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

Since the Second World War New York’s Suffolk County, occupying almost two-thirds of Long Island’s land mass, has experienced tremendous changes in population, demographics and in its economy.

In 1960, Suffolk’s population was half of its much smaller western neighbor Nassau County. By 1990 Suffolk’s population surpassed Nassau’s. According to 2012 census data Suffolk County has about 1.5 million residents compared to Nassau’s 1.3 million. Suffolk’s economy likewise evolved from mainly agriculture to a highly diverse base of manufacturing, construction, finance, farming, wholesale and retail business establishments, the total number of which surpassed Nassau County’s over the last fifteen years. The Hauppauge Industrial Park in western Suffolk, with over 1,300 companies employing over 55,000 Long Islanders, is the second largest industrial park in the country.

No wonder, then, that in 2002 court administrators added Suffolk to the growing list of counties in New York State with a specialized Commercial Division to handle increasingly complex business-related litigation. Starting with a single judge, today the Suffolk County Commercial Division, operating at the Supreme Court complex in Riverhead, has three judges including Presiding Justice Elizabeth H. Emerson, who has served in the Commercial Division from its inception; Justice Emily Pines, who joined the Commercial Division in 2007; and the Commercial Division’s most recent member, Justice Thomas F. Whelan. Continue Reading Business Divorce Cases in the Suffolk County Commercial Division

The purported co-owner of an ice skating rink, who petitioned to dissolve the business claiming he was frozen out by his fellow shareholder, got a cold reception from a judge who dismissed the case for lack of standing primarily based on a prior bankruptcy reorganization plan that did not identify the petitioner as a shareholder.  The decision earlier this month in Matter of Gleich (Iceland, Inc.), Short Form Order, Index No. 19767/10 (Sup. Ct. Nassau County Apr. 6, 2011), issued by Nassau County Acting Supreme Court Justice Thomas A. Adams, also invoked the evidentiary rule known as the Dead-Man’s Statute in rejecting the petitioner’s testimony concerning an alleged oral stock conveyance agreement by a deceased shareholder.

The corporation known as Iceland, Inc. was formed in 1991 to operate an ice skating rink in New Hyde Park on Long Island.  At inception the shares were owned 47% by Jacqueline Haenel, 3% by petitioner Stephan Gleich, and the remaining 50% by two others.  Gleich, an attorney, previously represented Mrs. Haenel’s husband in business matters and they became social friends as well.

The rink’s business floundered leading to a Chapter 11 bankruptcy filing in 1994.  It was uncontested that Gleich performed considerable legal work for the company.  Gleich claimed he did so as an “employee” of the company while Mr. Haenel characterized his role as Iceland’s “counsel” even though his retention was never approved by the bankruptcy trustee. 

Continue Reading Judicial Estoppel + Dead-Man’s Statute = No Standing to Seek Judicial Dissolution of Close Corporation

When bankruptcy interrupts corporate dissolution proceedings, it usually means bad news for the petitioner.  For instance, last year I wrote about a petition for corporate dissolution doomed by the petitioner’s failure to disclose his stock interest in prior bankruptcy proceedings.  A recent decision presents an interesting departure from the norm, involving a dissolution case commenced in 1990 that took a 10-year detour through bankruptcy court before returning to state court to resume a buyout proceeding.  The case, Smith v. Russo, 2009 NY Slip Op 32785(U) (Sup Ct Queens County Nov. 13, 2009), raised the question whether the bankruptcy court’s basis for rejecting as inadequate a buyout settlement proposed by the bankruptcy trustee should be given collateral estoppel effect — for the benefit of the former bankrupt — in the subsequent state court valuation proceeding.

Husband and wife Richard and Nelsi Smith were 27.5% shareholders of Meadow Mechanical Corporation formed in 1980.  In 1990, the other shareholders removed Richard as president and barred both Smiths from the business premises, prompting the Smiths to sue for dissolution under Section 1104-a of the Business Corporation Law.  The other shareholders then elected to purchase the Smiths’ shares for fair value under BCL Section 1118.

Continue Reading Bankruptcy Court’s Ruling Does Not Establish “Floor” Value in Subsequent Stock Appraisal Proceeding

It’s not often that bankruptcy law intersects with corporate dissolution proceedings based on deadlock or minority shareholder oppression, but when it does, likely it’s bad news for the petitioner seeking to liquidate the company or to be bought out by another shareholder.

Such was the fate of the plaintiff in a recently decided dissolution case called Light v. Boussi, 2008 NY Slip Op 51212(U) (Sup Ct Kings County June 19, 2008).  In 2006, plaintiff Beril Light sued Samuel Boussi for an accounting, imposition of constructive trust, damages and an order compelling dissolution of a real estate holding company formed in 1995 called 10-18, Inc.  Light claimed that he and Boussi were 50-50 shareholders.  Light alleged that Boussi failed to maintain corporate formalities, provide him with notice of corporate meetings or financial information, or distribute to Boussi 50% of the company profits.  Boussi denied that Light ever was a shareholder and also asserted as affirmative defenses that Light lacked legal capacity to sue, and that Light’s claims were barred by the doctrine of judicial estoppel.

Both defenses arose from the fact that in 1998, Light and his wife filed a voluntary petition under Chapter 11 of the Bankruptcy Code.  Their petition listed various assets owned by them including real properties and interests in stock corporations, but made no mention of 10-18, Inc.  The bankruptcy court entered a final decree in 2002, Light’s bankruptcy case was closed, and the trustee was discharged.

Continue Reading Failure to Disclose Stock Interest in Bankruptcy Petition Defeats Standing in Later Dissolution Proceeding