Attorney Disqualification


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

cash registerAppellate case law in New York generally prohibits use of company funds to pay for legal defense costs in judicial dissolution proceedings.

The theory supporting the prohibition, as articulated over 50 years ago in Matter of Clemente Brothers, 19 AD2d 568 [3d Dept], aff’d, 13 NY2d 963 [1963], is that the statute authorizing dissolution proceedings “grants to the corporation as a separate entity no authority to determine whether a proceeding shall be initiated to dissolve itself,” thus making the corporation a proper jural party “for the limited and passive purpose of rendering it amenable to the orders of the court” and barring it from assuming a “militant alignment on the side of one of two equal, discordant stockholders.”

The principles animating Clemente and its progeny such as Matter of Rappaport, 110 AD2d 639 [2d Dept 1985], and Matter of Boucher, 105 AD3d 951 [2d Dept 2013], involving deadlock dissolution proceedings between 50-50 shareholders, have been extended to cases brought under the separate statute enacted in 1979 providing a dissolution remedy for oppressed minority shareholders. Continue Reading The Prohibition Against Using Company Funds for Legal Fees in Dissolution Proceedings

There’s nothing new about cross-border business ventures in which a resident of State A is a co-owner of a closely held business entity organized in State B. As happens most frequently with business entities formed in Delaware, the organizational filing may be the only nexus with the state of formation, in which case for practical reasons internal conflicts that ripen into litigation tend to be fought in the jurisdiction where the business operates which also may coincide with the co-owners’ domiciles. In other words, it’s not at all unusual to see co-owners of a New York-based business organized in Delaware or Nevada duking it out in a New York court which can and will decide the internal dispute by applying the laws of the organizational state. (Read here my recent post about the “internal affairs” doctrine.)

The same cannot be said for internal disputes that prompt one of the co-owners to seek judicial dissolution of the business entity. By and large, courts will decline jurisdiction over dissolution suits involving foreign entities based on the principle of interstate comity. (Read herehere, and here some of my prior posts on the subject.) One consequence of this jurisdictional exception is the phenomenon of dueling lawsuits in different states in which business co-owners attempt to secure the home court advantage, with one side bringing a dissolution action in the business’s state of formation and the other bringing an “ordinary” lawsuit for damages and/or injunctive relief in that party’s distant home state.

That is exactly what happened in Picarella v. HMA Properties, LLC, 2013 NY Slip Op 31354(U) (Sup Ct Suffolk County June 17, 2013), a multi-jurisdictional turf battle between co-members of a Florida limited liability company (LLC) decided last month by Suffolk County Commercial Division Justice Elizabeth Hazlett Emerson. Justice Emerson’s ruling, dismissing the New York action on the legal grounds of forum non conveniens in favor of a pending dissolution proceeding in Florida, provides highly useful guidance for business divorce litigants and their counsel who are either contemplating or find themselves in a multi-state contest.

Continue Reading Fighting for Home Court Advantage in Multi-State Business Divorce Litigation

A recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria in Vecchio v. Post Road Entertainment, LLC, Short Form Order, Index No. 187/08 (Sup Ct Nassau County May 1, 2012), draws attention to an issue that regularly arises in litigation among co-owners of closely held companies: Does attorney-client privilege protect from disclosure to the non-controlling owner the activities, work product and communications of the company counsel?

It’s a complex and nuanced issue, the outcome of which in any given case will depend on the specific factual circumstances. In some cases, the issue may arise as to outside company counsel who was involved in relevant events both before and after the dispute arose, and who represents the company under the direction of the controlling owners in the litigation against the non-controlling owner. The analysis under those circumstances may differ from a situation “merely” involving requested discovery of the company’s outside corporate counsel who is not involved in the litigation.

Vecchio involves the latter situation. In 2004, the plaintiff, Michael Vecchio, and the three individual defendants formed a New York limited liability company called Post Road Entertainment, LLC for the purpose of operating bars and restaurants. Vecchio allegedly provided $850,000 financing, and two of the defendants operated the business. The members also entered into a buy-sell agreement including a right of first refusal and a redemption of membership interest for $1.5 million upon death, funded by a company-owned life insurance policy.

Continue Reading Obtaining Discovery of the Company Lawyer in Business Divorce Cases: Privileged or Not?

I don’t frequent beauty salons and I’m not much of a drinker, so I did a double take when I read a recent court decision involving a falling out among co-owners of a start-up business known as a “beauty bar” offering alcoholic beverages and beauty salon services. I don’t know about you, but getting tipsy before having your hair done seems like a bad idea, unless you have no fear of walking out with a mohawk.  

The case, Big Brows LLC v. Devitt, 32 Misc 3d 1231(A) (Sup Ct Kings County Aug. 12, 2011), presents an interesting issue of attorney ethics with great practical significance in disputes between co-owners of closely held business entities: Can the same lawyer represent multiple owners, including both managers and non-managers, when the managers are accused of acting against the interests of the business?

The facts in Big Brows are straightforward. In April 2009, a group of eight individuals, three of whom were designated the managers, formed a limited liability company called Big Brows LLC to open a beauty bar at a Brooklyn location formerly operated as the Black Bean Café. Simultaneously Big Brows entered into an agreement with the Café’s owner to purchase its assets for $125,000. The agreement required a $15,000 up-front payment, another $80,000 conditioned upon the approval of a temporary liquor license from the State Liquor Authority (SLA), and thereafter the balance in installment payments.

Continue Reading “Beauty Bar” Case Highlights Conflicted Legal Representation in Dispute Among LLC Members

The vast majority of corporate dissolution cases fall into one or another familiar fact pattern involving 50/50 deadlock or minority shareholder oppression. So it’s always refreshing when a new case comes along presenting a novel scenario, as in Matter of Toledano (Home Tower Group, Inc.), 2011 NY Slip Op 32127(U) (Sup Ct Nassau County July 25, 2011), where the court converted a failed voluntary dissolution into a compulsory judicial dissolution.

Shmouel Toledano and Yoram Eliyahu are real estate developers who, prior to 2006, acquired 41 commercial properties in New York and Connecticut.  Toledano and Eliyahu each own 50% of the shares in 10 separate corporations formed to hold title to the properties. In November 2006, they entered into a written “dissolution agreement” to sell as many of the properties as possible over the following 18 months, at the end of which any unsold properties would be distributed to the shareholders.

The agreement required Eliyahu to divide the unsold developed properties into two pools, giving Toledano first choice. The agreement also required that certain undeveloped “keeper” properties be offered for sale subject to the shareholders’ right of first refusal. Finally, the agreement required Eliyahu to purchase for $600,000 Toledano’s half interest in the property housing the corporate offices.

Continue Reading Deadlock Over Voluntary Dissolution Agreement Leads to Involuntary Judicial Dissolution

Woe unto the corporate counsel who gets caught in the crossfire of a nasty shareholder dispute.

Efforts to disqualify or even sue outside corporate counsel are not unusual when the opportunity presents itself in a corporate dissolution proceeding or other internal feud.  (Read here my recent post on disqualification cases.)  A critical, threshold question is whether the lawyer or law firm represents only the company or its principals as well.  The answer determines to whom the lawyer owes a duty that might give rise to a conflict or an actionable breach.

In the realm of the closely held business entity, the general rule is that a lawyer’s representation of the company does not make him or her a lawyer for the company’s owners, managers or employees.  The rule usually plays out in the setting of an application to disqualify company counsel based on alleged conflicting representation in a lawsuit amongst the company and a present or former owner, manager, etc., and it usually is found to prevail unless the lawyer expressly assumed an affirmative duty to represent the individual along with the company.  A recent example of the rule’s application is Monroe County Commercial Division Justice Kenneth R. Fisher’s scholarly opinion denying a motion to disqualify company counsel in Bonn, Dioguardi & Ray, LLP v. ThomasYork, LLP, Dec. & Order, Index No. 2010/15130 (Sup. Ct. Monroe County Feb. 16, 2011).

Continue Reading Lawyers Caught in the Crossfire of Shareholder Disputes

Scenario #1:  Shareholders Moe, Larry and Curly jointly retain attorney Foghorn to form WoobWoobWoob Corp. and to prepare and supervise the execution of a shareholders’ agreement.  Foghorn thereafter serves as WoobWoobWoob’s outside general counsel until a pie-throwing incident precipitates a judicial dissolution petition by Curly.  Moe and Larry hire Foghorn to oppose the petition, arguing that the shareholders’ agreement was not validly executed and that Curly is not a shareholder.  Curly moves to disqualify Foghorn from representing Moe and Larry.  Should the court grant Curly’s motion?

Scenario #2:  Moe and Larry are the original shareholders of NyukNyukNyuk Corp.  Curly subsequently enters into a stock purchase agreement, thereby becoming the third shareholder, along with an amended and restated shareholders’ agreement with Moe and Larry.  The  agreements are prepared by attorney Throckmorton acting on behalf of Moe and Larry.  Curly was represented by his own counsel.  Three years later, following an eye-poking incident, Curly petitions for judicial dissolution of NyukNyukNyuk.  Curly also moves to disqualify Throckmorton from representing Moe and Larry on the grounds that, in preparing the agreements, Throckmorton learned confidential information about the operation of NyukNyukNyuk concerning a central issue in the dissolution litigation, and that Throckmorton may have to testify as a witness.  Is the motion a winner?

Before you say, “I’m trying to think but nothing happens,” the answers can be found in two recent court decisions requiring disqualification in circumstances resembling Scenario #1 but not in Scenario #2.

Continue Reading Disqualification of Counsel in Business Divorce Proceedings

There’s been a recent flurry of courtroom battles over the authority of one 50% owner to engage counsel to represent the company adverse to the other 50% owner in dissolution proceedings or other types of internecine corporate warfare.  I’ve previously written about some of these cases, including Sports Legends, Inc. v. Carberry, in which the court dismissed as unauthorized a suit by the corporation initiated by one 50% shareholder against the other for conversion of company assets (read here), and the infinitely fascinating Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC, where one 50% LLC member hired company counsel in a multi-faceted litigation with the other 50% member that included dueling dissolution applications (read here and here).

Two new decisions reinforce the general proscription against the hiring and militant alignment of company counsel by one 50% owner against the other.  One comes out of the Delaware Court of Chancery, which many — present company excluded, I’m a dyed-in-the-wool New York partisan — consider the premier business law court.  The other decision appears to be the final word in the Caplash saga.

Continue Reading Delaware and New York Courts Agree that 50% LLC Member May Not Hire Lawyer to Represent Company Adverse to Other 50% Member