Franklin C. McRoberts

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Years ago, we wrote about the perils of “impromptu” settlements in business divorce cases – settlements eked out at the courthouse, on the fly, under pressure, during conferences, hearings, or trials. The resulting agreements tend to be memorialized in on-the-record, transcribed settlements made verbally between lawyers, clients, and the judge.

In-court settlements are both common and vital to litigation, the ultimate goal of which, of course, is to resolve disputes. But sometimes the parties’ eagerness to resolve a lengthy, difficult litigation can cause them to overlook or ignore subtle (or not-so-subtle) aspects of the deal vital to the overall transaction.

In a recent decision, fissures in the façade of an impromptu settlement began to appear almost from the moment the parties put their agreement on the record. What followed was a series of painful, two-and-a-half year, post-settlement proceedings – a veritable parade of horribles that reached its climax in a decision last month by a Manhattan appeals court in Kadosh v Kadosh, 169 AD3d 439 [1st Dept Feb. 7, 2019]. Continue Reading A Pig in a Poke: The Rollercoaster Kadosh Settlement Litigation

It’s simply in the nature of things that business divorce litigants tend to accuse one another of all manner of heinous, dastardly misdeeds. Phrases like “oppression,” “fraud,” “deceit,” “theft,” “siphoning” of assets, “diversion” of opportunities, etc., are the norm. As a litigant, if you make those kinds of allegations, and they turn out to be unsuccessful, or you withdraw them, can you be sued for defamation? Staten Island Supreme Court Justice Wayne M. Ozzi considered that question in Seneca v Cangro, 2018 NY Slip Op 33404(U) [Sup Ct Richmond County Nov. 27, 2018], a lawsuit pitting an uncle against his nephews over claims they defamed him while suing to dissolve three family-owned entities.

The Family Businesses

In 1962, ancestors of the current antagonists formed C. Seneca Construction, Inc. (the “Corporation”), a real property holding, management, and construction company. In 2004, the family expanded its business with the formation of two additional real property companies organized as LLCs (the “LLCs”). Pursuant to written operating agreements, one of which you can read here, Anthony Seneca was a 25% member of the LLCs, and his nephews, Emil and Carlo Cangro, collectively owned 25%. Anthony, Emil, and Carlo allegedly owned shares of stock in the Corporation in the same percentages. Continue Reading Sue for Dissolution – Get Sued for Defamation?

After 35 years, Matter of Kemp & Beatley, Inc. (64 NY2d 63 [1984]), remains the leading authority in New York on oppression-based corporate dissolution. In Kemp & Beatley, the Court of Appeals announced a now-venerable legal rule: “Assuming the petitioner has set forth a prima facie case of oppressive conduct,” a shareholder wishing to “forestall dissolution” must “demonstrate to the court the existence of an adequate, alternative remedy.” In practice, what this means is that courts must consider whether a buyout will provide the petitioning shareholder a “reasonable means of withdrawing his or her investment.”

A recent decision by a Manhattan-based appeals court, Campbell v McCall’s Bronxwood Funeral Home, Inc., 2019 NY Slip Op 00182 [1st Dept Jan. 10, 2019], presents a number of interesting questions about how courts should apply Kemp & Beatley’s pronouncement that courts must consider an “adequate, alternative remedy” to dissolution in the face of a written shareholder’s agreement that provides a formula and method for buying out a shareholder’s stock. Campbell is an epic 12-year litigation with seemingly no end in sight. Continue Reading A Fresh Take on an Old Doctrine – The “Adequate, Alternative Remedy” to Dissolution

Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.

With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.

Three Memorable Decisions from Justice Ramos

For Justice Ramos, we focus on three LLC cases.

In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members. Continue Reading A Fond Adieu to Two Giants of the Manhattan Commercial Division Bench

A basic and well-known principle of partnership law is that, absent an agreement to the contrary, general partners have authority to unilaterally bind the partnership to contracts with third parties.

In New York, the rule is codified in Section 20 (1) of the Partnership Law, which states:

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership . . .

Generally speaking, partners also have the power to unilaterally convey partnership real property, as codified in Section 21 of the Partnership Law which states, “Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name . . .”

Important restrictions exist, though – statutory and potentially contractual – on general partners’ ability to bind the partnership to transactions which may, in effect, cause the dissolution of the business. These restrictions can be a trap for the ill-informed, as emphasized by a recent Brooklyn appeals court decision in Camuso v Brooklyn Portfolio, LLC, 164 AD3d 739 [2d Dept 2018]. Camuso is a reminder that careful due diligence is vital when buying partnership real property. Continue Reading When Dealing in Partnership Owned Real Property, Caveat Emptor

Let’s face it. In business divorce, the accounting cause of action doesn’t get a lot of love. It’s not as sexy as the torts (conversion, breach of fiduciary duty, waste, etc). It lacks the oomph of judicial dissolution.

Nonetheless, accounting claims are ubiquitous in business divorce litigation, pleaded practically as a matter of course. Sometimes the claim is tacked on as if by rote, perhaps simply to beef up a petition, complaint, or counter complaint. But other times, like the books and records proceeding, the accounting cause of action can be a vital tool in the closely-held business owner’s litigation toolbox.

Ancient Roots

The accounting cause of action has its roots in a basic, ancient principle of partnership law: partners owe one another fiduciary duties, including the duty to account. The common-law duty of partners to account to one another and to the partnership is codified in Sections 42, 43, and 44 of the New York Partnership Law. Although there are not any quite comparable statutes in the Business Corporation Law (Section 720 provides a narrower right to sue a director or officer for an accounting) or the Limited Liability Company Law, it is well-settled that the obligation of business owners to account to one another is fully applicable to closely-held corporations and LLCs. Continue Reading Accounting Unchained: Is the Closely Held Business Owner’s Right to an Accounting Absolute?

Last week, this blog wrote about a decision by Manhattan Commercial Division Justice Saliann Scarpulla in the burgeoning Yu family melee, in that case pitting one brother against the other and their sister over dissolution of two single-asset real estate holding LLCs. In her decision, Justice Scarpulla denied dissolution of the LLCs, despite the plaintiff’s allegations that his brother and sister had a personal “vendetta” against him, which they carried out by amending the operating agreement to remove the plaintiff as a manager, authorizing a mandatory capital, and, when he was unable to meet the capital call, foreclosing on his membership interest.

This week, we look at a companion decision by Justice Scarpulla, issued the same day as the first, expanding the intra-family brouhaha to include the three siblings’ parents. In Matter of Yu v Bong Yu, 2018 NY Slip Op 32009(U) [Sup Ct, NY County Aug. 15, 2018], the court considered the important but novel question of what impact, if any, does a shareholder’s assignment of voting rights under a stock pledge agreement have on his or her standing to sue for statutory dissolution of the business as well as under the common law. Continue Reading Stock Pledge Agreement Defeats Minority Shareholder’s Standing to Sue for Statutory But Not Common-Law Dissolution

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