Like most civil cases, the vast majority of business divorce disputes get resolved before trial, which is disappointing for us voyeurs since only at trial with live witnesses undergoing cross examination does one get the full flavor of the case’s factual intricacies, credibility issues, and the emotional undercurrents.
Even rarer are written post-trial decisions by judges with detailed findings of fact and conclusions of law, which is why I was so pleased recently to come across a trio of expansive post-trial decisions by Queens County Justice Timothy J. Dufficy in three business divorce cases involving family-owned businesses.
One of them, Shih v Kim, was featured in last week’s post on this blog, in which a romantically-involved couple started a business while engaged and continued as business partners even after the engagement broke off — until the defendant went rogue by diverting cash to himself and diverting business to a competing company.
The two other cases form interesting bookends, metaphorically speaking. Both involve businesses run by brothers. Both involve challenges to the documented ownership of the business. In one case, Justice Dufficy rejected a bid to establish an undocumented, de facto partnership interest and dismissed the case. In the other, Justice Dufficy upheld the documented, 50/50 ownership of an LLC, granted dissolution, and appointed a receiver. Let’s take a closer look.
The Barone Case
In Barone v Barone, 2017 NY Slip Op 50229(U) [Sup Ct Queens County Feb. 17, 2017], Frank Barone, himself critically ill at the time of trial, sued the wife of his deceased brother Joseph Barone seeking a share of the real estate fortune valued at $40 million she inherited from Joseph. The trial centered on Frank’s claim that he, Joseph, and Joseph’s widow Maria together owned the realty as partners in a de facto partnership.
Justice Dufficy conducted an eight-day bench trial. In his detailed findings of fact, he described a “business partnership” started by Frank and Joseph in 1962 selling used cars out of a trailer in a rented lot in Flushing, New York. Over the next 30 years they purchased around 40 properties — all of which were titled and mortgaged in Joseph’s name solely.
Joseph died in 1992. His will left to his wife Maria the 31 real properties he owned at the time and authorized the purchase of a lifetime annuity for Frank paying $50,000 annually. Frank not only didn’t challenge his brother’s will, as his executor he had it probated and he filed an estate tax return identifying the properties as owned by Joseph solely.
Also as executor Frank transferred the properties into a corporation owned 100% by Maria. In 2005 some of the properties were transferred to a second corporation also owned 100% by Maria. Frank never received or purchased any shares or received K-1s from either corporation. After Joseph’s death and until Maria terminated his employment in 2012, Frank served as President of both corporations and signed corporate returns naming Maria as sole shareholder. As Justice Dufficy summed up, “[a]ll of the written evidence during the trial supported the conclusion that plaintiff Frank was not a shareholder, not the possessor of the right to be a shareholder, and did not have an ownership interest in any of the Barone corporations.”
On these facts, Frank’s claimed de facto partnership seemingly went down like a lead balloon. Citing a plethora of case precedents, Justice Dufficy held that the evidence at trial failed to establish an agreement to share profits and losses, or that Frank invested any capital in the business, or that there was joint management and control of the business. The existence of a partnership, the judge noted, also was negated by an avalanche of corporate, tax, and financial records proving the adoption of a corporate form that excluded Frank’s ownership and also gave him actual notice that he was not, in fact, a partner. “The fact that [Frank] felt in his own mind that he was a partner of the real-estate business with his brother,” Justice Dufficy wrote, “is legally insufficient to carry his burden.”
Barone is neither the first nor the last example of spoiled ownership expectations in the setting of a family-owned business. The chasm between Frank’s subjective, familial expectations and the objective, formal realities of Joseph’s — followed by Maria’s — sole ownership is put on full display in the concluding section of Justice Dufficy’s opinion, where he wrote:
Plaintiff Frank’s response to the lack of any tangible, objective documentary evidence of partnership here is essentially that “he was my brother, we were family, I trusted him.” The existence of a familial relationship is no reason to throw caution to the wind where legal rights and obligations are concerned. The Commercial Division of Supreme Court, Queens County, is rife with disputes between litigants who are related, yet claim that they failed to receive their just legal entitlement. If the plaintiff and his brother or his sister-in-law had agreed to share in not only the profits, but the financial obligations of the business at issue here, or the plaintiff had purchased or been gifted shares in the corporation, that might be a basis for a finding of entitlement. But that is not what transpired, based upon this record. As the executor of his brother’s will, the plaintiff transferred the real property that had been held solely in his brother’s name to the Barone corporations. The Barone corporations continued to operate the business. The plaintiff executed not one, but two employment agreements, which unequivocally stated that Barone was the employer and he was the employee. Federal and state income tax returns were filed for the Barone Corporation, as were state payroll tax forms. There were no partnership tax forms filed. Plaintiff Frank knew, or should have known that he was an officer of the corporation, rather than a partner in a partnership venture. He also knew that defendant Maria Barone held the only share of stock of the corporation, evidencing a 100% interest in the corporation. The court is sympathetic to the plaintiff and his family. However, as tempting as it might be, this Court cannot morph the parties’ relationship into something it was not, for the purpose of insuring that everyone in the family receives the benefit of Joseph’s massive estate. That would contravene not only the law, but the clear and uncontested wishes of the decedent in his will. By reason of the foregoing, the Court renders its decision in favor of the defendants, dismissing all of the plaintiff’s claims in this action.
The 47th Road LLC Case
The second fraternal feud decided post-trial by Justice Dufficy, Matter of 47th Road LLC, 2017 NY Slip Op 50196(U) [Sup Ct Queens County Feb. 16, 2017], is a dissolution proceeding with what the court called a “tortured history of brother against brother” in which the facts and outcome are the polar opposite of Barone.
As found by Justice Dufficy, in 1996 the petitioner, Vincent Cortazar, and his brother, respondent James Cortazar, as joint tenants acquired an eight-unit apartment building in Long Island City, which in 2009 they transferred to 47th Road LLC in which each brother held a 50% membership interest.
The brothers mortgaged the property on successive occasions, using $1 million in excess proceeds to purchase acreage in California which, unbeknownst to Vincent, was titled only in the name of James. When Vincent found out, there was a physically violent confrontation between the brothers after which James locked out Vincent from the LLC’s day-to-day operations.
James collected rents but apparently refused to service the mortgage debt, as a result of which one or more foreclosure proceedings were brought against the property and remaining pending at the time of trial. Vincent’s attempts to renegotiate the mortgage debt failed due to non-cooperation by James whom, Justice Dufficy found, “apparently does not care that the only asset of the company will be lost to foreclosure.”
In his defense, James contended that Vincent’s name was put on the 1996 deed “as a convenience” since he did contribute financially to the purchase price; that Vincent “fraudulently transferred” the property to the LLC without James’s consent; and that, rather than being a 50% member of the LLC, Vincent was merely an employee or independent contractor.
Besides noting that James’s trial testimony in general “was not credible,” Justice Dufficy rejected each of James’s contentions as contradicted by sworn allegations made by him in another litigation, by a 2009 agreement signed by both brothers, by evidence of Vincent’s “sweat equity” contribution to the property’s acquisition and management, and by the fact that their 50/50 equity ownership was unchanged by the transfer of the property into the LLC.
Justice Dufficy’s legal analysis beginning at page 6 of his decision includes an excellent review of the statutory standard and interpretative case law governing dissolution of LLCs, citing familiar cases such as 1545 Ocean Avenue, Doyle v Icon, and (pardon the self-promotion) a couple of cases I litigated and won (Natanel v Cohen and Sieni v Jamsfab, LLC). His conclusion, that the brothers’ mutual antipathy and the impending foreclosure supports Vincent’s petition for dissolution, is succinctly put:
In the case at bar, the dissension among the parties has driven the company’s only asset into foreclosure. There are numerous outstanding violations on the property, and the respondent has collected the rents without making repairs, paying the violations, or the mortgage. There are other lawsuits in this and other states between the protagonists. Due to the violent relationship between the two managers, the company will be unable to achieve its purpose of operating an apartment building. The parties seem willing to permit the building to be foreclosed rather than cooperate with each other in the decision-making process. In short, the Court finds that it is not reasonably practicable to carry on the business.
In addition to ordering dissolution, Justice Dufficy appointed a receiver to wind up the LLC’s affairs.
Ownership disputes are a recurrent theme in cases involving family-owned businesses. While the trials in Barone and 47th Road LLC reached opposite results, in both cases the outcomes largely were dictated by clear documentary evidence, which is more than can be said in many such disputes involving family-owned businesses that often eschew recordkeeping and follow few if any formalities.