Franklin C. McRoberts

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This is the final installment of a three-part series about the basics of contested New York business appraisal proceedings. The first post addresses the various ways in which business owners can steer a dispute into an appraisal proceeding. The second post addresses the legal rules and principles that apply in appraisal proceedings. This final post addresses the appraisal methodologies and principles that apply in valuation proceedings. Without further ado, let’s talk accounting.

Valuation Date

The date on which a business interest is appraised – the “valuation date” – can have a huge impact on its worth. For example, for a real estate holding company in a rising market, generally speaking, the later the valuation date the greater the value. If the valuation date is earlier, the seller may receive and the buyer may pay less for an ownership stake. For most kinds of appraisal proceedings, the valuation date is set by statute, so there is little to litigate on the subject.

Under Partnership Law 69 and 73, a wrongfully withdrawn, retired, or deceased partner is entitled to have the “value” of his or her interest determined as of the date of “dissolution,” meaning the event of withdrawal, retirement, or death. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 3

A few weeks ago, this blog – in the first of a three-part series about business valuation proceedings – addressed the various statutory triggers by which owners of New York partnerships, corporations, and limited liability companies can wind up in a contested business appraisal proceeding.

So you, or your client, have found yourself in an appraisal proceeding. The question then becomes: What are the legal rules, principles, and standards that apply in the valuation proceeding itself? That is the subject of today’s article.

“Value” Versus “Fair Value”

The ultimate purpose and objective of an appraisal proceeding is to determine the correct “value,” the term found in the Partnership Law (i.e. Sections 69 and 73), or “fair value,” the term used in both the Business Corporation Law (i.e. Sections 623 and 1118) and Limited Liability Company Law (i.e. Sections 509, 1002, and 1005), of an owner’s interest in a business for the purpose of a buyout of liquidation of that ownership interest.

The interplay of the “value” and “fair value” standards raises a trio of threshold questions. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 2

Last month, seasoned business appraiser Andy Ross of Getty Marcus CPA, P.C., and I made a presentation at the Nassau County Bar Association about appraisal proceedings in business divorce cases. With the subject of business valuations front of mind, this article – the first in a three-part series – is a treetops summary of the rules governing how business owners may wind up in an appraisal proceeding. Later articles will address the legal and accounting principles that apply in the valuation proceedings.

But before we get started, some context. What exactly is a valuation proceeding? A valuation proceeding is a special kind of lawsuit in which the owners of a business litigate the “value” (the relevant standard under New York’s Partnership Law) or “fair value” (the standard under the New York Business Corporation Law and Limited Liability Company Law) of a partnership, stock, or membership interest in a business for the purpose of a potential buyout or liquidation of that owner’s interest. Appraisal proceedings may be forced, or they may be voluntary. They may involve a variety of different accounting approaches or methodologies to value an ownership interest. They are always heavily dependent upon expert testimony of accountants. For that reason, the “determination of a fact-finder as to the value of a business, if it is within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” (Matter of Wright v Irish, 156 AD3d 803 [2d Dept 2017]).

What are the ways in which a business owner can wind up in a valuation proceeding? The statutory paths, or routes, to a litigated appraisal depend on the kind of entity involved. This article discusses three basic entity forms: partnerships, corporations, and LLCs, and provides a non-exhaustive list of the most common ways to get to a valuation proceeding. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 1

With a genuine sense of loss, we bid adieu to Manhattan Commercial Division Justice Shirley Werner Kornreich, who retired at the end of May after more than three decades of service on the bench, including nearly ten years as a Justice of the Commercial Division. Her accomplishments are many and varied. She is a detailed and scholarly writer. She ran an orderly and efficient part. Invariably well prepared, she asked probing questions at oral argument, arriving quickly at the “nub” of the issue. It was a pleasure and a luxury to be a litigant in her part.

Justice Kornreich also knew and understood as well as any judge the complexities and dynamics of business divorce cases.

As a testament to Justice Kornreich’s quality as a jurist, this blog has written about her opinions on many an occasion, with some of her decisions receiving repeat treatment. Rather than quantify her massive body of work, this week’s post will summarize a half dozen or so of Justice Kornreich’s more memorable decisions in the area of business divorce. You can click on the case name to read the earlier post. Continue Reading A Trip Down Business Divorce Lane with Recently Retired Justice Shirley Werner Kornreich

Lawyers are famous for arguing seemingly inconsistent positions at the same time. We practitioners lovingly refer to the technique as “arguing in the alternative.” The famous Texas trial lawyer, Richard “Racehorse” Haynes, gave a vivid example:

Say you sue me because you say my dog bit you. Well, this is my defense: My dog doesn’t bite. And second, in the alternative, my dog was tied up that night. And third, I don’t believe you really got bit. And fourth, I don’t have a dog.

A litigator’s stock in trade, arguing multiple positions at once can be vital to advance the client’s interests and to preserve arguments for later appellate review. Sometimes, though, one comes across arguments so seemingly in tension that they don’t quite seem able to coexist. A recent appellate decision, Alam v Uddin, 2018 NY Slip Op 02763 [2d Dept Apr. 25, 2018], involved a rather odd array of apparently conflicting arguments on both sides. Continue Reading Corporate Frankenstein “Partnership to Form a Corporation” Lives Another Day

In business divorce litigation, petitioners / plaintiffs often want to start the case with a bang. A common tactic is to file a petition / complaint simultaneously with an injunction motion. Often there is a real need for an injunction – the respondent / defendant may be engaging in activities that could cause real, irreparable harm.

But often another objective is that if the injunction motion succeeds, it will be an early win in the case, set the stage favorably for the litigation to come, put significant leverage on the respondent / defendant by restricting its freedom to operate the business, and possibly result in a speedier resolution of the case. If the injunction motion or complaint itself has vulnerabilities, however, a case meant to start with a bang may end with an unceremonious whimper. That is just one lesson from a recent decision by Manhattan Commercial Division Justice Saliann Scarpulla in Pappas v 38-40 LLC, 2018 NY Slip Op 30329(U) [Sup Ct NY County Feb. 22, 2018]). Continue Reading Operating Agreement Dooms Derivative Claims by Deceased LLC Member’s Estate

How can majority business owners legally rid themselves of a problematic minority owner? Not by transferring the business’s assets to another entity for no consideration. That was the conclusion of Manhattan Commercial Division Justice Shirley Werner Kornreich last month in a lawsuit over a minority shareholder’s stake in Bareburger, Inc., owner of its namesake restaurant chain.

The Bareburger Litigation

In Stavroulakis v Pelakanos, 2018 NY Slip Op 50180(U) [Sup Ct NY County Feb 13, 2018], Bareburger had no written shareholders agreement. Stavroulakis owned 16% of the corporation. He and his co-owners were friends before founding the business. After Bareburger took off, Stavroulakis’ co-owners complained that he was not involved enough to justify his ownership so, as related by Justice Kornreich, they did something rather drastic:

Unbeknownst to him and without his consent, after plaintiff moved to Greece, the defendants, who collectively owned the rest of the Company, transferred all of the Company’s assets to other entities in which defendants (but not plaintiff) have an interest. They did so for no consideration either to plaintiff or the Company, rendering the Company an empty shell.

Continue Reading The Cash-Out Merger Solution to the Problem Minority Owner

Under the right set of facts, New York courts occasionally find remedies for LLC owners not explicitly authorized in the Limited Liability Company Law (“LLC Law”). Judges have a natural inclination to try to find solutions for legal problems where existing law falls short, which is part of how the common law came to be.

One striking example is the LLC derivative cause of action. In Tzolis v Wolff, 10 NY3d 100 [2008], the Court of Appeals ruled that members of an LLC “may bring derivative suits on the LLC’s behalf, even though there are no provisions governing such suits in the Limited Liability Company Law,” and even though the Legislature considered, but rejected, including a derivative right of action in the LLC Law.

Another remedy not found in the LLC statutes is the so-called “equitable buyout” in LLC dissolution proceedings.

In a nutshell, an equitable buyout grants an LLC member the possibility upon dissolution of the company (under circumstances yet to be well defined by the courts) of the ability to purchase the other member’s interest as an alternative to liquidation and sale of the company’s assets at auction. An equitable buyout results in one member involuntarily selling his or her equity to the other, and the other member becoming the business’s sole owner. The entity’s existence continues post-buyout – despite ostensibly being “dissolved.” Continue Reading The LLC Equitable Buyout: Past, Present, Future

As LLCs have become the dominant form of closely-held business in New York, cases involving dissolution of partnerships have become more and more rare. Section 63 of the Partnership Law is the statute governing judicial dissolution of New York general partnerships. The last time this blog wrote about a general partnership dissolution under Partnership Law § 63 was Summer 2015, a testimonial to how uncommon they have become.

After a lengthy interlude, along comes Magid v Magid, 2017 NY Slip Op 32603(U) [Sup Ct NY County Dec. 14, 2017].

Magid involved a fact pattern familiar to this blog’s regular readers – an entity owned by siblings, an income-producing property, a rising real estate market, some family members who want to sell, others who do not. Litigation ensues. Usually, the various dissolution statutes under the Business Corporation Law (BCL) or the Limited Liability Company Law (LLC Law) provide the standards to resolve the dispute.

In Magid, Manhattan Commercial Division Justice Eileen Bransten considered the applicable standards for judicial dissolution – particularly based on deadlock – under Partnership Law § 63. Magid raises the question – is the standard for judicial dissolution based on deadlock under Partnership Law § 63 any different than under BCL § 1104, the deadlock statute for corporation dissolutions? Continue Reading Rare Partnership Dissolution Decision Applies Deadlock Standard to Dissolution Under Partnership Law

The sudden death of Alexander Calderwood, the brilliant but troubled co-founder of the Ace brand of hotels, resulted in some fierce litigation between Calderwood’s estate and Calderwood’s LLC co-member over the nature of his estate’s membership interest in the company after his death. The litigation came to a head earlier this month, when Justice Barbara R. Kapnick issued a scholarly decision for a unanimous panel of the Appellate Division, First Department in Estate of Calderwood v ACE Group Int’l, LLC, 2017 NY Slip Op 08750 [1st Dept Dec. 14, 2017].

Boiled down, the question on appeal was whether, under Delaware law, Calderwood’s estate was a bona fide member of the LLC with all of a member’s associated rights and privileges, or instead, a mere assignee of Calderwood’s membership interest. As written about in a post last Spring (read here), New York County Commercial Division Justice Shirley Werner Kornreich issued a decision dismissing most of the Estate’s amended complaint, holding that the Estate lacked membership status in the LLC upon Calderwood’s death. Let’s see how the appeals court considered the issue. Continue Reading Delaware Contractarian Principles Prevail in Appeal Over Deceased Ace Hotel Founder’s LLC Interest