Much digital ink has been spilled on this blog (here, here, here, and here) and elsewhere (Tom Rutledge’s terrific article can be read here) concerning the ability of LLC controllers to adopt or amend an operating agreement without the consent of all members.

In New York, Shapiro v Ettenson kicked things off, holding that the majority members of an LLC validly adopted a post-formation operating agreement without the minority member’s consent. The agreement in that case eliminated the minority member’s salary, authorized dilution of a member interest for failing to make mandatory capital contributions (the majority members issued a capital call promptly after the amendment), and member expulsion (the majority members expelled the minority member soon after the court upheld the LLC agreement).

Next came Ho v Yen where the court denied interim injunctive relief to a minority member who challenged the majority members’ adoption of a post-formation LLC agreement that authorized member expulsion and buy-out at book value (the majority members expelled the minority member within days after the amendment).

The appellate panel in Shapiro rested its holding on LLC Law § 402 (c) (3) which speaks to the majority’s right not only to adopt an operating agreement but also to amend it subject, of course, to any contrary provision in the operating agreement and certain statutory carve-outs in LLC Law § 417 (b). But since the vast majority of operating agreements that I’ve seen expressly require the consent of all members to amend, I figured I’d have a long wait before seeing a case that tests the limits of the non-unanimous amendment power.

My wait wasn’t nearly as long as I expected. Last month, in Yu v Guard Hill Estates, LLC, 2018 NY Slip Op 32466(U) [Sup Ct NY County Sept 28, 2018], Manhattan Commercial Division Justice Saliann Scarpulla denied a motion to dismiss a minority LLC member’s claims against the majority members for breaching their fiduciary duty by adopting, without the minority member’s consent, amendments authorizing mandatory capital calls and foreclosing upon the interest of a member who fails to contribute. What makes the case even more interesting is that the pre-existing operating agreement signed by all the members included a provision generally authorizing amendment by vote of members holding 51% of the member interests.  Continue Reading Does This Decision Put the Brakes on Non-Unanimous Amendments to Operating Agreements?

What’s a weaponized LLC? It’s one whose operating agreement gives the controlling majority members the authority to dilute, remove from management, or expel a non-controlling minority member, typically for failing to satisfy a mandatory capital call or engaging in conduct the majority determines to be a breach of specified standards of conduct.

Weaponization can occur openly or stealthily. Openly, the dilution, removal, or expulsion powers are spelled out explicitly in the operating agreement signed by all the members. Stealthily, the operating agreement authorizes amendment of the operating agreement by the majority, i.e., without minority consent, effectively allowing such powers to be added at a later time of the majority’s choosing.

Few tears normally are shed when a minority member is diluted, removed from management, or expelled under the express provisions of an operating agreement to which the minority member knowingly subscribed. As the saying goes, you made your bed, now lie in it.

Does the minority member hit with the stealth variety via an amendment to which he or she never consented deserve any greater sympathy? More importantly for litigators, does the majority’s adoption and implementation of such measures for the purpose of squeezing out the minority member, or otherwise gaining leverage in a dispute not necessarily related to the LLC’s governance and business affairs, provide the minority member with grounds to seek judicial dissolution of the LLC? Continue Reading Judicial Dissolution and the Weaponized LLC

powerlessAn appellate decision last week sounds alarm bells for minority members of New York LLCs that have no operating agreement and for anyone considering becoming a minority member of an LLC without first having in place an operating agreement.

By the same token, the decision provides opportunities for majority members of existing LLCs without operating agreements to cement and expand their control powers.

Last week’s unanimous decision by the Manhattan-based Appellate Division, First Department in Shapiro v Ettenson, 2017 NY Slip Op 00442 [1st Dept Jan. 24, 2017], affirmed the lower court’s order enforcing an operating agreement signed by two of the LLC’s three co-founding, co-equal members, adopted two years after the LLC’s formation without the signature or consent of the LLC’s third member. Among other features, the operating agreement departed from the statutory default rule by authorizing the reduction of the percentage interest of a member who fails to satisfy a capital call approved by the majority, which is exactly what the two majority members did following their adoption of the agreement, along with eliminating the minority member’s salary. Continue Reading Thinking About Becoming a Minority Member of a New York LLC Without an Operating Agreement? Think Again

SushiThe Japanese word “omakase” translates as “I’ll Ieave it up to you” and is used by patrons of sushi restaurants to leave the selection to the chef rather than ordering à la carte.

The minority member of an LLC that operates a high-end Japanese restaurant in Brooklyn featuring omakase service, and who sued for judicial dissolution, recently learned a different meaning of omakase, as in, don’t leave it up to the court to protect you from being frozen out by the majority member when you don’t have a written operating agreement, much less a written operating agreement containing minority-interest safeguards.

The hard lesson learned by the petitioner in Matter of Norvell v Guchi’s Idea LLC, 2016 NY Slip Op 32307(U) [Sup Ct Kings County Nov. 18, 2016], has been taught before, starting most prominently with the First Department’s 2013 decision in Doyle v Icon, LLC and reinforced by that court two years later in Barone v Sowers, holding that minority member claims of oppressive majority conduct including systematic exclusion from the LLC’s operations and profits, in the absence of a showing that the LLC is financially unfeasible or not carrying on its business in conformity with its operating agreement, do not constitute grounds for judicial dissolution under LLC Law § 702. Continue Reading Another Frozen-Out Minority LLC Member’s Petition for Dissolution Bites the . . . Sushi?

pizzaA self-described “world-renowned Neapolitan pizza chef” won a round in court earlier this month in a dispute with his business partner over control of a popular pizzeria located in Manhattan’s Greenwich Village. The court’s opinion by Manhattan Commercial Division Justice O. Peter Sherwood in Manzella v Caporuscio, 2015 NY Slip Op 31870(U)[Sup Ct NY County Oct. 6, 2015], granted summary judgment for the chef/majority member on his counterclaim against the minority member for breach of fiduciary duty and modified a prior Consent Order to authorize termination of the minority member’s employment for cause.

The case involves a Greenwich Village restaurant called Keste Pizza and Vino founded in 2009 by pizza chef Roberto Caporuscio. Since 2012 the business is co-owned by Caporuscio and Sandra Manzella as 55% and 45% members, respectively, of Keste Group LLC. Keste has a fairly standard operating agreement for member-managed LLCs, giving Caporuscio as majority member the controlling vote with a few exceptions requiring unanimous consent such as the admission of a new member.

Keste’s operating agreement (read here) doesn’t mention much less guarantee a member’s “employment” by the LLC. What it does say — which apparently stiffened spines on both sides in the lead-up to litigation — is that “[n]otwithstanding anything to the contrary contained in the provisions of this Agreement, the Members agree that Caporuscio and Manzella shall have primary responsibility for running the day-to-day operations of the Company” (¶ 4.1). Continue Reading Pizza Chef with Bigger Piece of LLC Pie Allowed to Terminate Minority Member’s Employment

Sign hereIt just got more dangerous to become a minority member of a New York limited liability company without a written operating agreement.

In a case of first impression decided last month, a Manhattan judge ruled that the majority members of an LLC that had no operating agreement at the time of its formation were authorized by statute to later adopt and enforce against a non-signatory minority member an operating agreement that, among other things, authorizes additional capital calls and potentially dilutes the membership interest of a member who fails to contribute.

The facts in Shapiro v Ettenson, 2015 NY Slip Op 31670(U) [Sup Ct NY County Aug. 16, 2015], are fairly simple. In January 2012, three individuals — plaintiff Shapiro and defendants Ettenson and Newman — filed articles of organization for ENS Health, LLC as a member-managed LLC with each member holding a one-third membership interest. From its formation until December 2013, ENS had no written operating agreement. Between September and December 2013, the members negotiated and exchanged draft agreements but none was executed. Continue Reading Can LLC Agreement Be Enforced Against Member Who Doesn’t Sign It?

If you Google the names Edward Kalikow and Eugene Shalik, you’ll notice a distinct pattern in the search results dating before and after 2006. Before that date, you’ll come across numerous trade publications trumpeting significant real estate development projects across the country involving Messrs. Kalikow and Shalik as longtime, successful, Long Island-based business partners. But after 2006, pretty much all you’ll find are numerous court decisions in multiple, nasty lawsuits between the two gentlemen and their affiliated entities fighting over all sorts of matters big and small. So what happened in 2006?

As best as I can glean from the public record, that’s the year Kalikow’s mother died, leaving behind a will naming Shalik as executor and apparently giving a good portion if not the bulk of her estate, including valuable real estate partnership interests left to her by her late husband, to a charitable foundation of which Shalik is trustee. Kalikow’s subsequent challenge to the will’s disposition of the partnership interests, alongside a host of other business disputes precipitated by the poisonous atmosphere, evolved into a litigation juggernaut still going strong after eight years of zigzagging through surrogate’s court, civil court, tax court, arbitration and appellate tribunals.

One of the more recent legal spats, involving a single-asset realty company owned by the two of them 50/50, led to an interesting decision earlier this year by Nassau County Commercial Division Justice Vito M. DeStefano in which the court addressed the question whether the non-managing member of a New York limited liability company owes any fiduciary duty to the LLC or its other members. The court’s decision in Kalikow v. Shalik, 2014 NY Slip Op 24099 [Sup Ct, Nassau County Feb. 26, 2014], also considered whether a common-law claim for contribution exists when one of two LLC members, both of whom personally guaranteed the LLC’s mortgage debt, voluntarily pays down a portion of the debt to avoid a default.  Continue Reading Court Dismisses Fiduciary Breach, Contribution Claims Against Non-Managing LLC Member

Lawsuits among partners in closely held businesses present infinite variations on claims for breach of contractual, statutory and common law duties. Depending on many factors — the size of the business and number of partners; their individual roles in the business and relative voting power; the degree of personal animosity; whether the firm is family-owned; the nature, profitability and prospects of the business, etc. — the partners and their lawyers usually know early on if the severe rupture in relations symbolized by the outbreak of litigation is reconcilable or not. This is true even when no one in the lawsuit is asking the court to dissolve the entity and end the partnership.

Experienced judges know it too. They’ve seen these intensely personal and bitterly fought cases linger for years, generating one pre-trial motion after another along with appeals, as the sides jostle for position and superior leverage for what all concerned know is most likely to happen in the end anyway: a settlement involving either a buy-out of one side by the other or, if the business assets lend themselves to it, a division of assets.

But judges don’t have the power to order dissolution of the business and thereby hasten the inevitable buy-out or division of assets unless someone asks for it by way of petition brought under the applicable dissolution statute, which, for various reasons beyond the scope of this post, they may never do.

So how can a judge prod the parties toward a business divorce when no one has petitioned for dissolution? One of our most experienced judges in this field, Nassau County Commercial Division Justice Stephen A. Bucaria, recently devised a novel solution in Digirolomo v. Sugar LI, LLC, Short Form Order, Index No. 008756 (Sup Ct Nassau County Nov. 20, 2013), by granting a preliminary injunction in favor of an LLC’s minority members, preventing the controlling member from enforcing capital call provisions in the operating agreement, conditioned on the plaintiffs’ filing within 30 days an amended complaint seeking judicial dissolution of the LLCContinue Reading Novel Ruling in Lawsuit Over Capital Call Prods Parties to Equitable Buy-Out

Last week, a Manhattan appellate panel in Antonini v. Petito, 2012 NY Slip Op 04393 (1st Dept June 7, 2012), reversed a trial court order and granted summary judgment terminating the combined 50% interest of two LLC members based on their alleged failure to contribute to mortgage payments for the LLC’s real property. The court’s ruling enforced a provision in the LLC’s operating agreement that closely tracks the language in §502(c) of the Limited Liability Company Law authorizing, among other consequences for failure to make required capital contributions, the “forfeiture of the defaulting member’s interest.”

The harsh outcome is surprising not least of all because the operating agreement’s provision, while not a model of clarity, raises a question whether the specified array of penalties for failure to make a “required contribution” applies only to a member’s failure to make the initial capital contribution which is expressly qualified “as the sole Capital Contribution to be made by [the member].” The mortgage payments at issue were not the initial contributions and, in fact, there was no dispute that, by the time they arose, the “defaulting” members’ capital contributions exceeded those made by the prevailing 50% member. The outcome is stranger still because the members’ obligation to contribute toward the mortgage payments is contained in a separate litigation settlement agreement that makes no reference to — much less does it purport to amend — the operating agreement’s provision for capital contributions.

Background

The case involves a realty company named Bridgeview at Broadway, LLC (“Bridgeview”) formed in 2006 by three individuals as equal one-third members: Vittorio Antonini, Orazio Petito and Rocco Petito. In September 2006, Bridgeview paid $2.75 million to acquire for renovation and development two adjacent mixed-use properties in Brooklyn’s Williamsburgh section, next door to the famous Peter Luger’s Steakhouse. The purchase was mostly financed with a $2.5 million mortgage loan from BRT Realty Trust. Each member made a required initial capital contribution of $285,000.

Continue Reading Bad LLC Agreement Makes Bad Law in Dispute Over Capital Call

I don’t know Mr. Duff or Mr. Curto. I do know they went into business together to develop real estate and formed a limited liability company for that purpose. I imagine Mr. Duff and Mr. Curto were friends, neighbors or business associates when they decided to start their relatively modest venture. I imagine their prior social or business relationship fostered a sense of mutual trust, confidence and enthusiasm for the project, along with a casual attitude toward documenting the economic and management rights and obligations owed one another. I imagine they found online or otherwise obtained and signed a one-size-fits-all form of LLC operating agreement without consulting an attorney, before they made provision for financing their business plan.

I do know that Mr. Duff sued Mr. Curto after the business venture failed, alleging that Mr. Curto did not put in his pro rata share of capital contributions. I do know that Mr. Duff lost his suit because he and Mr. Curto left blank the space in the operating agreement where they were supposed to fill in their required capital contributions, and because the agreement did not otherwise address disparate member financing. I do know that this kind of costly oversight happens all too frequently with new business partners who fail to appreciate the insurance value of seeking out competent legal advice to assist them in crafting a partnership agreement that adequately addresses the partners’ financial responsibilities.

Duff v.Curto, 2012 NY Slip Op 30264(U) (Sup Ct Suffolk County Jan. 25, 2012), decided earlier this year by Suffolk County Commercial Division Justice Emily Pines, results from a perfect-storm confluence of poor legal planning and the real estate market downturn. At the top of the market in 2006, Duff and Curto as 50/50 owners formed Fairlea Court Holdings, LLC to acquire land in North Haven, New York for construction of a single-family home. When the improved property was sold in the down market in 2009, the sale proceeds were insufficient to cover the mortgage, construction loan and expenses.

Continue Reading The Importance of Defining Capital Contributions in the LLC Agreement