I am increasingly encountering businesses that straddle across several different entities, especially LLCs. The popularity of LLCs, their relatively low cost of organization, and business owners’ apparent desire to compartmentalize their businesses means that, these days, there are good odds that even the simplest businesses are actually a combination of two or more affiliated entities with the same management and ownership.

While I’m all for compartmentalization, transactions between affiliated entities with the same or similar ownership beget a broad array of potential issues, especially when relationships among the owners begin to fray. 

Consider an inter-affiliate transaction between two entities with the exact same ownership and management: for example, the entity that owns the property leases it to the entity that runs the deli. Managers or directors who authorize that transaction are conflicted, in the traditional sense, because they stand on both sides of the deal.  But so too does an owner who seeks to challenge the transaction; business owners who object to a pocket-to-pocket transaction are often left wondering whether they have grounds to complain.

A recent case from New York County, Pokoik v Realties, 2025 NY Slip Op 30463[U] (Sup Ct, New York County 2025) considers such a transaction, caps a decade-long litigation saga, and offers helpful guidance on when the business judgment rule applies to pocket-to-pocket transactions with common ownership on both sides. 

The Business Judgment Rule vs. Entire Fairness Review

The business judgment rule stems from the courts’ general acknowledgment that “courts are ill equipped to evaluate what are essentially business judgments.”  When the BJR applies to a challenged decision, courts only consider whether a challenged action was authorized, taken in good faith, and in furtherance of legitimate business interests (Ull v Royal Car Park LLC, 179 AD3d 469, 470 [1st Dept 2020]). 

One of the most common ways that plaintiffs seek to avoid application of the BJR is by demonstrating a conflict of interest: showing that the decision-maker stood on both sides of the challenged deal.  New York courts have said that common directorship or majority ownership between the parties to a transaction creates an “inherent conflict of interest” requiring careful scrutiny of the transaction (Alpert v 28 Williams St. Corp., 63 NY2d 557 [1984]).  Where that “inherent conflict” exists, the “burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the [transaction]” (id.). 

For instance, in Lewis v S. L. & E., Inc., 629 F2d 764, 770 (2d Cir 1980), the Second Circuit held that the BJR did not apply to transactions between two entities during the six-year period that the three defendants were directors and shareholders of both entities.

The Dispute at 575 Madison Ave

The dispute in Norsel stems from the tiered, multi-entity ownership structure in place at 575 Madison Avenue (the “Property”), which ultimately is owned and controlled on a 50/50 basis by members of the Pokoik and Steinberg families. 

Norsel Realties LLC owns the Property.  The sole member of Norsel Realties LLC is Norsel Realties, a partnership owned 50/50 by dozens of individuals and trusts from both the Pokoik and Steinberg families.

The Property also is subject to a long term ground lease in favor of 575 Realties, LLC—another entity jointly owned by the Pokoik and Steinberg families.  575 Realties, in turn, conveyed its leasehold interest in the Property to another Pokoik/Steinberg entity, 575 Associates, LLC.  575 Associates, in turn, leases the spaces at the Property to its various arm’s-length commercial tenants.

While the precise ownership of these entities lies buried beneath a complex web of trusts and fractional interests, Leon Pokoik and several other members of the Pokoik family who ultimately became plaintiffs in the litigation own a beneficial interest in each entity within the three-tiered structure: Norsel Realties LLC, 575 Realties, and 575 Associates.

The Ground Lease Renewal Rate

The long term ground lease between Norsel Realties LLC and 575 Realties provided 575 Realties the option to renew its tenancy for an additional 10 years, from January 2015 through December 2024.  If 575 Realties exercised that option, the ground lease provides that the new ground rent would be “a sum equal to five (5%) percent of the then appraised value of the land subject to this Lease covering the first renewal term, at the commencement thereof considered as unimproved and exclusive of any buildings or improvements thereon.”

When 575 Realties exercised its option to extend the ground lease, Michael Steinberg and Jay Lieberman—managers of both 575 Realties and Norsel Realties LLC spearheaded the companies’ calculation of the Ground Lease Renewal Rate.  The companies obtained a property appraisal (the “Leitner Appraisal”) which valued the leased fee interest at the Property—i.e., the Property “subject to” the ground lease—at $76 million and the average annual ground rent for the renewal period (the “Ground Lease Renewal Rate”) at $5.1 million.   

The Pokoiks Object to the Ground Lease Renewal Rate Calculation, Commence Suit

Certain members of the Pokoik family objected to the managers’ attempt to use the Leitner Appraisal to determine the Ground Lease Renewal Rate.  The Leitner Appraisal erred, argued the Pokoiks, because it calculated the value of the Property as encumbered by the long term ground lease.  This, argued the Pokoiks, was a misinterpretation of the ground lease’s renewal provision: the Leitner Appraisal construed the phrase “subject to this Lease” in the ground lease to be an encumbrance on the land’s value.  Instead, the Pokoiks contended that the “subject to the lease” language was meant simply to define the Property itself (that is, “the land [that is] subject to the lease”), not to indicate that the appraisal should discount the value based on the existence of the ground lease.

The Pokoiks commissioned their own appraisal (the “MVS Appraisal”) of the unencumbered, fee simple interest in the Property, which valued the Property at $210 million and calculated the Ground Lease Renewal Rate at $10.5 million.

Steinberg and Lieberman rejected the Pokoiks’ appraisal, mostly because it did not account for the existence of the ground lease.  By written consent dated August 28, 2014, all Norsel partners other than Plaintiffs executed a consent to a $7.2 million Ground Lease Renewal Rate based on the Leitner Appraisal.  A total of 89.2% of the partnership interests in Norsel—including other members of the Pokoik family—signed the consent.

Following Pokoik’s commencement of suit, the case took a decade long tour through the New York Courts, including two trips to the Appellate Division, generating noteworthy decisions on inspection rights (here) and derivative standing (here).  The Pokoiks’ claims were dismissed, reinstated, and pruned such that by the time the case reached a bench trial, the only remaining claims were against Michael Steinberg and Jay Lieberman—the managers of both Norsel and 575 Realty—for breach of fiduciary duty arising from the calculation of the Ground Lease Renewal Rate.

The Business Judgment Rule Applies to Defendants’ Interpretation of the Ground Lease

Following a seven-day bench trial, both parties submitted lengthy post-trial briefs.  Defendants argued that the calculation of the Ground Lease Renewal Rate was protected by the BJR: the Defendants acted in good faith, without conflict when they established the Ground Lease Renewal Rate based on the Leitner Appraisal.

The Pokoik Plaintiffs, by contrast, argued that the BJR did not apply and that the calculation of the Ground Lease Renewal Rate was subject to entire fairness review.  The managers—Michael Steinberg and Jay Lieberman—were on both sides of the deal: financially invested in both the ground lessor, Norsel, and the ground lessee, 575 Realties.  This “inherent conflict,” argued the Plaintiffs, subjected the Ground Lease Renewal Rate calculation to the entire fairness standard.  

New York County Commercial Division Justice Joel M. Cohen sided with Defendants, holding that the BJR protects Defendants’ calculation of the Ground Lease Renewal Rate.  While it was true that the Defendants were on both sides of the deal, so were the Plaintiffs.  Thus, held the Court, “[a]ll Norsel partners (including the Defendants and the Plaintiffs) stood to obtain the same benefits—and losses, if any—stemming from the fixing of the [Ground Lease Renewal Rate].” 

In so concluding, the Court arguably heightened the standard for avoiding the business judgment rule.  It was not enough for Plaintiffs to show that the Defendants were on both sides of the deal; Plaintiffs also had to show that they were not:

An ‘interested’ transaction is one in which one or more directors are on both sides of the transaction but the other shareholders challenging a transaction are not. . .  These circumstances are not present here since Plaintiffs held positions in all three relevant entities, distinguishing this case from Lewis.”

The Court went on to highlight the Plaintiffs’ failure of proof: the Plaintiffs could not show that the challenged transaction stood to put any additional monies in the hands of the Defendants or their family members: the only thing that Defendants received was the pro rata share of distributions from both affiliates—i.e., the same thing as Plaintiffs.

Applying the BJR, the Court easily concluded that Defendants’ interpretation of the ground lease—that the appraisal must consider the effect of the lease in setting the Ground Lease Renewal Rate—was “well within the bounds of management’s business judgment.”

Inherent Conflict Plus

There’s a lesson in here for future challenges to inter-affiliate transactions between entities with common ownership.  If the plaintiff also stands on both sides of the challenged deal, he should be prepared to allege and show something more than the “inherent conflict” by the decision makers. In those cases, Plaintiffs should be prepared to demonstrate why the challenged transaction stands to disproportionally benefit those in control in order to avoid application of the business judgment rule.