Welcome to our 17th annual edition of the Top 10 business divorce cases featured on this blog over the past year.

This year’s selections buck the trend of previous years in which cases involving limited liability companies dominated by far. The cases highlighted this year include co-owner disputes involving five corporations, one general partnership, and only four LLCs. Meaningful? Probably not. This year’s crop also stands out as mostly (six out of ten) featuring decisions by New York appellate courts which, as all litigators know, carry more precedential clout.

All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

Weinstein v Wallace Among this year’s Top 10, to this observer Weinstein is the case that packs the biggest punch. There, the Appellate Division, Second Department with little fanfare held that LLC Law Section 608 gives an executor or other representative of the estate of a deceased member “all of the rights of a member for the purpose of settling or managing its estate, which would include a member’s voting rights.” Without saying so the court effectively negated lower court precedent treating estate representatives as mere assignees or economic interest holders, i.e., without standing to assert derivative claims. Weinstein also removed lingering doubts about the jurisprudential basis for the Second Department’s 2023 enigmatic ruling in the Andris case where it revived a petition for judicial dissolution of an LLC brought by the estate representative of a deceased member. Petitions for judicial dissolution, petitions to inspect books and records, lawsuits asserting derivative claims — going forward we can expect to see those and other litigations brought on behalf of estates that previously were thought to be off limits for lack of standing.

Kavanaugh v Consumer Beverages, Inc. The Kavanaugh case, involving a petition for judicial dissolution of a prosperous, second-generation, family-owned business, merits Top 10 treatment as one of the clearest examples of an early-stage court decision putting dissolution out of reach upon a finding that prior, pending, related lawsuits against the controlling shareholder potentially provided “more than adequate remedies to a dissolution.” The lower court’s decision affirmed by the Appellate Division, Fourth Department rejected the petitioner’s argument that the adequacy of alternative remedies was off the menu until after the court rules on the merits of the dissolution petition. Kavanaugh also features the court’s enforcement of provision in the shareholder agreement that gave the controlling shareholder/president the power to convert the shares of some of his shareholder siblings to non-voting shares — thereby stripping them of standing to seek judicial dissolution — by terminating their employment not for cause.

1650 Broadway Associates, Inc. v Sturm It’s been a long time — 16 years to be precise — since we saw something like the Anda Management case in which the court allowed claims against the subject company’s accounting firm to go forward based on allegations that it took a partisan role by assisting one shareholder faction against the other in a judicial dissolution proceeding. The dry spell broke big time last year in the Sturm case in which the Appellate Division, First Department reinstated a shareholder’s lawsuit claiming malpractice and aiding and abetting fraud against the company’s accounting firm for failing to disclose alleged looting of company funds by the managing shareholder of the family-owned business. The court rejected the accounting firm’s argument that it merely was hired to prepare tax returns and other financial statements that documented the allegedly fraudulent loans, and thus investigating and reporting the manager’s alleged fraud were beyond its duties. Wrote the court: “The law is very clear that an agreement to perform unaudited services does not shield an accountant from liability because an accountant must perform all services in accordance with the standard of a reasonable accountant under similar circumstances, which includes reporting fraud that is or should be apparent.”

Rosenblum v Rosenblum I confess a particular fondness for fair value appraisal cases, which have become a very active part of my litigation practice, especially with LLCs following cash-out mergers. Rosenblum arose not from a cash-out merger, but from a 50% member’s voluntary, as-of-right withdrawal from a realty holding LLC triggering a fair value appraisal contest between mother and son under LLC Law Section 509. The court’s post-trial decision is noteworthy for its close attention to the dueling real estate and business appraisers’ testimony, focusing on their widely disparate positions on net operating income, capitalization rates, and inter-company loans. Of particular interest is the court’s adoption of the remaining member’s business appraiser’s proposed 15% discount for lack of marketability. In doing so the court rejected the withdrawn member’s expert’s proposed 0% discount predicated on the argument that any marketability discount was subsumed in the exposure-to-market duration stated in the real estate appraisal.

Behler v Tao My post last year about the Appellate Division, First Department’s majority and dissenting opinions in Behler, involving a fight between co-members of a Delaware LLC, characterized the case as pitting Delaware’s “harsh” contractarian approach against New York’s “fundamental fairness” approach in LLC member disputes. Both the lower court and the majority appellate decision dismissed the plaintiff minority member’s lawsuit seeking to enforce an oral buyout agreement based on a merger clause in a subsequently amended operating agreement that the plaintiff never executed, and notwithstanding allegations that the defendant controller post-amendment acknowledged the buyout obligation. The three-Justice majority opinion faulted the plaintiff for not scrutinizing the LLC’s single-member operating agreement, which authorized the original member to amend the agreement, before investing in the company. It also relied on Delaware LLC Act Section 18-101(9) binding LLC members to the operating agreement regardless of whether they sign it. The two dissenting Justices offered a dramatically different take on the facts and the law, writing that “[t]he fundamental issue in this case is whether a manager of an LLC may persuade a friend to invest in his LLC by orally promising the friend a guaranteed exit opportunity at a specific time and price, and then, with total impunity, amend the LLC’s operating agreement unilaterally . . ..” The losing party appealed as of right to the New York Court of Appeals — the state’s top court — which has scheduled oral argument on January 7, 2025. We’ll keep a lookout for the Court of Appeals’ decision.

Gam v Dvir Decisions on the merits of claims under Sections 706 and 716 of New York’s Business Corporation Law for judicial removal of directors and officers are extremely rare. Refreshment appeared last year courtesy of the Appellate Division, Second Department’s decision in the Gam case involving a dispute between co-shareholders of a successful bagel shop. The plaintiff accused her partner of a variety of misdeeds financial and otherwise, and sought defendant’s removal as an officer of the corporation under BCL 716(c). Following a jury trial on derivative claims that held the defendant liable for money damages, the trial judge held that the plaintiff had proven cause for defendant’s removal. The defendant’s unsuccessful appeal argued that the money judgment against him was remedy enough, and that removal and the loss of his income was punitive rather than remedial. The Second Department’s terse affirmance got right to the point, stating “[h]ere, [plaintiff] established that she was a 50% shareholder of [the corporation] and that there was cause for the defendant’s removal based upon his wrongful taking of [the corporation’s] funds for his sole benefit.”

Schneider v Pine Mgt., Inc. The alleged withholding of distributions by LLC managers is one of the more fertile grounds for litigation among members. In general, as seen in the Appellate Division, First Department’s Simon v Moskowitz decision, where the operating agreement gives the managers full discretion whether, when, and how much to distribute, the courts will not second guess management’s business judgment. The general rule also prevailed in Schneider, a fight between two 50/50 member factions of ten LLCs that own real properties. The court denied the plaintiff members’ bid for summary judgment, holding that the defendants were an “authorized person” under LLC Law Section 102(c) (“‘Authorized person'” means a person, whether or not a member, who is authorized by the operating agreement, or otherwise, to act on behalf of a limited liability company or foreign limited liability company”) and that the plaintiffs failed to demonstrate that defendants’ actions with respect to distributions — defendants allegedly hoarded earnings and slashed distributions in favor of funding over $12 million in construction — were outside of the authority given to plaintiffs as such. Cases like Schneider serve as important reminders to business lawyers who prepare operating agreements to at least consider including provisions mandating tax and non-tax distributions from earnings subject to holdbacks for reasonable cash reserves for contingencies and future capital requirements.

Mojtahedi v Craddock The court in Mojtahedi decided an issue on which there has been no clear case precedent, namely, whether New York courts have subject matter jurisdiction of petitions to inspect books and records of foreign business entities under foreign inspection statutes. The case involved an inspection petition for a New York-based Delaware corporation under Section 220 of the Delaware General Corporation Law. Readers may recall that New York courts have spurned jurisdiction of petitions for judicial dissolution of foreign business entities. Mojtahedi reached the opposite result, reasoning that “[t]he fact that the parties agree that Delaware law applies to the books and records request likewise does not defeat this Court’s jurisdiction over the issue, as the Court of Appeals recently stated that once another jurisdiction’s laws govern a matter, New York courts have ‘significant flexibility and discretion in deciding whether to take notice of that foreign law and apply it to the case at hand’” (citing Eccles v Shamrock Cap. Advisors, LLC, 42 NY3d 321 (2024)).

Pappas v B & G Holding Co. Over the years this blog has featured a number of posts about cases in which the testamentary disposition of a deceased owner’s equity interest conflicts with transfer restrictions in the entity’s governing agreement. Pappas is another noteworthy example, featuring a highly detailed and thoughtful opinion by Justice Gomez of the Bronx Commercial Division. The case involves a realty holding general partnership whose 1994 partnership agreement included a transfer upon death provision requiring the estate representative to sell, and the surviving partner to buy, the partnership interest held by the estate at a formula-based price. One of the two partners died in 2020. His will bequeathed his partnership interest to the plaintiff non-partner who, after a raft of litigation proceedings, eventually locked horns with the surviving partner over the central issue whether the testamentary bequest trumped the partnership agreement or vice versa. The court ruled in favor of the surviving partner, writing that, “here, contrary to plaintiffs’ assertion, the terms of the PA [Partnership Agreement] proscribe the bequest of [decedent’s] shares to [plaintiff]. This is true, despite, as urged, that there is no language in the PA proscribing the testamentary disposition of a partner’s shares. Indeed, plaintiffs’ suggestion that where, as here, the PA clearly proscribed the transfer, pledge, and/or assignment of a partner’s shares, such terms did not necessarily include a testamentary disposition, is absurd and turns the well settled principles of contract jurisprudence on their head. Accordingly, contrary to plaintiffs’ assertion, because at the time of his death [the decedent] owned his shares of [the partnership] and his conveyance to [plaintiff] was a nullity, the shares did not pass outside the estate and instead, became [the Estate]’s property.” You probably guessed that the litigation was fueled by the partnership agreement’s formula-based pricing of the decedent’s partnership interest, which valued the interest at a fraction of its market value at the time of the decedent’s death.

Schiano v Harsanyi Whereas the Sturm case highlighted above tackled the issue of the company’s outside accountant’s liability for improper nondisclosure of misconduct by one company owner to the detriment of another owner, in Schiano the focus shifted to alleged misconduct by the company’s in-house bookkeeper in an unusual lawsuit for breach of fiduciary duty and aiding and abetting a business owner’s fraud to the detriment of a co-owner. The case involves an incorporated vending machine business that dealt with a lot of cash. In litigation between the two principals, the defendant filed a third-party complaint against the plaintiff for fraud and against the bookkeeper for aiding and abetting the fraud which allegedly involved a long-running scheme to disguise cash from the vending machines taken by the plaintiff by recording the purloined funds as loans or capital contributions by the plaintiff. The lower court granted the bookkeeper’s dismissal motion, but on appeal the Appellate Division, Second Department reversed and reinstated the third-party claims. The appellate panel held that the defendant’s allegations sufficiently pleaded that the bookkeeper purposefully withheld her internal records from defendant, thereby enabling plaintiff’s allegedly fraudulent scheme to continue for years, and that the bookkeeper allegedly acted with knowledge that plaintiff was converting company money and that cash received by him was not a loan to the business as represented.