A recent decision from Manhattan Commercial Division Justice Robert R. Reed explores some of the mighty defensive powers, and some of the practical limits, of the Section 1118 buyout election in corporation judicial dissolution proceedings.

Section 1118 of the Business Corporation Law (the “BCL”) empowers the corporation, or any of its shareholders, to respond to a shareholder’s lawsuit to judicially dissolve the corporation for alleged minority oppression, looting, waste, or diversion under BCL § 1104-a by formally electing to purchase the petitioning shareholder’s equity for “fair value.”

In many ways, the outcome of a BCL § 1118 election resembles that of a minority shareholder’s election to dissent from a cash-out merger, a sale of all or substantially all assets, or any other corporate transaction triggering statutory dissenting shareholder appraisal rights under BCL § 623: the election essentially stops dead in its tracks litigation over the merits of the dissolution proceeding or other challenged transaction, converting the litigation to one solely for valuation of, and payment for, the petitioner’s shares.

In Heredia v Lanco Brokerage Corp. (88 Misc 3d 1213(A) [Sup Ct, NY County Jan. 23, 2026]), Justice Reed considered the impact of a well-timed BCL § 1118 buyout election upon the suing shareholder’s motion for a preliminary injunction, his motion for disqualification of defense counsel, and the defendants’ motion to stay disclosure.

Heredia provides some valuable lessons for business divorce practitioners:

• A BCL § 1118 buyout election of a petition or complaint containing a claim for BCL § 1104-a dissolution commingled with claims for common-law or BCL § 1104 deadlock dissolution may stay litigation of all the dissolution claims, even for common-law and BCL § 1104 dissolution, to which BCL § 1118 ordinarily is no defense

• A BCL § 1118 buyout election can fundamentally undermine the petitioner’s motion for a preliminary injunction, especially where the motion seeks control or management rights in the corporation

• A BCL § 1118 buyout election can potentially undermine a motion to disqualify defense counsel jointly representing the corporation and its shareholders for alleged conflicts of interest between the corporation and its shareholders

• A BCL § 1118 buyout election may not defeat the petitioner’s right to access books and records of the corporation, nor to an accounting from the other shareholders, at least to the extent related to issues of valuation

• Where the petitioner brings claims for dissolution together with derivative claims for money damages against the respondent shareholders, a BCL § 1118 buyout election may not stay litigation of the derivative claims because derivative claims often are “inextricably intertwined” with issues of valuation

• In a proper case, upon a timely BCL § 1118 buyout election, a busy Commercial Division Justice may be inclined to refer the entire case, including all issues related to disclosure and valuation, to a Judicial Hearing Officer or Special Referee

According to his amended complaint, Plaintiff Jony Heredia (“Heredia”) is the surviving husband, executor, and sole beneficiary of the estate (the “Estate”) of Rosanna Monteagudo (the “Monteagudo”). Until her death in 2023, Monteagudo was 50% shareholder of an insurance brokerage firm called Lanco Brokerage Corp. (“Lanco”). Defendants Jesus Acosta (“Acosta”) and Kenia Tavarez (“Tavarez”) owned the remaining 35% and 15%, respectively, of Lanco’s shares.

Heredia alleged that Lanco purchased, paid for, and collected the proceeds from, a life insurance policy on Monteagudo’s life for $500,000. Heredia alleged that the shareholders had an agreement to use life insurance proceeds to finance buyouts of each other’s stock upon death.

Heredia alleged that Acosta and Tavarez refused to buy out the Estate’s shares, refused to make distributions, refused to provide access to books, records, and financial information to determine the value of Monteagudo’s shares, improperly employed family members, engaged in waste and misappropriation, and excluded Heredia from participating in the business. The amended complaint contained 19 claims, mostly pled derivatively on behalf of Lanco, plus a single blended claim for dissolution under (i) the common law, (ii) BCL § 1104, and/or (iii) BCL § 1104-a. Of course, these three dissolution remedies are very distinct – different essential elements, different procedural rules, different defenses.

The litigation began, as these things often do, with an order to show cause for an injunction, part of which included a proposed mandate to permit Heredia to “participate fully” in the business (read here and here).

Followed quickly on the heels of the injunction motion was an order to show cause to disqualify defense counsel from jointly representing Lanco, Acosta, and Tavarez because of alleged conflicts of interest (read here and here).

Followed quickly on the heels of the disqualification motion was a notice of election by Lanco, Acosta, and Tavarez to purchase the Estate’s shares for fair value under BCL § 1118.

And followed quickly on the heels of the buyout election was Lanco, Acosta, and Tavarez’s order to show cause to stay disclosure “except that necessary to determine the fair value of the Estate’s interest in Lanco” (read here). Apparently, the Court never signed the order to show cause, but ruled on it anyway,

Justice Reed held oral argument, issuing his written decision the following month. There’s more to unpack than we have space to write, so we’ll focus upon the impact of the BCL § 1118 buyout election upon the court’s rulings.

On the injunction motion, the Court wrote:

While plaintiffs seek mandatory injunctive relief to include Heredia in the management of Lanco’s business operations, the true relief plaintiffs seek is the value of the Estate’s shares in the business itself. It is clear from the complaint that Heredia brings the instant action to preserve the corporation, for the sole purpose of safeguarding the value of the Estate’s equity interest. . . .

The court notes that, on October 16, 2025, defendants filed a Notice of Purchase Election pursuant to BCL § 1118 (a). BCL § 1118 (a) provides the non-petitioning shareholders with an absolute right to avoid the dissolution proceedings and any possibility of the Company’s liquidation by electing to purchase petitioner’s shares at their fair value and upon terms and conditions approved by the court. This right of election is a defense mechanism available to the non-petitioning party in any proceeding brought pursuant to BCL 1104-a. . . .

Courts prefer for dissenting minority shareholders to be bought out, rather than ordering dissolution, so that the corporation can continue to exist. In that there has been an election to purchase the Estate’s shares pursuant to BCL § 1118 (a), the legitimate ends of the litigation would be fostered by petitioner expeditiously proceeding with a hearing to determine the fair value of his interest in the corporation. Since Heredia has neither alleged nor shown himself to be active in the daily operations of the business, it is this court’s view that it would be in plaintiffs’ best interest to secure the fair value of the Estate’s shares, and not to continue litigation that may diminish the value of the corporation (citation modified).

In a most interesting passage, the Court wrote that a BCL § 1118 election contemplates some degree of `control transference to the buyer:

[P]laintiffs’ request to participate in the management of Lanco is denied. While the Estate retains all rights incident to share ownership during the pendency of the valuation proceeding–including rights to information, to dividends if declared, and to challenge breaches of fiduciary duty–plaintiffs have no right to participate in day-to-day management or business decisions of the enterprise. The Section 1118 election contemplates that the electing shareholders will continue to operate the business pending the buyout, subject to their ongoing fiduciary obligations (citation modified).

But the Court granted the portions of the injunction motion seeking access to books, records, and financial information, and for an accounting, writing that “Defendants’ election does not terminate or suspend plaintiffs’ inspection rights,” and because “the deceased shareholder and individual defendants considered each other partners and held themselves out to the public as partners, the parties owe each other a fiduciary duty” to account.

Turning to the disqualification motion, the Court wrote:

Disqualification of defendants’ counsel is not warranted here. To the extent the parties have differing interests with respect to the dissolution claims brought under BCL § 1104 and § 1104-a, such claims shall be stayed pursuant to defendants’ exercise of election to purchase shares and pending a valuation hearing and determination before a referee. To the extent the parties’ interests differ with respect to the derivative claims, the court is satisfied that dual representation is appropriate and that separate counsel is not warranted.

Finally turning to the disclosure stay motion, the Court wrote:

While the dissolution proceeding itself is stayed upon defendants’ filing of a Notice of Election pursuant to BCL § 1118, plaintiffs’ derivative claims are not similarly stayed. The fair value of the shares must reflect the actual worth of the corporation, and plaintiffs’ allegations of corporate waste, self-dealing, and other misconduct, if proven, may adversely impact the valuation. Therefore, discovery concerning the derivative or non-dissolution claims must proceed in tandem with the determination of the shares’ fair value as they are inextricably intertwined, subject to appropriate limitations to ensure that discovery remains focused on valuation-related issues. Discovery into matters collateral to valuation, or into the underlying dissolution claims, which are stayed, shall not be permitted (citation modified).

The Court concluded its opinion by referring the entire proceeding to a referee to conduct disclosure, and to hear and report on valuation:

Given the complexity of the valuation issues and the interrelated nature of the waste and misconduct claims, this matter is appropriately referred to a referee to hear and report on the fair value of plaintiffs’ shares. An order of reference allows the court to direct that a referee perform a particular act or to receive and report on evidence. In this case, the referee shall be tasked with, first, determining the fair value of plaintiffs’ shares as of the date specified by BCL § 1118 (b), and second, hearing evidence and making findings of fact and conclusions of law regarding plaintiffs’ claims of waste of corporate assets, oppressive conduct, and corporate misconduct, to the extent that such claims may affect the valuation of the corporation or the fair value of plaintiffs’ shares (citation modified).

Heredia is a prime example of effective strategic use of a BCL § 1118 buyout election to defend against a variety of legal challenges at the same time – dissolution, injunction, disqualification, disclosure.

But, of course, it does not mean victory is at hand for Lanco, Acosta, and Tavarez. Far from it. They must now gird themselves to pay a potentially hefty fair value award, with prejudgment interest running from the day before commencement of the dissolution lawsuit, with potential surcharges or additions to the fair value award to the extent the Estate prevails on its derivative claims. Plus, of course, the costs of litigation to get there. On that point, Justice Reed wrote: “To the extent that the individual defendants have used Lanco funds to pay their legal fees . . ., the issue may be examined at the time of the hearing, and, if necessary, appropriately provided for in the judgment to be entered following the hearing.” One should never underestimate the impact of a potential fee-shift upon a final judgment.

Unfortunately for legal voyeurs, NYSCEF filings tend to get more scarce after an order of reference. We’ll keep an eye out for future decisions on the fair value portion of the case. Maybe we’ll encounter Heredia again on New York Business Divorce.