I’m very pleased to present my 11th annual list of this past year’s ten most significant business divorce cases.
This year’s list includes four important appellate decisions, including one likely to stand as a landmark ruling by the New York Court of Appeals on the issues of wrongful dissolution and valuation of partnerships.
This year’s list also features noteworthy rulings in business divorce cases involving closely held corporations and, of course, limited liability companies on a variety of issues including standing to sue derivatively, the right to defend a suit derivatively, whether an inactive member of a member-managed LLC owes fiduciary duties, and more.
All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:
Congel v Malfitano, 31 NY3d 272 [2018]. Topping the list is this blockbuster ruling by New York’s high court adopting a contract-centric approach to partnership dissolution and upholding minority and marketability discounts in valuing the interest of a partner who was found to have caused a wrongful dissolution.
Feldmeier v Feldmeier Equipment, Inc., 164 AD3d 1093 [4th Dept 2018]. Here’s another noteworthy appellate ruling involving a recurrent issue in family-owned businesses in which the court affirmed the dismissal of a minority shareholder’s suit for common-law dissolution based on the lower court’s finding that the merit-based bonuses historically granted the shareholder-employees were not disguised dividends.
Horowitz v Montauk U.S.A., LLC, No. 16-3912 [2d Cir. Apr. 20, 2018]. The third of this year’s important appellate business divorce rulings comes from the U.S. Second Circuit Court of Appeals. The case, one of several spawned by a bitter dispute between 50/50 owners of a Hamptons restaurant, involved trademark infringement claims brought by one ownership faction against the restaurant entity. In what appears to be a first-impression decision, the court held that a non-party member of the other ownership faction had the right to defend the suit derivatively on behalf of the restaurant entity.
Pokoik v Norsel Realties, 159 AD3d 459 [1st Dept 2018]. The final appellate ruling to make this year’s list witnessed the reversal of the lower court’s order dismissing derivative claims brought by a limited partner against the general partner. The lower court had found that the plaintiiff lacked standing to sue derivatively because of his “personal animus” as evidenced by his “litigious nature” including several prior lawsuits against the defendants. The appellate court disagreed, finding no conflict of interest and no “indication of an especially acrimonious relationship between the parties.”
Talking Capital LLC v Omanoff, 2018 NY Slip Op 30332(U) {Sup Ct NY County Feb. 23, 2018]. In a suit among members of a Delaware LLC, this significant decision by since-retired Commercial Division Justice Shirley Kornreich rejected the defendants’ contention that the plaintiff member lacked standing to assert derivative claims based on provisions in the LLC agreement requiring unanimous consent before members may act on behalf of the LLC.
Balkind v Nickel, 2018 NY Slip Op 31703(U) [Sup Ct NY County July 16, 2018]. In one of two decisions on this year’s list by Commercial Division Justice Saliann Scarpulla, the court interpreted the deadlock dissolution statute to deny standing to a 49% shareholder despite a shareholders’ agreement that granted him and the 51% shareholder co-equal board control.
Matter of D’Errico (Epic Gymnastics, LLC), Decision & Order, Index No. 610084/2016 [Sup Ct Nassau County Aug. 21, 2018]. In this noteworthy case — one of the relatively few in which a minority member of an LLC successfully sued for dissolution under LLC Law § 702 — the majority members had formed a new, similarly named entity to collect the subject LLC’s revenues, thereby reducing the subject LLC, as colorfully described by Commercial Division Justice Timothy Driscoll, to a “marionette” to be “manipulated at will” by the new LLC.
Marcus v Antell, 2018 NY Slip Op 32527(U) [Sup Ct NY County Oct. 5, 2018]. Does an inactive member of a member-managed LLC owe fiduciary duties? In this first-impression ruling, Commercial Division Justice Barry Ostrager answered “yes,” relying on a strict reading of LLC Law § 401 (b) (ii) providing that any member of a member-managed LLC “shall have and be subject to all of the duties and liabilities of a manager provided in this chapter.”
Yu v Guard Hill Estates, LLC, 2018 NY Slip Op 32466(U) [Sup Ct NY County Sept 28, 2018]. Justice Scarpulla’s second contribution to this year’s list involves a dispute between family members in which the plaintiff challenged as a fiduciary breach his siblings’ amendments to an LLC agreement adopted without the plaintiff’s consent, even though the original agreement authorized amendments with majority approval. Justice Scarpulla’s denial of the defendants’ dismissal motion deepens the debate over non-unanimous amendments triggered by the Shapiro v Ettenson rulings.
Vaccari v Vaccari, 2018 NY Slip Op 30546(U) [Sup Ct NY County Mar. 28, 2018]. This important decision by since-retired Commercial Division Justice Eileen Bransten puts the kibosh on minority shareholder dissolution petitions claiming oppression based only on the majority’s alleged denial of access to books and records.