Search results for: corporate opportunity

Misappropriation of corporate opportunity is one of our favorite, most frequently blogged topics on New York Business Divorce. A special kind of breach of fiduciary duty, the corporate opportunity doctrine holds that “corporate fiduciaries and employees cannot . . . divert and exploit for their own benefit any opportunity that should be deemed an asset of the corporation.”

Recently, we’ve written about some rather egregious examples of corporate opportunity misappropriation: total theft of entire businesses through the secret formation of a new entity and clandestine transfer of all of the oldco’s assets to newco. For interested readers, here are links to recent articles on Ng v Asquared and O’Mahony v Whiston.

Far less frequently, because decisions involving it are quite rare, we’ve written about the doctrine of faithless servant in business divorce cases. Another special kind of breach of fiduciary duty rooted in agency law, the faithless servant doctrine holds that “[o]ne who owes a duty of fidelity to a principal and who is faithless in the performance of his services is generally disentitled to recover his compensation, whether commissions or salary,” from the first act of disloyalty.

A key difference between the two common-law doctrines: misappropriation of corporate opportunity requires proof of actual damages. Faithless servant does not: it is an equitable forfeiture doctrine requiring a disloyal (i.e., “faithless”) agent to “disgorge” all compensation earned during the period of his or her disloyalty, even if the employer suffered no ascertainable damage from the agent’s disloyalty.

For the first time on this blog, the corporate opportunity and faithless servant doctrines converge in Owen v Hurlbut, 80 Misc 3d 1234(A) [Sup Ct, Monroe County Nov. 2, 2023]).

In Owen, Monroe County Surrogate and Acting Supreme Court Justice Christopher S. Ciaccio ruled that a shareholder’s scheme to misappropriate all the assets of an entity by transferring them to a secretly-formed, new entity provided the legal basis for disgorgement of three years – and more than one and a half million dollars – of the shareholder’s employment compensation under the faithless servant doctrine.

Continue Reading A Potent Combo: Misappropriation of Corporate Opportunity Meets Faithless Servant

One of the earliest signs that a closely-held business is headed for divorce lies in how its owners treat new opportunities. When the relationship among the owners reaches a certain level of distrust, an owner presented with a potentially valuable opportunity is naturally tempted to pursue the opportunity independently, rather than through the business. That temptation explains why we business divorce litigators frequently see claims for “usurpation of corporate opportunity.”

A species of the breach of fiduciary duty claim, a claim for usurpation of corporate opportunity is derivative—asserted on behalf of the company—and disarmingly simple to allege (“You engaged in deal X personally, in violation of your fiduciary duties to bring that deal to the company”).

Despite its frequency and apparent simplicity, a claim for usurpation of corporate opportunity often is difficult to prove, requiring the plaintiff to confront a bevy of difficult questions: What about the company and the opportunity begets the legitimate expectation that the fiduciary was required to bring it to the company before pursuing it independently? What if the company lacked the funding or legal authority to pursue the opportunity? Did the fiduciary act in bad faith to personally profit from the opportunity? What if the counterparty was unwilling to deal with the company? And, perhaps most importantly, what state’s law applies to the claim?

Two recent cases out of the Manhattan Commercial Division and the U.S. District Court for the Southern District of New York provide a fine springboard to unpack these questions and explore the bounds of the corporate opportunity doctrine under New York and Delaware law.

Continue Reading A Recurring Business Divorce Feature: Usurpation of Corporate Opportunity

Strict procedural rules apply to corporate dissolution proceedings in New York, a difficult truth learned the hard way by a five-time rejected, would-be dissolution petitioner in a recent decision by Bronx County Supreme Court Justice Ruben Franco in Corner Furniture Discount Ctr., Inc. v Sapirstein, 2019 NY Slip Op 32245(U) [Sup Ct Bronx County June 14, 2019]. Four other decisions in a related case compounded the loss, as we shall see below.

The Underlying Facts

In the 1980s, Stechler and Sapirstein formed a retail furniture business. In the 2000s, Stechler’s son joined. The business expanded into four corporations. The two named plaintiffs – Corner Furniture Discount Center, Inc. and 2901 Furniture Outlet, Inc. (the “Furniture Entities”) – were operating entities. Two non-parties – Rongar Realty of N.Y., Inc. and 2926 Realty Corp. (the “Realty Entities”) – were real estate holding companies. Continue Reading How Not to Start a Corporate Dissolution Proceeding

You’ve met with your client who’s embroiled in a nasty dispute with his or her business partners.  You’ve learned the facts and reviewed the documents.  You’ve explained to your client the ins and outs, the pros and cons, the timing, expense and possible outcomes of bringing a judicial dissolution proceeding.  The client has given you the green light to start the lawsuit.  You’re at your desk, fingers on the keyboard, ready to draft papers.  What documents do you prepare, and where do you start?

If the case involves a closely held New York business corporation and you’re seeking judicial dissolution based on 50/50 deadlock or minority shareholder oppression, the rules laid out in Article 11 of the Business Corporation Law require you to file a "special proceeding" consisting minimally of two documents: (1) a petition and (2) an order to show cause (OSC).

The petition differs slightly in format but closely resembles an ordinary complaint in which you’ll set forth in numbered paragraphs all of the relevant factual allegations along with the legal claims and relief sought.  (Read here my recent post on the need to include detailed factual allegations in the petition rather than bare allegations of dysfunction or misconduct.)

The focus of this post is the OSC, which is a form of court order, prepared by the petitioner’s lawyer and affixed on top of the petition, submitted to the assigned judge for signature.  At its most basic the OSC requires the respondents to appear in court on a specified date to "show cause" why the relief demanded in the petition should not be granted.  It is used in special proceedings in lieu of the more familiar summons that accompanies a complaint in ordinary lawsuits.   

Continue Reading Dissecting the Order to Show Cause in Corporate Dissolution Proceedings

CabThe adjudication of corporate dissolution cases can and often does present any number of complex, fact-intensive issues that, if placed in the procedural context of an ordinary, plenary action, necessarily would occupy the parties in protracted pre-trial discovery proceedings including document exchange and depositions.

Dissolution cases in New York, however, are not ordinary lawsuits initiated by summons and complaint followed by discovery and trial.  Rather, the governing statutes mandate that the dissolution request be brought in the form of a so-called “special proceeding” initiated by petition and order to show cause followed usually within 4 to 6 weeks by a hearing based on the papers, akin to the manner in which a summary judgment motion is determined.  That is, the procedural rules for special proceedings laid out in Article 4 of the Civil Practice Law and Rules contemplate a potential summary disposition of the case at the initial hearing without the benefit (or detriment, depending on one’s point of view) of discovery.  CPLR Section 408 specifically requires leave of court before a party may serve a disclosure demand.

I have seen first hand and from afar many instances in which lawyers ignore the constraints on discovery in dissolution proceedings, or assume the court will rubber stamp applications for leave to serve discovery demands.  This is a mistake, as illustrated by a recent, unpublished decision by Nassau County Commercial Division Justice Timothy S. Driscoll in Matter of Kaufman (L.I. Yellow Cab Corp.), Short Form Order, Index No. 001486-09 (Sup Ct Nassau County Sept. 15, 2010).

Continue Reading Do Not Take Pre-Trial Discovery for Granted in Corporate Dissolution Proceedings

If you’re going to accuse your business partner of bad acts and ask for judicial dissolution of the business, be prepared to settle or take the case all the way to trial. That seems to be the message given to the petitioner in one recent dissolution proceeding when the court turned down her request to discontinue the case “without prejudice” to her bringing a future dissolution proceeding based on the same allegations.  Matter of Holland (Romper Nursery, Inc.), Short Form Order, Index No. 8871/07 (Sup Ct Nassau County Dec. 30, 2008).

The underlying dispute is a fascinating one involving one of the toughest nuts to crack in the realm of business divorce:  What should a court do when a 50% shareholder seeks judicial dissolution of a profitable operating company under the deadlock statute (BCL 1104) on the ground of “internal dissension” due to personal animus between the two shareholders?  I wrote an October 2004 article for the New York State Bar Association Journal on the subject, in which I concluded that

Cases decided under the internal dissension statute exhibit something of a split personality, depending on whether the court views the corporation, successful or not, as more akin to a partnership terminable at will, or as an entity distinct from its owners, to be maintained if financially viable notwithstanding internecine warfare.  Arguably, this duality is inherent in the statute’s requirement that the petitioner establish both the existence of internal dissension and that the factions are so divided that dissolution would be beneficial to the shareholders. In other words, the statute can be read such that the cessation of shareholder hostilities itself is an adequate benefit of dissolution, or it can be read to require some other benefit (i.e., financial) that may be hard to show when the business is otherwise viable and making money.

The Romper Nursery Case Background

The Romper Room Nursery School seems an unlikely setting for a bitter shareholder dispute.  Jeanie Holland and Margaret Zack as 50-50 shareholders opened the nursery school in 1975.  During the summer a day camp operates at  the school’s two locations in Great Neck and East Williston on Long Island.  The school also offers bus transportation.

Continue Reading Court Rejects Bid by Corporate Dissolution Petitioner to Voluntarily Withdraw Case Without Prejudice

Occasionally, we come across post-trial decisions with such scathing rebuke of one side that it’s difficult to imagine why the loser ever chose to take the case to trial. O’Mahony v Whiston is a perfect example.

Years into a protracted derivative lawsuit by a 20% founding shareholder against his co-founder 60% shareholders over their misappropriation of “Smithfield,” an Irish sports bar in Manhattan, New York County Commercial Division Justice Jennifer G. Schecter colorfully warned the litigants of the trial risks when she denied summary judgment:

[T]he court would be remiss if it did not take this opportunity to encourage a sober reckoning on each side, as the parties (or at least their attorneys) have an unjustifiably rosy view of their respective positions such that each side believes sanctions are warranted against the other due their contentions being frivolous. Not so. An impartial view of the record makes clear that while the parties’ actions certainly suffered from shortcomings, each side has a certain amount of justification for what they did. Before trial, perhaps cooler heads will prevail. For this reason, the pre-trial process will be delayed for 30 days, during which the parties shall personally meet for good faith settlement discussions.

Instead of settling, both sides appealed. In the resulting decision, the Appellate Division ruled: “Summary judgment was properly denied” because the record raised numerous issues of fact, including, according to the appeals court:

  • “whether a bar opened by defendants qualified as a corporate opportunity of the bar and corporation owned by plaintiffs and defendants together”;
  • “whether assets of the corporation, including its goodwill, were given to the new bar for no consideration”;
  • “whether the individual defendants looted, committed waste, or paid themselves unfair bonuses”;
  • “whether a loan issued by plaintiffs to the corporation was repaid;” and
  • “whether the individual defendants’ treatment of plaintiffs amounted to shareholder oppression.”

Issues of fact framed succinctly, the parties proceeded to a bench trial before Justice Schecter in January 2022. What resulted was an absolutely devastating finding of liability and damages against the defendant majority shareholders for misappropriation of corporate opportunity, including a rare imposition of punitive damages and an accounting surcharge. Justice Schecter’s post-trial decision is a tour de force, well worth a read. But first, the basic facts.

Continue Reading Misappropriated Watering Hole Becomes Money Judgment Sinkhole

Litigated business breakups are often highly intense and emotional for the participants. The intensity and emotion multiply when the litigants are close family members.

If you add to the mix several years and more than ten rounds of motion practice, a successful judicial dissolution and winding up, an appeal, a remand, a motion for summary judgment, and another motion for summary judgment, lawyers and clients can become exceedingly close through the experience.

This week, we’re pleased to feature a story about two longtime favorite clients and the Homerian odyssey of litigation they endured, resulting in a recent victory in the form of total dismissal of what remained of a complaint filed by a son against his own father and stepmother for dissolution of a landscape and masonry supply business and accompanying damages claims related to six parcels of real property on which the business operated based upon a theory of “misappropriation of corporate opportunity.”

The Company, its Ownership Structure, and the Six Parcels of Real Estate

Joseph founded Jos. M. Troffa Landscape and Mason Supply, Inc. (the “Company”) as sole shareholder in the 1970s. Over time, Joseph grew the Company into a very successful business.

In the 1990s, Joseph gifted his son from his first marriage, Jonathan, shortly after he graduated high school, half the shares of the Company for no consideration.

The Company operated on six adjacent parcels of real estate in East Setauket, New York, five of which Joseph and his second wife, Laura, acquired over a period of decades through two real estate holding companies, NIMT Enterprises, LLC (“NIMT”) and L.J.T. Development Enterprises, Inc. (“LJT”).

The sixth parcel – a 1.78 piece of unimproved land known as the “Compost Yard” – Joseph acquired in his own name in March 2013. According to Joseph and Laura, Jonathan always knew and agreed that NIMT (of which Jonathan was a 1% member), LJT, and Joseph were to be the owners of the properties; it was only after lawyers got involved that Jonathan devised a scheme to sue Joseph, Laura, and their real estate companies in connection with those properties.

Continue Reading A Litigation Odyssey

Under a common-law doctrine successful litigants love to hate – the “American Rule” – a party to litigation cannot recover its legal fees unless a contract, statute, or court rule expressly authorizes fee-shifting to the prevailing party.

For many clients, it’s a bitter pill to swallow to learn they cannot recover their legal fees from the other side, even if they win. But in business divorce litigation, as we’ve previously written, there are many exceptions.

A pair of brand-new Manhattan appeals court decisions highlight two exceptions to the general rule against fee-shifting, and some key differences between them.

In O’Mahony v Whiston (224 AD3d 609 [1st Dept Feb. 27, 2024]), the Court considered the propriety of a $1.8 million post-trial attorneys’ fee award to a successful plaintiff under the shareholder derivative statute, Section 626 of the Business Corporation Law (the “BCL”).

Under BCL § 626 (e), where a shareholder derivative plaintiff is “successful, in whole or in part, or if anything was received by the plaintiff” on behalf of the entity, “the court may award the plaintiff . . . including reasonable attorney’s fees . . . .”

In Seibel v Ramsay (___ AD3d ___, 2024 NY Slip Op 01617 [1st Dept Mar. 21, 2024]), the Court considered the propriety of a $4 million post-trial attorneys’ fee award to celebrity chef Gordon Ramsay under a contractual indemnification provision. As we shall see, though, Ramsay was not even a party to the contract.

I wrote about both of these exceptionally interesting cases previously (you can read my articles about the events preceding the recent appeals here and here).

I’m pleased to write about the two cases again at the finale of their ten-year-long merits litigation odysseys (except in the unlikely event one or more losing defendant obtains leave to reargue or leave to appeal to the New York State Court of Appeals).

The message of both these cases is clear. Where fee-shifting is on the table because of a statute or contract, do not underestimate the awesome (for plaintiff) and terrifying (for defendant) potential for a massive fee award if the case goes the distance to a final adjudication on the merits. In fact, as we shall see below, the Appellate Division made clear that there is nothing inherently reversible about an attorneys’ fee award far exceeding the amount of the actual damages award.

But whether the fee award is collectible, however, is an entirely different question. We’ll consider that problem at the end of this article.

Continue Reading Two Cases. Two Mammoth Fee Awards. Coup de Grâce or Pyrrhic Victory?

Some years are easier than others to select the most significant business divorce cases. In this, the 16th year I’ve published this top-10 list, the task is made especially difficult by a veritable flood of court decisions involving novel issues in business divorce cases. But select I must.

The cases I’ve selected for this year’s list include decisions by New York courts and a couple of out-of-state courts at the trial and appellate levels, involving mostly limited liability companies but also a few close corporations. All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

Doeblin v MacArthur Case law is clear that designated managing members of New York LLCs owe fiduciary duties whereas non-managing members do not. In Doeblin, Commercial Division Justice Andrea Masley was tasked with deciding whether a non-managing member who nonetheless allegedly acted in a managerial capacity owes a fiduciary duty to the company. Upon her review of applicable precedent, Justice Masley concluded that a fiduciary duty is imposed on a non-managing member who shares management duties or takes control of management duties where management duties are not shared. The facts alleged in the plaintiff’s complaint, Justice Masley held, did not make the cut. Case dismissed.

Andris v 1376 Forest Realty, LLC Section 702 of the LLC Law expressly confers standing to seek judicial dissolution on members. Section 608 provides that a deceased member’s executor “may exercise all of the member’s rights for the purpose of settling his or her estate.” Does Section 608 confer on the executor standing to seek judicial dissolution? Cases denying executors as non-members standing to pursue derivative claims suggest not. But in Andris, quoting Section 608’s language without further analysis, the Appellate Division, Second Department, affirmed the lower court’s denial of the executor’s motion for a summary judgment of dissolution based on disputed issues of fact concerning the grounds for dissolution. Given that the respondent in the lower court proceedings did not contest the executor’s standing to pursue dissolution, whether or not Andris made new law will need to be tested in future litigations.

Continue Reading Top 10 Business Divorce Cases of 2023