Arbitration and Mediation

Courts determine the value of equity interests in closely held firms in a variety of settings, including (among others) dissenting shareholder proceedings triggered by mergers; elective stock buy-outs triggered by minority shareholder dissolution petitions; partnership buy-outs triggered by death or dissolution; disputes over contractual buy-outs contained in agreements among the co-owners; and damages claims arising from buy-outs tainted by fraud or wrongful nondisclosure.

The central feature of a valuation contest is the battle of the opposing appraisal experts. Nothing is more critical to the success of a litigant’s valuation case than putting on the testimony of a qualified, independent, experienced, credible, well-prepared, articulate appraiser who, using his or her written appraisal report as a springboard, can both educate and persuade the judge (or jury in certain types of cases) who has ultimate responsibility for  determining the value of the equity interest under the applicable standard of value.

In most valuation proceedings, the parties either are required to, or voluntarily agree to, disclose certain information concerning their intended expert witnesses in advance of the valuation hearing. I say in most cases because the governing rules can vary depending whether the case is brought in court or as an arbitration and, if in court, as a plenary action versus a special proceeding, or in the court’s Commercial Division versus in a general civil part. Disclosure practices also can vary from judge to judge. Continue Reading The High Price of Bungled Expert Disclosure in Valuation Cases

The prosecution or defense of a business divorce case, like any other civil litigation, is subject to a mind boggling set of procedural rules which, in the event of noncompliance, can deal either side a significant setback or even dismissal. Adding to the complexity are the rules specific to business divorce cases, which are contained in the statutes governing judicial dissolution cases.

Besides the potential jeopardy to a client’s position on the merits, failure to comply can cost the client time and money. The client’s confidence in his or her attorney also can be compromised by needless errors that detract from achievement of the client’s litigation goals.

Recently, I was asked about the most common mistakes attorneys make when filing or defending dissolution cases. I figured others might benefit from the answer, so compiled below is a list of 10  snafus highlighted in cases that I’ve previously featured on this blog. Follow the links to read more about each one.

  1. File a bare-bones dissolution petition.  Judicial dissolution of a corporation must be brought by way of petition in a special proceeding, that is, not by ordinary summons and complaint where the rules essentially permit a bare-bones pleading that alleges the elements of a claim in conclusory fashion. The petition is different. It must provide detailed and, if necessary, documented facts establishing entitlement to dissolution. Failure to do so likely will result in a painful dismissal. Read more here. Continue Reading 10 Ways to Screw Up Your Business Divorce Case

As I’ve previously written (read here), the usual, broad form of arbitration clause found in many shareholder agreements mandates the arbitration of petitions for judicial dissolution of closely held corporations brought under Article 11 of the Business Corporation Law (BCL). A decision earlier this month by Brooklyn Commercial Division Justice Carolyn E. Demarest (pictured) in Pisane v. Feig, Decision and Order, Index No. 12246/11 (Sup Ct Kings County Sept. 14, 2012), serves as a compelling reminder of the extremely limited scope of judicial review of the arbitrator’s award including the arbitrator’s interpretation of the shareholders’ agreement and stock valuation. [Disclosure: My firm and I represented the prevailing party in the case.]

Round One: The Court Orders Arbitration of Dissolution Petition

Justice Demarest’s 22-page decision gives a detailed description of the proceedings. In brief, in May 2011, Neil Pisane, as 42.5% shareholder of S&N Chemical Co. and several affiliated companies, petitioned for judicial dissolution under BCL §1104-a predicated on allegations of oppressive actions and diversion of corporate assets by respondent Steven Feig, who also held a 42.5% interest in the companies. (A third shareholder, who was not named as a party, held a 15% non-voting interest.) After Feig moved to compel arbitration under the arbitration clause in the governing shareholders’ agreement, the court entered a stipulated order staying the litigation proceedings pending arbitration.

Pisane thereafter refiled his dissolution petition as an arbitration claim with the American Arbitration Association. Feig’s answer included a number of counterclaims, one of which asserted that Pisane’s filing of a dissolution petition triggered his contractual obligation under the shareholders’ agreement to sell his shares to Feig at a specified formula price and terms. In another counterclaim, Feig alternatively elected to purchase Pisane’s shares for fair value under BCL §1118.

Continue Reading Arbitration Award in Stock Buy-Out Dispute Withstands Challenge

Buy-sell provisions in shareholder agreements are good. Arbitration provisions in shareholder agreements are good. Inconsistent buy-sell and arbitration provisions in shareholder agreements are bad.

That pretty much sums up the lesson to be learned from an appellate opinion handed down last month in Matter of Grande’ Vie, LLC, 2012 NY Slip Op 02190 (4th Dept Mar. 23, 2012), in which a majority of the court, with one judge dissenting, ordered arbitration over an appraisal for the buy-out of a deceased LLC member’s interest notwithstanding language in the buy-sell provision stating that the appraisal “shall be binding.”

The case involves two real estate holding companies organized as LLCs owned equally by three members, one of whom died in 2008. The operating agreement included buy-sell provisions triggered, inter alia, by the death of a member whose estate was entitled to be paid a purchase price determined by appraisal. The agreement also included a broad arbitration clause. Litigation broke out in 2010 after the estate sought arbitration of the value of the decedent’s membership interest, while the surviving members sought to compel a sale at a value set forth in a written appraisal rendered by an appraiser selected by the surviving members after the appraisers specifically named in the agreement declined the assignment.

Continue Reading Clash of the Clauses: Divided Appellate Panel Rules that “Binding” Appraisal Per Buy-Sell Agreement Must be Arbitrated

Lundy’s on Sheepshead Bay in Brooklyn was a world famous seafood restaurant for over 40 years. Today, it’s the site of Masal Café, a successful Turkish coffee house and restaurant that opened in 2003. It’s also the site of a food fight (sorry, I couldn’t resist) that landed in court when each of two shareholder factions claimed to hold majority ownership and control of the restaurant corporation.

The fight took an unusual turn with a ruling earlier this month compelling arbitration of one side’s claims of financial wrongdoing but reserving for judicial determination the stock ownership issue. This rare instance of concurrent arbitration and court proceedings stems from highly unusual dispute resolution provisions in the shareholders’ agreement, as well as from the procedural course charted by the parties in court.

The power struggle in Boz Export & Import, Inc. d/b/a Masal Café v. Karakus, 2011 NY Slip Op 51685(U) (Sup Ct Kings Co Sept. 15, 2011), pits shareholders Mustafa Boz and Ammer Muslu against a third shareholder, Selahattin Karakus. Before the falling out, Karakus and his cousin, Tahsin, each held 36% of the corporation’s shares while Boz and Muslu together controlled the remaining 28%. Karakus also was president. Sometime in 2010 Tahsin left the United States and was barred from reentry.

Continue Reading Concurrent Arbitration and Court Proceedings in Shareholder Dispute? It Can Happen.

The pictured courthouse in Mineola, New York, is home to the three judges of the Commercial Division of the Nassau County Supreme Court.  They are, in order of seniority on the Supreme Court bench, Justice Stephen A. Bucaria, Justice Ira B. Warshawsky and Justice Timothy S. Driscoll.  As someone who constantly monitors newly issued court decisions throughout New York State involving shareholder disputes and the like, I can say with a high degree of confidence that these three, prolific judges generate a greatly disproportionate share of the accessible decisions in business divorce cases.

Whether it’s because there’s something in Nassau County’s water that breeds dissension among business partners, or because these three judges like to write about business divorce cases, or because Nassau County Supreme Court makes more of its trial court decisions available online than other counties, I can’t say.  But I can say it provides a great service for attorneys in need of judicial guidance to help navigate and advise their clients through the perilous waters of business breakups.

Without further ado, I give you three recent decisions of interest by the three Justices of the Nassau County Commercial Division.

Justice Warshawsky Orders Arbitration of LLC Dissolution Petition 

In a post two months ago I wrote about a Montana Supreme Court decision that denied an application to compel arbitration of an LLC dissolution lawsuit because the arbitration clause in the operating agreement did not specifically mention dissolution, even though it broadly encompassed any dispute concerning “any activity conducted pursuant to” the operating agreement.  I also suggested that under New York law the outcome likely would be different.

Continue Reading New Decisions of Interest by Nassau County’s Commercial Division Judges

Somewhere out on the grasslands of Big Sky Country, the controlling member of a cattle ranch organized as a Montana LLC is sighing "oy vey" instead of singing "yippie-yi-yo-ki-yay" after a recent decision by the Montana Supreme Court holding that the operating agreement’s arbitration clause does not require arbitration of another member’s petition for judicial dissolution of the LLC.  Gordon v. Kuzara, 2010 MT 275 (Dec. 21, 2010).

The case involves an application to dissolve Half Breed, LLC by one of the managing members (Gordon) based on allegations that the controlling member (Kuzara) engaged in a variety of misconduct including diversion of assets and improper accounting and tax reporting.  Kuzara responded with a motion to compel arbitration based on the following arbitration clause in the operating agreement:

Before an action may be brought by any member of the company challenging this agreement, any activity conducted pursuant to this agreement, or any interpretation of the terms of this agreement … one meeting of company members shall thereafter be held for the purpose of resolving a challenge. . . . [I]f a challenge cannot be resolved in such a meeting by a vote of a majority of actual member ownership interests, then the issue shall be submitted to a group of three arbitrators [for binding arbitration].

Continue Reading A Lesson in Arbitration Clause Drafting from Big Sky Country

Shareholders’ agreements often include broad arbitration clauses mandating arbitration of all disputes arising out of or relating to the agreement.  Courts routinely enforce such clauses when a non-compliant shareholder files a court petition for judicial dissolution of the corporation.  (For more on general principles concerning arbitration of dissolution disputes, read here.) 

In a recently decided dissolution case called Matter of Rosenberg (ARS Financial Services, Inc.), 2010 NY Slip Op 30616(U) (Sup Ct Nassau County Mar. 17, 2010), the shareholders’ agreement contained the following arbitration clause:

Any controversy, dispute or question arising out of, or in connection with, or in relation to this agreement or the interpretation, performance or non-performance of any breach thereof shall be determined by arbitration . . ..

Reads like a standard, broad arbitration clause, doesn’t it?  Yet, the court refused the respondent shareholders’ application to compel arbitration.  What went wrong (or right, depending on your perspective)?

Rosenberg involved a petition by a 50% shareholder for judicial dissolution of a financial planning and wealth management firm.  The petitioner alleged that the respondent 50% shareholder had diverted corporate monies and that there was a complete breakdown in the shareholders’ relationship leading to a state of irreconcilable deadlock.  The respondent countered that the petition was a bad faith effort to "blow up" a profitable company so that the petitioner could take the business and its clients for himself and his alleged new business partner.

Continue Reading Court Denies Arbitration of Corporate Dissolution Petition Notwithstanding Broad Clause

See full size imageOur English common-law heritage includes what’s known as the rule against unreasonable restraints on alienation.  Law students first encounter the rule in their property class, where they learn about the abolishment of the feudal “fee tail” which restricted the transfer of real property to a specific line of male heirs.  Basically, our laws and public policy strongly favor the right of persons to freely dispose of their property both real and personal.  Agreements that place ownership of property in the hands of one person and the right to alienate, i.e., sell or otherwise convey the property, in the hands of another, are unenforceable.

The rule is not absolute.  It only prohibits unreasonable restraints on alienation.  For instance, where a niece agreed to pay $15,000 to her uncle and aunt for a $100,000 farm that was in the family for generations on condition that, during the uncle’s and aunt’s lifetimes, the niece wouldn’t mortgage the farm or convey it to her husband, a court enforced a reversion clause in the recorded deed giving the property back to her relatives when the niece placed mortgages on the farm that subsequently were foreclosed.  The court found it reasonable to enforce the restraint to preserve family ownership of the farm for a limited duration.  Moreover, the niece’s interest in free alienation was outweighed by her agreement to the restraint in consideration for a drastically reduced price.  (Example taken from Alby v. Banc One Financial, 128 P3d 81 [Sup. Ct. Wa. 2006].)

What’s this got to do with shareholder and operating agreements?

Continue Reading Beware Unreasonable Restraints on Alienation When Drafting Shareholder and Operating Agreements

As I’ve previously pointed out (read here), when shareholder disputes arise, including corporate dissolution contests, courts will readily stay litigation proceedings in favor of arbitration where the parties’ shareholders’ agreement provides for mandatory arbitration.   There is no exception for dissolution cases arising from 50-50 deadlock, as the unsuccessful petitioner recently learned in Matter of Brooks (Aqua Shield Inc.), Short Form Order, Index No. 1572/09 (Sup Ct Nassau County June 5, 2009)

Aqua Shield Inc. was formed in 2000 to market a patented telescopic swimming pool enclosure invented by co-founder and petitioner Bob Brooks who, along with his wife, holds 50% of the company’s shares.  The other 50% is held by investor Igor Korsunsky and his wife. 

The October 2001 shareholders’ agreement has a broad arbitration clause requiring arbitration of "any controversy or claim arising out of or relating to [this] Agreement or its breach . . .." 

In November 2008, the Korsunskys commenced an arbitration proceeding with the American Arbitration Association (AAA) against the Brookses who interposed an answer.  The AAA issued an order on motions and scheduling orders in February 2009, and scheduled a preliminary hearing for April 2009. 

Continue Reading No Exception to Arbitration for Deadlock Dissolution Petition, Court Rules