The COVID-19 pandemic kept New York’s courthouses dark the last few months, but it didn’t slow down the output of decisions by Commercial Division judges. If anything, the pause of new case filings and non-emergency motions in pending cases allowed judges to catch up on the backlog of undecided motions, as evidenced by an uptick in the number of recently reported decisions involving disputes between co-owners of closely held business entities.
Of the ten New York counties with Commercial Divisions, Manhattan has the largest roster of Commercial Division judges and the most cases, so its biggest share of the reported business divorce decisions is no surprise. This post highlights three of these decisions by three different Commercial Division judges on a variety of interesting issues concerning choice-of-law and dissolution of a foreign business entity, the doctrine of in pari delicto as a defense to a shareholder derivative action, and the contested ownership of membership interests in a family-owned LLC.
Court Applies New York Law in Dismissing Claim to Dissolve Bahamian Company
BML Properties Ltd. v China Construction America, Inc., 2020 NY Slip Op 30816(U) [Sup Ct NY County Mar. 17, 2020], involves an unusual application of a New York choice-of-law provision in a joint venture agreement to a minority shareholder’s claim seeking oppression-based judicial dissolution of a Bahamian business entity.
The case arises from an agreement to develop a multibillion dollar resort complex in the Bahamas that ultimately failed and went bankrupt. The plaintiff, a Bahamian company (BML), was controlling shareholder of the joint venture entity organized as a Bahamian corporation (JV) and in which the defendant, a New York-based Delaware company (CCA), held preferred non-voting shares. After the project collapsed, BML sued CCA for breach of contract and fraud. The suit was filed in New York state court asserting claims under New York law based on New York forum selection and choice-of-law provisions in an “Investors Agreement” between BML and CCA.
CCA counterclaimed for judicial dissolution of the JV under the Bahamas Companies Act based on alleged shareholder oppression. BML moved to dismiss the counterclaim, arguing that the choice-of-law provision in the Investors Agreement required application of New York law rather than Bahamian law and that CCA lacked standing under New York’s oppressed-shareholder statute (§ 1104-a of the Business Corporation Law) because CCA held only non-voting shares.
Manhattan Commercial Division Justice Saliann Scarpulla agreed with BML and dismissed the dissolution counterclaim, writing that “these sophisticated business entities, negotiating a multibillion dollar business agreement, plainly and broadly agreed that New York law, not Bahamian law, would govern their relationship” and that “there is no reason to ignore the parties’ choice of New York law simply because the Bahamian statute is more favorable to [CCA].”
Missing from the court’s analysis and, for that matter, from the parties’ briefs, is any mention of the line of case authorities uniformly holding that New York courts lack subject matter jurisdiction to entertain applications to dissolve foreign business entities. And, it’s not as if parties can waive objections to subject matter jurisdiction.
Shareholder Derivative Claims Against Entities Controlled by Majority Shareholders Defeated by Doctrine of In Pari Delicto
Rutigliano v Absolute Electrical Contracting of NY, Inc., 2020 NY Slip Op 31768(U) [Sup Ct NY County June 4, 2020], involves a dispute regarding the ownership and control of a unionized electrical contracting business (Absolute) from which the plaintiff one-third shareholder allegedly was frozen out by his fellow shareholders. The complaint alleged that the two other shareholders formed a separate company (EDM) to bid on non-union jobs for which Absolute was not eligible and that in doing so, they used Absolute’s funds and other assets. The complaint asserted derivative claims on Absolute’s behalf for unjust enrichment and conversion against EDM and its successor company.
The corporate defendants moved to dismiss the derivative claims based on the doctrine of in pari delicto under which a court will refrain from granting relief to a party who is equally at fault in a particular controversy as the party from whom relief is sought.
In his decision granting dismissal, Manhattan Commercial Division Justice Joel M. Cohen began his analysis by noting that the plaintiff’s derivative claims “are subject to the same defenses that would apply if the claims were made directly by Absolute.” Because plaintiff alleged that the individual defendants, as officers of Absolute, used its assets to benefit EDM, and because their actions as officers are imputed to Absolute, Justice Cohen concluded, “Plaintiff, stepping into the shoes of Absolute, cannot bring these claims against EDM [and its alleged successor entity] for engaging in activity in which Absolute, through [the individual defendants], knowingly took part.”
Justice Cohen then dropped the other shoe on the plaintiff’s case, noting that despite having given him the opportunity to plead a “viable derivative claim” against the two individual defendants “for breaching duties owed to Absolute” and against EDM for aiding and abetting the individual defendants’ alleged fiduciary breaches, the plaintiff “has not done so.”
Court Denies Dismissal of Daughter’s Claim to Enforce Father’s Alleged Oral Promise in 1999 to Transfer 50% LLC Membership Interest
Renk v Renk, 2020 NY Slip Op 31526(U) [Sup Ct NY County May 21, 2020], involves a dispute pitting a daughter against her father and siblings over her alleged 50% ownership of a successful family-operated jewelry business known as Sequin, LLC. The company was formed in 1999 by Kimberly (plaintiff) and her sister Linda (defendant) when the sisters were on good terms.
It was undisputed that Linda had a 50% membership interest in Sequin from inception. The dispute concerned the other 50% interest which, according to Kimberly, was put in the name of her father because of her involvement at the time with another, competing business. For almost two decades Kimberly and Linda ran the business together but the father never formally transferred the 50% interest to Kimberly.
Kimberly filed suit after her relationship with Linda fizzled, claiming her right to a 50% ownership interest and seeking damages as part of an internal family power struggle related to the running of the company. In defendants’ motion to dismiss the complaint, Linda alleged that any promise made by their father to transfer his interest to Kimberly is barred by the statute of limitations, fails to state a valid claim, and also is barred by documentary evidence including the agenda of a 2006 shareholder meeting.
In his decision, Manhattan Commercial Division Justice Barry Ostrager parsed the complaint’s 11 causes of action, dismissing some and upholding others. As to the statute of limitations defense, he found that the defendants met their initial burden of showing that the claims accrued within the one-year period of the applicable statute of frauds, i.e., in 2000, thus requiring commencement of suit by 2006.
He then went on to find, however, that “after giving Kimberly’s allegations every favorable inference,” she “succeeded in raising issues of fact that bar the dismissal of her claims as time-barred at this stage of the litigation.” Among the evidence forestalling dismissal was a 2013 codicil to the father’s will signed less than six years before Kimberly filed suit in which he stated that he is “holding an ownership interest in [Sequin] for [his] daughter [Kimberly] which [he] intend[s] to transfer to her as soon as possible.”
Justice Ostrager also rejected as “too vague” a basis for dismissal the 2006 meeting agenda which referred to “Considerations for gifting and/or sale membership units by [the father] to [his son] and [Kimberly]” and listed related items such as tax consequences and valuation methodology.
in the end, Justice Ostrager dismissed Kimberly’s claims against her family members for fraud, fiduciary breach, aiding and abetting fiduciary breach, and negligent misrepresentation. On the other hand he allowed the action to proceed on Kimberly’s claim against her father for breach of oral contract to transfer the 50% membership interest, and for unjust enrichment, an accounting, and constructive trust against all defendants.