Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.
With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.
Three Memorable Decisions from Justice Ramos
For Justice Ramos, we focus on three LLC cases.
In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members.
In Roni, the LLC investors filed suit against several real estate developers who solicited them to invest in a series of LLCs, claiming fraud and breach of fiduciary duty based on the defendants’ alleged nondisclosure, before the LLCs’ formation, that the defendants would receive millions of dollars in “commissions” from the property sellers and mortgage brokers. In a decision which surprised some at the time, Justice Ramos denied the defendants’ motion to dismiss, holding that the “Promoters were in a unique position of having superior (arguably exclusive) access to information concerning every aspect of the transactions” and “there was no way for Plaintiffs, by due diligence, to discover that the Promoters were receiving Commissions.” Sure enough, the Appellate Division eventually affirmed, 74 AD3d 442 [1st Dept 2010], as did the New York State Court of Appeals, 18 NY3d 846 . Roni is classic example of Justice Ramos’s knack for accurately determining (or predicting) the law in undecided areas.
Another of our favorite decisions from Justice Ramos is a trailblazing ruling from 2010 about the rights of majority LLC members to effectuate a cash-out a/k/a freeze-out merger, a frequent subject of this blog (read here and here, for example). In Stulman v John Dory LLC, 2010 NY Slip Op 33911(U) [Sup Ct, NY County Sept. 10, 2010], Justice Ramos became the first judge in New York to rule that majority members of an LLC (without a written operating agreement otherwise prohibiting them from doing so) may merge the entity into another under Section 1002 of the New York Limited Liability Company Law (the “LLC Law”) by written consents, pursuant to Section 407 (a) of the LLC Law, instead of a formal meeting and vote of the members. In effect, this procedure allows the majority members to merge the LLC without providing the minority prior notice of the merger, and at the moment of the merger’s consummation, the minority’s sole remedy is an appraisal proceeding for the “fair value” of his or her former interest. Post-Stulman, every other court to have considered this issue has agreed with Justice Ramos.
Finally, in Shao v Lin, 2013 NY Slip Op 51079(U) [Sup Ct, NY County July 9, 2013], Justice Ramos held invalid an attempt by one member of a three-member LLC to circumvent membership interest transfer restrictions of the type commonly found in LLC agreements by “pledging” to a second member his membership interest in the LLC, thus giving the “pledgee” supermajority status, which he purported to use to terminate the third member as manager of the LLC. Justice Ramos agreed with the third member, who promptly sued after his management rights were “terminated,” that the transaction was really a prohibited assignment of the membership interest, resulting in a prohibited transfer of the membership interest, giving rise to a claim of damages. Shao was the first New York case of which we are aware to consider the still rarely litigated, potentially murky distinctions between permitted versus prohibited assignments of New York LLC membership interests.
Three Memorable Decisions from Justice Bransten
And now, onto our three picks for Justice Bransten.
In Garber v Stevens, Mem. Decision, Index No. 601917/2005 [Sup Ct, NY County June 6, 2012], Justice Bransten granted a rarely-invoked remedy which, as far as we are aware, no New York court has granted since: the removal of a general partner of a New York limited partnership, and replacement with a limited partner, under the court’s general “equitable power.” In Garber, Justice Bransten held that equitable removal of a general partner and substitution with a limited partner may be appropriate as an alternative to dissolution – to “avoid the drastic measure of liquidating the Partnership,” when “necessary to preserve the partnership” – like in the case of extreme mismanagement of partnership property. In NWM Capital, LLC v Scharfman, 144 AD3d 414 [1st Dept 2016], the Appellate Division later adopted Justice Bransten’s “necessary to preserve the partnership” standard for equitable general partner removal.
One of Justice Bransten’s most interesting business divorce cases involves the intra-family battle between the second wife of Walter Zacharius, founder of the harlequin romance novel giant, Kensington Publishing Corporation, and his two children from a prior marriage. Justice Bransten issued many decisions in this litigation, but one in particular stood out, so much so that in 2014 it made our annual list of top-ten business divorce cases.
In Zacharius v Kensington Publishing Corp., 42 Misc 3d 1208 [A] [Sup Ct, NY County Jan. 6, 2014], after Zacharius’s death, the second wife owned 59% of the corporation’s stock, giving her presumptive voting control. But the second wife’s stepchildren alleged that a written voting agreement between them and their father effectively gave them the right post-death to vote his shares, which the second wife now owned, reducing her to minority voting status, preventing her from selling to another publishing house.
After the second wife alleged the voting agreement was a forgery, Justice Bransten ruled that the voting agreement was facially enforceable under Section 620 (a) of the Business Corporation Law (the “BCL”), entitling the children for the time being to vote their father’s shares, but also that the wife stated a viable claim that the voting agreement was a fraud, granting her discovery on her allegations to invalidate the voting agreement. Almost five years after Justice Bransten’s original ruling, the parties are still litigating the validity of the voting agreement, with a summary judgment motion by defendants to dismiss the claim fully briefed and pending. Perhaps Justice Bransten will issue a decision before she departs. If not, we look forward to one from her successor.
Lastly, in Magid v Magid, 2017 NY Slip Op 32603(U) [Sup Ct, NY County Dec. 14, 2017], Justice Bransten issued what remains the most recent New York decision to consider the “deadlock” standard for dissolution of a New York general partnership under Section 63 of the Partnership Law. In Magid, Justice Bransten held that, unlike BCL 1104, a 50/50 ownership split is not necessarily an essential requirement for deadlock under Partnership Law Section 63. Magid was a significant step forward from prior appellate law on the subject of deadlock under Section 63, the most recent of which, Seligson v Russo, 16 AD3d 253 [1st Dept 2005], involved true “50-50 deadlock.” Under Magid, courts may have discretion to use a more flexible approach to “deadlock” under Section 63 than the mandatory 50/50 division required of corporate deadlock dissolution petitions.
Of course, these decisions represent a small fraction of the many important business divorce decisions Justices Ramos and Bransten have rendered over their combined 60 years on the bench. They are just a small sample of what we view as exemplary of their shared characteristics for innovation, thoughtfulness, and creative resolution of difficult legal problems in new and uncertain areas.
A Look Back; an Eye Toward the Future
It is always bittersweet to see judges we know and admire depart the bench. Justices Ramos and Bransten will be missed. Yet, their robes will be filled (and formidable caseload assumed) by two very able, relatively-new jurists, both with a wealth of commercial litigation experience of their own in private practice, Acting Manhattan Supreme Court Justice Joel M. Cohen and Brooklyn Supreme Court Justice Andrew Borrok. Business divorce practitioners look forward to working with them in the very near future.