depending on the tax and liquidity situation of the individual shareholders, it may be ‘financially unfeasible’ to hold the investment, regardless of the profitability of the property”; and that the two shareholders “have a fundamental and intractable dispute as to the means, methods, and finances” of the corporation. In view of the deadlock, Justice Bucaria also preliminarily enjoined the shareholders/directors of the Massachusetts corporation’s direct parent company from holding any meetings for the purpose of taking any action with respect to the car wash/service station or the subject property.
Court Sustains Claim for Contract Breach Involving Inter-Member Sale of LLC Interest Based on Non-Compliance With Operating Agreement’s Notice Provision
Edelman v Organic Avenue, LLC, 2016 NY Slip Op 30262(U) [Sup Ct NY County Feb. 16, 2016]. The lesson of this case is, follow to the letter the operating agreement’s notice provisions. The plaintiff in this case held 100,000 Class B non-voting membership units equal to 0.55% of the LLC which owns and operates retail stores for the sale or organic juice and products. In 2012 plaintiff and the other members executed a Third Amended and Restated Operating Agreement which permitted amendment by members holding at least two-thirds voting interests. At the end of 2012, the voting members with the requisite interests adopted a Fourth Amended and Restated Operating Agreement, which plaintiff did not execute and never received until 2015. The new operating agreement authorized the LLC’s majority member to offer to purchase the other members’ interests prior to year-end 2013 for $1.335 per unit, and gave each member the right to accept the offer within 15 days of the offer notice. Plaintiff received a timely notice of offer by email only in November 2013. He did not accept the offer and was still a unit holder in 2015 when, as part of a restructuring, each of the LLC members, including plaintiff, exchanged their units for membership interests in a company that acquired all of the LLC’s assets.
The plaintiff subsequently brought suit against the original LLC and its majority member, seeking to enforce his right under the Fourth Amended and Restated Operating Agreement to receive $1.335 per unit for his former 100,000 units, plus interest from 2013. The defendants moved to dismiss the complaint based on plaintiff’s failure to accept within 15 days the November 2013 offer which plaintiff admittedly received by email. The plaintiff countered that the offer did not conform to the operating agreement’s provision generally governing notices, which required a mailing to the member in addition to any electronic transmission. In her decision denying the defendants’ dismissal motion, Manhattan Supreme Court Justice Cynthia S. Kern agreed with the plaintiff, writing that the majority member “has not established that its offer was sent in conformity with the notice provision” and that “plaintiff has sufficiently alleged damages for the purposes of a motion to dismiss.”