Let’s face it. In business divorce, the accounting cause of action doesn’t get a lot of love. It’s not as sexy as the torts (conversion, breach of fiduciary duty, waste, etc). It lacks the oomph of judicial dissolution.

Nonetheless, accounting claims are ubiquitous in business divorce litigation, pleaded practically as a matter of course. Sometimes the claim is tacked on as if by rote, perhaps simply to beef up a petition, complaint, or counter complaint. But other times, like the books and records proceeding, the accounting cause of action can be a vital tool in the closely-held business owner’s litigation toolbox.

Ancient Roots

The accounting cause of action has its roots in a basic, ancient principle of partnership law: partners owe one another fiduciary duties, including the duty to account. The common-law duty of partners to account to one another and to the partnership is codified in Sections 42, 43, and 44 of the New York Partnership Law. Although there are not any quite comparable statutes in the Business Corporation Law (Section 720 provides a narrower right to sue a director or officer for an accounting) or the Limited Liability Company Law, it is well-settled that the obligation of business owners to account to one another is fully applicable to closely-held corporations and LLCs. Continue Reading Accounting Unchained: Is the Closely Held Business Owner’s Right to an Accounting Absolute?

P'shipIn the early 1990’s New York enacted its version of the Revised Uniform Limited Partnership Act (NYRULPA), codified in Article 8-A of the New York Partnership Law §§ 121-101 et seq. The law’s modernized features include in §§ 121-1101 through 1105 provisions for the merger and consolidation of limited partnerships along with the right of dissenting limited partners to be paid “fair value” for their partnership interests as determined in an appraisal proceeding.

You can count on one hand the number of published New York court decisions over the last 25 years dealing with dissenting limited partners. In fact, until this year, it’s possible you could count the number on one finger, that being the Court of Appeals’ 2008 ruling in the Appleton Acquisition case which I wrote about here. Appleton held that a limited partner may not bring an action seeking damages or rescission based on allegations of fraud by the general partner in connection with a merger transaction, and that the statutory appraisal proceeding is the exclusive remedy for such claims. Appleton never reached the issue of appraisal.

It therefore appears that last month’s decision by Manhattan Supreme Court Justice Geoffrey D. Wright in Levine v Seven Pines Associates L.P., 2015 NY Slip Op 30138(U) [Sup Ct NY County Jan. 28, 2015], may be the first published ruling that addresses issues attendant to a fair value determination in a dissenting limited partner case under NYRULPA.

Now, if you’re hoping for a meaty decision that delves into the fine points of appraisal methodology, Levine is not your case. Rather, Levine was decided on pre-trial motions to fix a date for an appraisal hearing and to compel the respondent limited partnership to provide certain pre-trial disclosure. In addition, the procedural aspects of the dissenting limited partner provisions in § 121-1105 expressly piggyback on the well-established procedures set forth in § 623 of the Business Corporation Law dealing with dissenting shareholders. Still, the issues decided in Levine serve up some useful pointers for practitioners. Continue Reading Decision in Dissenting Limited Partner Case Directs Fair Value Hearing, Grants Discovery

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

Someday, if and when the facts come out in discovery, we’ll learn what really happened in the curious case of Matter of Hu (Lowbet Realty Corp.), 2012 NY Slip Op 22314 (Sup Ct Kings County Nov. 2, 2012), in which a slippery minority shareholder somehow managed to sell the corporation’s sole realty asset and abscond with $1.6 million sale proceeds in violation of court order in a pending liquidation proceeding brought by the majority shareholder. In the meantime, the buyer and the property manager now find themselves ensnared in the majority shareholder’s effort to rescind the sale and to recover damages.

The court’s decision in Lowbet, issued earlier this month by Brooklyn Commercial Division Justice Carolyn E. Demarest, tells a remarkable story of brazen disobedience of court order by one Margaret Liu, a 25% shareholder of Lowbet Realty Corp. The decision also sheds light on an interesting, rarely seen procedural question in corporate dissolution proceedings, namely, whether the court may adjudicate within such summary proceedings a shareholder’s claim for relief against a third party who is neither a shareholder nor officer/director of the corporation, rather than being forced to commence a separate, plenary action by ordinary summons and complaint.

Background

The petitioner, Shau Chung Hu, was the 100% owner of Lowbet when, in 1980, it purchased a 19-unit apartment building in Brooklyn. In 1985, Hu married Margaret Liu and gave her a 25% stock interest in Lowbet. Mr. Hu and Ms. Liu separated in 1995, at which time Mr. Hu went to China where he has resided ever since, leaving Ms. Liu in full control over Lowbet. Continue Reading Dissolution Case Ensnares Buyer of Corporation’s Realty in Unauthorized Sale

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?

CabThe adjudication of corporate dissolution cases can and often does present any number of complex, fact-intensive issues that, if placed in the procedural context of an ordinary, plenary action, necessarily would occupy the parties in protracted pre-trial discovery proceedings including document exchange and depositions.

Dissolution cases in New York, however, are not ordinary lawsuits initiated by summons and complaint followed by discovery and trial.  Rather, the governing statutes mandate that the dissolution request be brought in the form of a so-called “special proceeding” initiated by petition and order to show cause followed usually within 4 to 6 weeks by a hearing based on the papers, akin to the manner in which a summary judgment motion is determined.  That is, the procedural rules for special proceedings laid out in Article 4 of the Civil Practice Law and Rules contemplate a potential summary disposition of the case at the initial hearing without the benefit (or detriment, depending on one’s point of view) of discovery.  CPLR Section 408 specifically requires leave of court before a party may serve a disclosure demand.

I have seen first hand and from afar many instances in which lawyers ignore the constraints on discovery in dissolution proceedings, or assume the court will rubber stamp applications for leave to serve discovery demands.  This is a mistake, as illustrated by a recent, unpublished decision by Nassau County Commercial Division Justice Timothy S. Driscoll in Matter of Kaufman (L.I. Yellow Cab Corp.), Short Form Order, Index No. 001486-09 (Sup Ct Nassau County Sept. 15, 2010).

Continue Reading Do Not Take Pre-Trial Discovery for Granted in Corporate Dissolution Proceedings

"Well over one and a half years have been wasted on a defense which is utterly without support."

Pretty strong stuff, coming from a recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria in Rosenfeld v. Luccaro, 2009 NY Slip Op 30963(U) (Sup Ct Nassau County Apr. 23, 2009), where the court granted dissolution of two closely held corporations based on "hopeless" deadlock and bitter dissension between two 50% shareholder factions.  The court’s sharp words were provoked by the respondent’s assertion that the petitioners were not — and had never been — shareholders, despite a seeming avalanche of corporate and tax records to the contrary.    

The subject corporations were formed in the 1970s by 50-50 shareholders Anthony Luccaro’s father and Walter Rosenfeld to own and operate a marina called Toms Point Marina located in Port Washington on Long Island.  Anthony Luccaro subsequently acquired his father’s interest, and Rosenfeld died some time in the 1980s.  His estate’s distributees included his second wife, Judith, and his three children from a prior marriage.

Fast forward to 2007, when the Rosenfeld children commenced judicial dissolution proceedings under Sections 1104 and 1104-a of the Business Corporation Law, claiming deadlock and oppression by Luccaro who allegedly refused to recognize the election of petitioner Todd Rosenfeld as director, refused access to the bylaws and other books and records, threatened the life of petitioner Steven Rosenfeld if he entered the marina property, operated the marina as a cash business without proper controls and employed his family members without proper accounting, refused to issue K-1 tax forms to the Rosenfelds, and took cash and other distributions for himself without making any distributions to the Rosenfelds.

Continue Reading Controlling Shareholder’s Unreasonable Refusal to Admit Petitioners’ Stock Ownership Constitutes Ground for Corporate Dissolution, Incurs Award of Attorney’s Fees

Over at the newly revived and highly recommended Unincorporated Business Law Prof Blog, there’s news of a recent decision by a U.S. District Court in Nevada holding under federal law that for purposes of attorney-client privilege, a limited liability company is more akin to a corporation than a partnership and on that basis, ruling that communications between the LLC’s manager and the LLC’s counsel need not be disclosed to an LLC member and former manager who brought an action against the LLC.  The case, Montgomery v. eTreppid Technologies, LLC, 2008 WL 1826818 (D. Nev. Apr. 18, 2008), appears to be the first published decision on this issue.

The privilege issue frequently arises in business divorce litigation where, typically, a non-controlling faction seeks access to the controlling faction’s communications with attorneys who’ve worked for, and been paid by, the company.  The issue tends to get further complicated by allegations that the legal work for the company in fact is being done for the interests of the controlling faction.

Montgomery involved a manager-managed LLC with a board-like management structure, hence an easier comparison to the corporate form.  It’ll be interesting to see how federal and state courts grapple with the issue in other cases, and whether courts will distinguish Montgomery in cases involving member-managed LLCs.

Strained relations between managing and non-managing members of limited liability companies (LLC) sometimes lead to fights over the former’s denial to the latter of access to company records.  Section 1102 of the New York Limited Liability Company Law (LLCL) sets forth a three-part scheme governing the maintenance of, and member access to, LLC records.

The first part, Section 1102(a), requires that every LLC maintain five specific categories of records:

(1)  if the limited liability company is managed by a manager or managers, a current list of the full name set forth in alphabetical order and last known mailing address of each such manager;

(2)  a current list of the full name set forth in alphabetical order and last known mailing address of each member together with the contribution and the share of profits and losses of each member or information from which such share can be readily derived;

(3) a copy of the articles of organization and all amendments thereto or restatements thereof, together with executed copies of any powers of attorney pursuant to which any certificate or amendment has been executed;

(4) a copy of the operating agreement, any amendments thereto and any amended and restated operating agreement; and

(5) a copy of the limited liability company’s federal, state and local income tax or information returns and reports, if any, for the three most recent fiscal years.

Note that the preceding list limits financial information to recent tax returns.  This becomes more important under the second part, Section 1102(b), which provides for member access to LLC records including all the records mandated under Section 1102(a), as follows:

Any member may, subject to reasonable standards as may be set forth
in, or pursuant to, the operating agreement, inspect and copy at his or her
own expense, for any purpose reasonably related to the member’s interest
as a member, the records referred to in subdivision (a) of this section, any
financial statements maintained by the limited liability company for the three
most recent fiscal years and other information regarding the affairs of the 
limited liability company as is just and reasonable.

Continue Reading Statute and Cases Create Uncertainty Over LLC Member’s Right to Inspect Books and Records