If you haven’t yet listened to prior episodes of the Business Divorce Roundtable (a) it’s time you did and (b) absolutely you won’t want to miss the latest episode (click on the link at the bottom of this post) featuring first-hand, real-life, business divorce stories told by business appraiser Tony Cotrupe of Melioria Advisors (photo left) and attorney Jeffrey Eilender of Schlam Stone & Dolan (photo right).

Tony’s and Jeff’s stories have a common element: both involve the contentious break-up of a poisonous business relationship between two brothers. The similarity ends there. In my interview of Tony, he puts us inside a fast-paced and ultimately successful effort by the feuding second-generation owners of a propane distributorship, guided by their respective lawyers working in collaboration, to avoid litigation by engineering a buy-out of one brother by the other based on Tony’s business appraisal as the jointly retained, independent evaluator. It’s a happy ending to what otherwIse could have turned into a drawn-out courtroom slugfest.

Courtroom slugfest aptly sums up Jeff’s story as counsel for the brother owning the minority interest in Kassab v. Kasab, a case I’ve featured on this blog several times including last month’s post-trial decision giving the other brother the opportunity to buy out the minority interest upon pain of dissolution if he doesn’t (read here, here, and here). Jeff’s insider analysis of the case provides unique insights into a multi-faceted, roller-coaster-ride of a case involving novel issues under the statutes and case law governing business corporations and limited liability companies.

If you’re a lawyer, business appraiser or business owner with a business divorce story you’d like to share for a future podcast, drop me a line at pmahler@farrellfritz.com.

 

Regular readers of this blog know it’s been anything but summer doldrums in the world of business divorce, what with case law developments such as the Appellate Division’s potentially far-reaching ruling on the purposeless purpose clause and LLC dissolution in Mace v Tunick reported in last week’s post, and the astonishing story of minority shareholder oppression in the Twin Bay Village case also reported earlier this month.

This year’s edition of Summer Shorts picks up the summer pace with short summaries of three must-read decisions by New York and Delaware courts on three very different business divorce topics: use of a Special Litigation Committee to evaluate derivative claims brought by LLC members (New York); grounds for dissolution and the court’s remedial powers in shareholder oppression cases (New York); and LLC deadlock dissolution (Delaware).

Appellate Ruling Rejects Appointment of Special Litigation Committee in LLC Derivative Suit Where Not Authorized By Operating Agreement

LNYC Loft, LLC v Hudson Opportunity Fund I, LLC, 2017 NY Slip Op 06147 [1st Dept Aug. 15, 2017].  In Tzolis v Wolff, New York’s highest court recognized a common-law right of LLC members to sue derivatively on behalf of the LLC. Subsequent lower court decisions have clarified other aspects of the right by analogy to corporation law, such as requiring the plaintiff LLC member to allege pre-suit demand or demand futility. In shareholder derivative suits involving corporations, the board’s inherent authority to appoint a Special Litigation Committee composed of independent and disinterested directors to assess derivative claims is well established and, when properly implemented, can result in the court’s dismissal of derivative claims based on the SLC’s conclusion that the claims do not merit prosecution by the corporation. Continue Reading Summer Shorts: Three Must-Read Decisions

Who paysThere are two breeds of buy-outs in corporate dissolution proceedings: voluntary and involuntary.

When a minority shareholder petitions for judicial dissolution on grounds of oppression, New York’s statutory scheme gives respondents the option to avoid a dissolution contest voluntarily by electing within 90 days to purchase the petitioner’s shares for “fair value” in an amount either to be agreed upon by the parties or determined by the court in an appraisal proceeding.

The buy-out statute (Business Corporation Law § 1118) grants the right of election to “any other shareholder or shareholders or the corporation” which, as a practical matter, leaves it up to the controlling shareholders whether to purchase the shares individually or through the corporation. Not surprisingly, in my experience the election overwhelmingly is made by the corporation. After all, who wants to undertake personal liability voluntarily, especially before the court determines the value of the petitioner’s shares and the terms of payment? Continue Reading Who Pays When the Court Compels a Buy-Out?

LLCIf there’s a common theme to the trio of LLC cases highlighted in this post, it’s that having a well-crafted written operating agreement is no guarantee there won’t be a litigation dust-up, while not having a written operating agreement greatly enhances the odds of a legal dispute among members at some point down the road.

Let’s start with the well-crafted operating agreement in Estate of Calderwood v Ace Group International LLC, 2016 NY Slip Op 30591(U) [Sup Ct NY County Feb. 29, 2016], in which Manhattan Commercial Division Justice Shirley Werner Kornreich ruled that upon the death of the subject Delaware LLC’s majority member, under the express terms of Sections 9.7 and 7.1 of the LLC Agreement (read here), his estate was deemed a “Withdrawing Member” with no management rights and retaining solely the right to receive distributions. Continue Reading LLC Case Notes: Member Expulsion, Withdrawal, and LLC Purpose

DiscountOn the heels of last week’s post titled The DLOM Debate Heats Up, a timely new ruling by a New Jersey intermediate appellate court adds yet another interesting twist to the application of the discount for lack of marketability in fair value proceedings involving dissenting shareholder appraisals and oppressed minority shareholder buyouts.

New Jersey courts have a more restrictive approach to DLOM in fair value contests than New York courts, generally reserving it for “extraordinary circumstances” involving inequitable or coercive conduct by the seller. This latest New Jersey ruling doesn’t make new law but, to this observer at least, its application and quantification of DLOM seem equally if not more reliant on legal doctrine and, in particular, free-floating equity considerations than on empirically-based appraisal theory and methodology.

The New Jersey Appellate Division’s unpublished decision in Wisniewski v Walsh, 2015 N.J. Super. Unpub. LEXIS 3001 [App. Div. Dec. 24, 2015], caps an astonishing 20-year litigation saga involving a family-owned trucking business taken over from the founding father by three siblings, one of whom sued the other two under New Jersey’s oppressed shareholder statute. In 2000 the trial judge ruled that the petitioner himself was the oppressor and ordered him to sell his one-third interest to the company or his siblings for fair value to be determined by the court. Continue Reading Court Applies 25% Marketability Discount Despite “Strong Indicators of Liquidity”

equityWhen it comes to LLC jurisprudence, equity’s on a roll.

A few major examples come to mind: the recent Carlisle case in which the Delaware Court of Chancery enforced “equitable dissolution” of an LLC upon the petition of the assignee of a membership interest who lacked standing under the dissolution statute; the Mizrahi case in which a New York appellate panel ordered an “equitable buy-out” of a 50% LLC member upon petition by the other 50% member in the absence of a statutory buy-out remedy; the Gottlieb decision in which another New York appellate panel gave birth to common-law “equitable accounting” claims.

Add to the growing list of equity-driven rulings for these contract-centric creatures of statute an unpublished decision last week by a New Jersey intermediate appellate court in All Saints University of Medicine Aruba v Chilana, No. A-2425-13T1 [N.J. Super. Ct. App. Div. Oct. 27, 2015], directing the lower court on remand to consider ordering a forced sale of a dissociated LLC member’s interest as a “common law equitable remedy” for “common law breaches of duty” notwithstanding the appellate court’s recognition that neither the applicable dissociation statute nor the LLC’s operating agreement authorized a compulsory sale. Continue Reading Dissociated LLC Member Faces “Equitable” Forced Buy-Out

ExpulsionPresently fourteen states and the District of Columbia have enacted the Revised Uniform Limited Liability Company Act (2006). RULLCA legislation is pending in three other states. Regrettably, New York is not one of them.

One of RULLCA’s innovative features, carried over from the original Uniform LLC Act (1996), is its provision in Section 602(6) authorizing judicial expulsion (“dissociation”) of a member who:

(A) has engaged, or is engaging, in wrongful conduct that has adversely and materially affected, or will adversely and materially affect, the company’s activities;

(B) has willfully or persistently committed, or is willfully and persistently committing, a material breach of the operating agreement or the person’s duties or obligations under Section 409; or

(C) has engaged in, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.

New Jersey adopted RULLCA effective March 2013 for all new LLCs and made applicable to all existing New Jersey LLCs as of March 2014. However, even before adopting RULLCA, New Jersey’s previous LLC Act included a provision substantially mirroring RULLCA’s Section 602(6). Continue Reading Involuntary Member Dissociation Under RULLCA

pushLong Island’s dense population and surfeit of privately owned businesses small, medium, and large assure the Commercial Division judges of the Nassau County Supreme Court more than their fair share of disputes between business co-owners. What’s amazing is the range of business divorce cases heard by that court, from AriZona Iced Tea involving a multi-billion dollar, internationally known brand to the smallest mom-and-pop shops where you wonder how the fight can be worth the legal bills.

One thing in common between the high-stakes AriZona Iced Tea case and, on the other end of the spectrum, the pending fight between two co-owners of the Gusto Latino Bar & Restaurant, a neighborhood watering hole located in Hempstead, New York, is that both cases took about five years to resolve. There the similarity ends. And, again, you have to wonder how the Gusto Latino case, in which the invested dollar amounts cited in the court’s decision wouldn’t even qualify as a rounding error in the AriZona Iced Tea case, possibly has justified five years of litigation expense.

So why am I writing about it? Not because there’s anything particularly compelling about its facts or the parties’ claims. Essentially it’s a garden variety case where parties go into business together without a shareholders’ agreement after which there’s a falling out and one side claims the other either is not a shareholder or, at most, holds a minority interest. We’ve all seen dozens of similar cases.

Rather, the Gusto Latino case is noteworthy because of the novel remedy devised by the presiding judge. For those who read this blog regularly, you’ve already guessed correctly that when I mention a novel remedy in a Nassau County Commercial Division business divorce case, chances are I’m referring to a decision by that court’s senior member, Justice Stephen A. Bucaria, who, as I’ve noted before, is not afraid to think outside the box when it comes to creative solutions to intractable shareholder disputes. Continue Reading First a Judicial Nudge, Then a Push to the Buy-Out in Shareholder Dispute

BuybackIf you’ve got an owner-operated, closely held business entity that pays no dividends, and it features controlling and non-controlling ownership interests, generally it’s a good idea to include in the owners’ agreement provisions for the compulsory buyback of the non-controlling owner’s interest upon termination of employment.

The reasons are fairly obvious. The last thing anyone needs is an outside owner with trapped-in capital, possibly having to go out-of-pocket for taxes on phantom income, who may feel compelled to challenge the controller’s financial and management decision-making, possibly through a books-and-records demand and/or a lawsuit asserting derivative claims or seeking judicial dissolution, as the only means available to pressure the controller into a reasonable buyout.

While I’m a fan of such forced buybacks, I’m less wild about buyback provisions that reduce the amount to be paid for the equity interest of a non-controlling owner whose termination is for cause. I get the idea — to incentivize an owner/employee to keep to the straight and narrow — but too many times I’ve seen trumped-up terminations for cause by a financially incentivized controller followed by litigation brought by the financially penalized, expelled owner who contests cause, especially when the alleged misconduct is claimed to fall within a broad, catch-all category such as violation of company policy or failure to perform duty.

Case in point: last week’s appellate ruling in Matter of Bonamie, 2015 NY Slip Op 06191 [3d Dept July 16, 2015]. Bonamie involves a company called Ongweoweh Corp. which, according to its website, was founded in 1978 by Frank Bonamie in upstate New York and is “a Native American-owned, pallet management company providing pallet & packaging procurement, recycling services and supply chain optimization programs.” According to this trade publication, in 2010 Frank’s son Daniel became the company’s CEO and president. Continue Reading The Hidden Cost of a Devalued Buyback Upon Termination for Cause

ValuationIf you’ve studied New York dissolution law, you know that, unlike proceedings involving close corporations, there’s no statutory authority for a court-ordered buy-out when a member of a limited liability company petitions for judicial dissolution under LLC Law § 702.

You also know, especially if you follow this blog, that notwithstanding the absence of such authority, on a few occasions New York courts have invoked their common-law powers of equity to compel buy-outs in LLC dissolution cases, or have reached the same result by characterizing the buy-out as a form of liquidation.

The selected valuation date can make a critical difference in determining the value of an equity interest in the business. In dissolution proceedings involving close corporations, the statute authorizing a buy-out election, Business Corporation Law § 1118, stipulates valuation as of the day before the filing of the petition. We don’t have similarly definitive guidance on the LLC side because there’s no enabling statute, but the few LLC cases decided so far suggest some answers. Continue Reading Court-Ordered LLC Buy-Outs: What’s the Valuation Date?