Access to Books and Records

Over the last several years, the books-and-records proceeding and its corresponding shareholder rights of inspection seem to have entered a bit of renaissance period in the courts. We here at New York Business Divorce have reported on at least nine decisions primarily addressing the topic since September 2014, going on record to proclaim the phenomenon as a “boost” for the summary proceeding, by which minority owners in closely-held businesses can get a window into the management and operation of the companies from which they’ve been shut out. We’ve even gone so far as to suggest that books-and-records proceedings may be “on a roll” of late, both in terms of an expansion what constitutes a “proper purpose” for bringing the proceeding, as well as in terms of the scope of information attainable.

That trend, at least with respect to the frequency with which issues related to inspection rights are being litigated, appears to be continuing into 2018. What follows are summaries of three of this year’s more notable decisions addressing inspection rights – all from Manhattan Supreme Court, as it happens.

But first, a quick refresher on the subject matter at hand…

Books-and-records proceedings and inspection rights generally

In New York, the books-and-record proceeding – much like the dissolution and appraisal proceedings with which readers of this blog surely are familiar – is a “special proceeding” under Article 4 of the Civil Practice Law and Rules. Special proceedings are expedited and summary in nature such that, in the language of CPLR 409, “[t]he court shall make a summary determination upon the pleadings, papers and admissions to the extent that no triable issues of fact are raised” and “may make any orders permitted on a motion for summary judgment.” In other words, the books-and-records proceeding is teed up from the outset for relief on an accelerated basis.

That relief is available with respect to all business forms – including corporations and limited liability companies, as well as co-ops, condominiums, and partnerships – and is governed by both statute and the common law. When petitioning for relief under the Business Corporation Law, BCL § 624 requires the petitioning shareholder first to have made a pre-suit demand upon the company complete with an affidavit of proper purpose. There’s no such analogue in the Limited Liability Company Law’s counterpart, LLCL § 1102.

As with dissolution and appraisal proceedings under BCL §§ 1104, 1104-a and 623, venue for the books-and-records proceeding typically is fixed in “the supreme court in the judicial district where the office of the corporation is located.” There’s no standing requirement, as in dissolution proceedings under BCL §§ 1104 and 1104-a, that the petitioner possess some minimum stock ownership percentage before running into court.

Unlike directors and managers, whose rights of inspection are “absolute and unqualified” to allow them carry out their fiduciary responsibilities in operating the business, the inspection rights of minority shareholders and members are limited in nature. This is particularly true under the governing statutes – say, BCL § 624 and LLCL § 1102 – which specifically (and with some admitted paucity) delineate the kinds of records to which a shareholder or member is entitled.

The common law is more generous, extending minority owners’ inspection rights beyond the materials itemized in the statutes and ultimately leaving the matter of scope to the presiding judge’s discretion. That scope recently has been expanded to include, for example, the right of a petitioning shareholder of a holding company to inspect the records of the company’s wholly-owned subsidiary in which the petitioner has no ownership interest (Matter of Pokoik v 575 Realties, Inc., 143 AD3d 487 [1st Dept 2016] [discussed here]). As with common-law dissolution, the common-law right of inspection was supplemented, not superseded, by subsequent statutory rights.

The standard a books-and-records petitioner must meet is one of “good faith and proper purpose.” As noted in the “boost” and “on a roll” references above, the definition of “proper purpose” also has been expanded of late to include, for example, the right of a minority owner to seek litigation fodder on the basis of suspected control-owner misconduct, “even if the inspection ultimately establishes that the board engaged in no wrongdoing” (see Retirement Plan for Gen. Empls. of City of N. Miami Beach v. McGraw Hill Cos., Inc., 120 AD3d 1052 [1st Dept 2014]; see also Novikov v Oceana Holdings Corp., 46 Misc3d 561 [Sup Ct, Kings County 2014] [discussed here]). Other commonly-asserted proper purposes include the right to obtain information in order to determine the value of one’s stock or to investigate the propriety (or impropriety) of a company’s dividend/distribution policy (or lack thereof).

If the books-and-records petitioner is able to establish that her demand for company information is relevant and necessary and for a valid purpose, then the burden shifts to the company and its control-owners to show bad faith and an improper purpose – for example, that the petitioner’s overbroad demand was meant only to harass or to obtain trades secrets or other proprietary business information to aid a competitor. In the event of sharply-conflicting and equally-persuasive allegations, the court may hold a hearing to determine issues concerning proper purpose and scope.

Now, back to our regularly-scheduled program…

Inspection rights are a gas, gas, gas!

Earlier this month, in Atlantis Management Group II LLC v Nabe (2018 NY Slip Op 32460[U] [Sup Ct, NY County, October 1, 2018]), Manhattan Commercial Division Justice Saliann Scarpulla, whose insightful decisions are no strangers to this blog, found that an outside investor-member of four NYC gas stations organized as LLCs was entitled to the books and records specifically listed in LLCL § 1102 and the parties’ operating agreement.

In Atlantis, the investor-member sued the defendant control-owners for an accounting and sought to inspect the companies’ books when the gross receipts and profits of one of the gas stations allegedly shot up after a neighboring station shut down. The control-owners countered for declaratory relief, claiming that the parties orally had amended their operating agreement under which the investor-member allegedly agreed to a flat $10K per month in lieu of any profit distributions and otherwise agreed to dispense with the control-owners’ duty to provide financial information.

Justice Scarpulla would have none of it. Never mind that, under LLCL § 102, oral operating agreements aren’t recognized in New York – an argument that the investor-member apparently didn’t make and that the court didn’t sua sponte raise in its decision – the court found not only that the investor-member had an “unconditional and distinct” right to inspect under LLCL § 1102 and the parties’ written operating agreement, but also that the control-owners’ stiff-arm tactics were “inconsistent with their fiduciary duties.”

Inspection rights and the attorney-client privilege

Speaking of the nonexistence of oral operating agreements in New York, last month in Jarmuth v Leonard (2018 NY Slip Op 32155[U] [Sup Ct, NY County, September 5, 2018]), Manhattan Supreme Court Justice Kelly O’Neill Levy – architect of the increasingly infamous Shapiro doctrine, which allows for the unilateral adoption without prior notice of an operating agreement by a majority – found that a shareholder-resident in a NYC co-op was entitled under BCL § 624 to introduce at the deposition of a board member meeting minutes allegedly memorializing advice from the co-op’s counsel given to the board.

In Jarmuth, the resident-shareholder sued the co-op and its board of directors for fiduciary breach and corporate waste when the directors decided at a board meeting to settle an underlying property-damage case against the co-op and one of the directors individually and to assume all of the co-op’s related legal fees. The shareholder-resident sought to confront the defendant-board member with a copy of the minutes at her deposition. The co-op objected on the basis of privilege, arguing in an attorney “briefirmation” that the minutes “memorializ[ed] counsel’s strategic discussions with the Board concerning the wisdom of a potential settlement of the [underlying] litigation and the ratification by the Board.”

Justice O’Neill Levy didn’t buy the co-op’s argument, particularly given the fact that the minutes otherwise were available to all of the co-op’s shareholders and thus weren’t intended to be confidential. The court then went on to cite the plaintiff’s rights of inspection under BCL § 624 and the common law and found that “[s]ince shareholders not on the Board have access to the meeting minutes, they are not privileged and may be introduced at further depositions.”

Inspection rights and pop divas

Finally, earlier this summer in Madonna Ciccone v One West 64th Street, Inc. (2018 Slip Op 31372[U] [Sup Ct, NY County, June 25, 2018]) (yes, that Madonna), Manhattan Supreme Court Justice Gerald Lebovits – who, in addition to issuing well-written and reasoned decisions, offers practitioners informative tips on legal writing and all matters New York practice in his monthly NYSBA Journal column, “The Legal Writer” – arguably bucked the recent trend in favor of shareholder inspection rights, finding that Madonna’s demand to inspect her co-op’s books and records didn’t meet the requisite standard.

In Ciccone, Madonna sued her co-op a little over two years after the board amended its proprietary lease – allegedly with the pop diva specifically in mind – to preclude her children and domestic workers from living in her apartment unless she too was “in residence.” Madonna alleged that the co-op breached the covenant of good faith and fair dealing and sought to have the amendment declared unenforceable. She also sought to inspect all documents related to amendment.

In a prior decision and order, the court dismissed Madonna’s causes of action for declaratory relief and breach of the implied covenant on the basis of the four-month limitations period for proceedings against a “body or officer” under CPLR 217. Despite the fact that the guts of her case had been dismissed, Madonna persisted with her books-and-records claim, arguing that her desire “to investigate how and why her lease was amended so she can protect her children so that they can live in [the apartment] as a family” was a proper purpose.

Justice Lebovits disagreed, finding that Madonna “does not need those materials anymore to prove a case that, by law, she is no longer allowed to prove” and that “[t]o seek the records at this phase is merely harassing.” The court stopped short of dismissing Madonna’s lone remaining claim, however, hinting that the defendant co-op hadn’t asked him to do so. According to the case docket as of the date of this post, the defendant apparently didn’t get the hint.

“We are poster-boys for why family members should not go into business together.”

So says respondent Paul Vaccari in his affidavit opposing the petition of his brothers Richard and Peter seeking to dissolve their jointly owned corporation that owns a five-story, mixed-use building in Manhattan’s Hell’s Kitchen, housing the operations of Piccinini Brothers, a third-generation wholesale butcher and purveyor of meat, poultry and game established by the brothers’ grandfather and great-uncle in the 1920’s.

The family-owned business at the center of Vaccari v Vaccari, 2018 NY Slip Op 30546(U) [Sup Ct NY County Mar. 28, 2018], decided last month by veteran Manhattan Commercial Division Justice Eileen Bransten, is a classic example of fraying family bonds in the successive ownership generations caused by divergent career interests and sibling sense of injustice over disparate treatment by their parents.

While Vaccari will not go down in the annals of business divorce litigation as a landmark case, it does add incrementally and usefully to the body of case law addressing the grounds available or not to establish minority shareholder oppression. Justice Bransten’s opinion also serves as an important reminder to counsel in dissolution proceedings of their summary nature and of the potentially high cost of noncompliance with the Commercial Division’s practice rules. Continue Reading Shareholder Oppression Requires More Than Denial of Access to Company Information

This winter forever will be remembered in the Northeast as the winter of the “bomb cyclone,” which gets credit for the 6º temperature and bone-chilling winds howling outside as I write this. So in its honor, I’m accelerating my annual Winter Case Notes synopses of recent business divorce cases, which normally don’t appear until later in the season.

This year’s selections include a variety of interesting issues, including LLC dissolution based on deadlock; the survival of an LLC membership interest after bankruptcy; application of the entire-fairness test in a challenge to a cash-out merger; an interim request for reinstatement by an expelled LLC member; and a successful appeal from a fee award in a shareholder derivative action.

Deadlock Between LLC’s Co-Managers Requires Hearing in Dissolution Proceeding

Advanced 23, LLC v Chamber House Partners, LLC, 2017 NY Slip Op 32662(U) [Sup Ct NY County Dec. 15, 2017].  Deadlock is not an independent basis for judicial dissolution of New York LLC’s under the governing standard adopted in the 1545 Ocean Avenue case but, as Manhattan Commercial Division Justice Saliann Scarpulla explains in her decision, when two co-equal managers are unable to cooperate, the court “must consider the managers’ disagreement in light of the operating agreement and the continued ability of [the LLC] to function in that context.” In Advanced 23, the co-managers exchanged accusations of bad acts and omissions, e.g., one of them transferring LLC funds to an unauthorized bank account, raising material issues of fact as to the effectiveness of the LLC’s management and therefore requiring an evidentiary hearing, which is just what Justice Scarpulla ordered. Of further note, in a companion decision denying the respondent’s motion to dismiss the petition (read here), Justice Scarpulla rejected without discussion the respondent’s argument that judicial dissolution under LLC Law § 702 was unavailable based on a provision in the operating agreement stating that the LLC “will be dissolved only upon the unanimous determination of the Members to dissolve.” In that regard, the decision aligns with Justice Stephen Bucaria’s holding in Matter of Youngwall, that even an express waiver of the right to seek judicial dissolution of an LLC is void as against public policy. Continue Reading Winter Case Notes: LLC Deadlock and Other Recent Decisions of Interest

I wish I could take credit for it, but I can’t. The phrase “bare naked assignee” was coined by the preeminent scholar and LLC maven Professor Daniel Kleinberger whose massive oeuvre (not to mention his guest posts on this blog here and here) includes a wonderful article published in 2009 called The Plight of the Bare Naked Assignee (available here on SSRN ). As described in the abstract, the article addresses the “new and separate opportunity for oppression” that “exists because LLC law purports to (1) recognize a species of persons holding legal rights vis-á-vis the LLC (assignees) while (2) denying those persons any remedies whatsoever in connection with those rights.”

Under the LLC statutes in New York and most other states, except as otherwise provided in the operating agreement, LLC membership interests are freely assignable in whole or in part. As the Professor’s article explains, the bedrock “pick your partner” principle of partnership law found expression in the default rules of LLC statutes which, contrary to traditional corporation laws, require majority (or unanimous) consent of the other LLC members for an assignee to become a full-fledged member with both economic and voting/management rights. Typical of these statutes, New York’s LLC Law § 603 provides that, absent such consent, the assignee has no right to participate in LLC management “or to exercise any rights or powers of a member” and only has the right “to receive, to the extent assigned, the distributions and allocations of profits and losses to which the assignor would be entitled.”

The vast majority of written operating agreements that I’ve encountered include detailed articles addressing the rights of members to assign (or not) their membership interests and, when permitted, what if any rights non-member assignees possess other than the right to receive distributions and profit/loss allocations. Of course, absent an operating agreement, the rights of an assignee are governed by the statutory default rules.

The Professor’s article broadly discusses theory and case law surrounding the difficulties faced by non-member assignees a/k/a transferees — oftentimes the heir of a deceased member — when it comes to protecting their economic interests against managerial abuse by the LLC’s controllers. My focus here addresses only one, narrow aspect of such protection, namely, the ability of a non-member assignee to inspect LLC records in the absence of dispositive rules in an operating agreement or, as in what I believe is a small minority of states including Texas, a statute giving assignees inspection rights. Continue Reading Can the Bare Naked Assignee Demand Access to LLC Records?

I’ve seen LLC operating agreements ranging from one page to over 100. Usually there’s a direct relationship between the length of the agreement and the complexity of the LLC’s capital and management structure.

But if there’s one thing I’ve learned about LLC agreements, it’s that no matter how comprehensive and tome-like their design, there’s no guarantee that a future, unanticipated dispute won’t expose the inevitable cracks in the design prompting the need for court intervention. Indeed, depending on the drafter’s skill, one can argue the more complex the LLC agreement, the greater the risk of a court contest over its interpretation.

Take the recent case of Tungsten Partners LLC v Ace Group International LLC, 2017 NY Slip Op 32025(U) [Sup Ct NY County Sept. 20, 2017], in which Manhattan Commercial Division Justice Shirley Werner Kornreich was called upon to decide whether the plaintiff holder of a 4% non-voting profits interest, identified as a “Management Member” in a 65-page operating agreement (plus another 170 pages of schedules and exhibits), was a member of the subject Delaware LLC for purposes of demanding access to books and records under § 18-305 of the Delaware LLC Act. Continue Reading A Member By Any Other Name . . . May Have Access to LLC Books and Records

The third time definitely wasn’t a charm for the plaintiff in Austin v Gould, 2017 NY Slip Op 31494(U) [Sup Ct NY County July 13, 2017], in which the court dismissed ill-pleaded claims for “unfettered and unlimited access to all books and records” of a series of Delaware limited liability companies and their wholly-owned real estate subsidiaries.

The decision by Manhattan Commercial Division Justice O. Peter Sherwood is the latest in a series of trial and appellate court rulings, spread over seven years and three separate lawsuits, rejecting claims by the LLCs’ non-managing one-third owner against the managing two-thirds owner allegedly for failing to distribute millions in management and acquisition fees.

The plaintiff’s two prior lawsuits — the first filed in 2010 and, after its dismissal, the second filed in 2013 — hit dead ends for various reasons including untimeliness and pleading deficiencies. The third lawsuit, filed in 2016, asserted claims for access to the LLCs’ books and records along with damages claims for breach of fiduciary duty and conversion. Continue Reading Books and Records Case Illustrates Crucial Importance of Pre-Suit Demand

CondoThis post concerns an atypical form of business organization — the condominium — in the context of disputes over access to books and records. Access to books and records is a subject that has garnered increased judicial attention in recent years as more New York litigants and their counsel discover the utility of commencing summary proceedings to enforce statutory and common-law inspection rights of shareholders in traditional corporations and of members of LLCs.

What I find most interesting is the seemingly expansive approach the courts have taken in upholding inspection rights regardless of business form based on common law rather than statute, as reflected in two cases decided last month involving condominiums.

Unincorporated Condo vs. Incorporated Co-op

The most recent government census data tallies over 300,000 co-op apartment units in New York City and over 100,000 condominium units. The approximate 3:1 ratio is destined to shrink, however, as the number of new and converted condominium buildings coming onto the market in recent years has far exceeded new and converted co-op buildings, among other reasons, due to the strong preference for condominium ownership by foreign buyers and less onerous restrictions on re-sale. Continue Reading Courts Expand Books and Records Access for Condo Owners


Two decisions do not a trend make, but I can’t shake the feeling that the Appellate Division, First Department, is telling trial judges to take a broader view of shareholder statutory and common-law rights to inspect corporation books and records.

The first decision, two years ago, was the McGraw-Hill case which I reported on here. In that case, the First Department reversed a lower court’s ruling denying a shareholder’s inspection petition under Section 624 of the Business Corporation Law and common law. The petitioner sought records concerning the McGraw-Hill Board of Directors’ oversight of purported wrongdoing by its wholly-owned subsidiary, the Standard & Poor’s credit rating agency. The appellate ruling focused on the proper-purpose standard, holding that the petitioner’s stated purpose to investigate alleged misconduct by McGraw-Hill’s management and obtaining information that may aid in litigation are proper purposes “even if the inspection ultimately establishes that the board had engaged in no wrongdoing.” Essentially, the ruling eliminated the Catch-22 of requiring outside shareholders to tender proof of management wrongdoing to gain access to company records enabling them — or not — to show wrongdoing.

The petition in McGraw-Hill sought records of the parent company in which the petitioners held shares, not the subsidiary. Last week, in Matter of Pokoik v 575 Realties, Inc., 2016 NY Slip Op 06648 [1st Dept Oct. 11, 2016], in a decision of apparent first impression, the First Department again reversed a lower court ruling denying inspection rights and held that the petitioner was entitled under the common law to inspect records of the corporation’s wholly-owned subsidiary. Continue Reading Ruling Upholds Shareholder’s Right to Inspect Subsidiary’s Books and Records


It’s late August, when the lure of the seashore and vacation plans push aside all but the most serious work-related endeavors, and when I share with my readers a few short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision in a dispute among former law firm partners in which the court upheld a partnership agreement amendment by the defendant majority partners, reducing the plaintiff’s percentage interest after he announced his intention to withdraw but before the actual withdrawal became effective. Next up is a relatively rare decision in an LLC dissolution case granting a motion to disqualify defense counsel under the advocate-witness rule of professional conduct. In the third case highlighted below, the Delaware Chancery Court dismissed a books-and-records action for lack of standing where the shares issued to the plaintiff never existed.

Court Enforces Eve-of-Withdrawal Reduction of Partnership Interest

Zohar v LaRock, Short Form Order, Index No. 14826/10 [Sup Ct Nassau County July 25, 2016]Article 8-B of New York’s Partnership Law authorizes regulated professional practices to organize as registered limited liability partnerships. The LLP form is highly popular with law firms because it offers the same limited liability protection afforded corporation shareholders and LLC members, except for their own professional negligence or malpractice. The LLP otherwise is subject to the same statutes and common-law rules governing general partnerships, which give partners great leeway in ordering their own affairs in their partnership agreement. Continue Reading Summer Shorts: Partnership Interest Reduction and Other Recent Decisions of Interest

consentThe pick-your-partner principle is universally embedded in the default rules of limited liability company enabling acts, including Sections 601 through 604 of the New York LLC Law which permit free assignment of distributional and other economic rights appurtenant to a membership interest but require the other members’ consent before an assignee is granted full member status with voting and other rights associated with membership in an LLC.

The distinction between a “mere” assignee versus a transferee with member status can become a battle ground when a putative LLC member who received his, her or its interest by assignment brings legal action against the LLC’s managers for dissolution, access to books and records, or asserting derivative claims on behalf of the LLC. That’s because by statute and/or common law, the suing party’s requisite legal standing to assert such claims depends on having member status.

A recent decision by Manhattan Commercial Division Justice Saliann Scarpulla in MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which she dismissed derivative claims by a mere assignee of LLC interests, starkly illustrates the distinction and the importance of compliance with the LLC agreement’s provisions for bestowing member status on assignees. Continue Reading Operating Agreement’s Two-Step Consent Provision Foils Assignment of LLC Member Interest