“We are poster-boys for why family members should not go into business together.”

So says respondent Paul Vaccari in his affidavit opposing the petition of his brothers Richard and Peter seeking to dissolve their jointly owned corporation that owns a five-story, mixed-use building in Manhattan’s Hell’s Kitchen, housing the operations of Piccinini Brothers, a third-generation wholesale butcher and purveyor of meat, poultry and game established by the brothers’ grandfather and great-uncle in the 1920’s.

The family-owned business at the center of Vaccari v Vaccari, 2018 NY Slip Op 30546(U) [Sup Ct NY County Mar. 28, 2018], decided last month by veteran Manhattan Commercial Division Justice Eileen Bransten, is a classic example of fraying family bonds in the successive ownership generations caused by divergent career interests and sibling sense of injustice over disparate treatment by their parents.

While Vaccari will not go down in the annals of business divorce litigation as a landmark case, it does add incrementally and usefully to the body of case law addressing the grounds available or not to establish minority shareholder oppression. Justice Bransten’s opinion also serves as an important reminder to counsel in dissolution proceedings of their summary nature and of the potentially high cost of noncompliance with the Commercial Division’s practice rules. Continue Reading Shareholder Oppression Requires More Than Denial of Access to Company Information

Under the right set of facts, New York courts occasionally find remedies for LLC owners not explicitly authorized in the Limited Liability Company Law (“LLC Law”). Judges have a natural inclination to try to find solutions for legal problems where existing law falls short, which is part of how the common law came to be.

One striking example is the LLC derivative cause of action. In Tzolis v Wolff, 10 NY3d 100 [2008], the Court of Appeals ruled that members of an LLC “may bring derivative suits on the LLC’s behalf, even though there are no provisions governing such suits in the Limited Liability Company Law,” and even though the Legislature considered, but rejected, including a derivative right of action in the LLC Law.

Another remedy not found in the LLC statutes is the so-called “equitable buyout” in LLC dissolution proceedings.

In a nutshell, an equitable buyout grants an LLC member the possibility upon dissolution of the company (under circumstances yet to be well defined by the courts) of the ability to purchase the other member’s interest as an alternative to liquidation and sale of the company’s assets at auction. An equitable buyout results in one member involuntarily selling his or her equity to the other, and the other member becoming the business’s sole owner. The entity’s existence continues post-buyout – despite ostensibly being “dissolved.” Continue Reading The LLC Equitable Buyout: Past, Present, Future

When you want to sue to dissolve a business in New York on behalf of the estate of a deceased shareholder, to which court should you go: Supreme or Surrogate’s Court?

For many practitioners, the Commercial Division of the Supreme Court, a specialized court in New York focusing on complex business-related disputes, is the venue of choice. Most types of disputes have a minimum monetary threshold for eligibility in the Commercial Division. Manhattan’s threshold is the highest – $500,000.  The rules of eligibility for cases to be heard in the Commercial Division, which you can read here, have three exceptions to the monetary threshold – one of which lists “[d]issolution of corporations, partnerships, limited liability companies, limited liability partnerships and joint ventures — without consideration of the monetary threshold.” In part because there is no monetary threshold for dissolution proceedings, practitioners in the several New York counties that have a Commercial Division usually litigate business dissolution disputes in the Commercial Division.

But once in a blue moon a dissolution case will wind up in the Surrogate’s Court. Continue Reading Surrogate’s Court Declines to Order Demise of Fashion Business

A dissolution petitioner received the judicial equivalent of the old quip “Where’s the beef?” in a Brooklyn appeals court decision last week reversing an order dissolving a limited liability company under Section 702 of the Limited Liability Company Law. In Matter of FR Holdings, FLP v Homapour, 2017 NY Slip Op 07439 (2d Dept Oct. 25, 2017), the Appellate Division, Second Department, sent the case back to the drawing board, despite the LLC having been in receivership for more than two years, because the petitioner “offered no competent evidentiary proof” in support of his petition for dissolution.

A Common Fact Pattern

FR Holdings involved a common fact pattern. 3 Covert LLC (“Covert”) was formed to own and operate a mixed-use apartment and commercial building in Brooklyn.  Under the operating agreement, the purpose of the member-managed LLC was “to purchase and sell residential and commercial real estate and to engage in all transactions reasonably necessary or incidental to the foregoing.” Section 6.01 (a) of the operating agreement permitted most actions by “the vote or consents of holders of a majority of the Membership Interests.” As alleged in the petition, the LLC had five members, four of whom each held 12.5% interests. The fifth member, FR Holdings, owned a 50% interest. Continue Reading “Where’s the Beef?” Says Appeals Court, Reversing LLC Dissolution

Over the years I’ve litigated and observed countless cases of alleged oppression of minority shareholders by the majority. Oppression can take endlessly different forms, some more crude than others in their execution, some more draconian than others in their effect.

If there was an award for the crudest and most draconian case of shareholder oppression, Matter of Twin Bay Village, Inc., 2017 NY Slip Op 06024 [3d Dept Aug. 3, 2017], decided earlier this month by an upstate appellate panel, would be a serious contender.

The case involves a bitter dispute between two branches of the Chomiak family over a lakefront resort called Twin Bay Village located on beautiful Lake George in upstate New York. In 1957, the husband-and-wife founders, Stephan and Eleonora Chomiak, opened the summer resort on land they owned. They and their two sons, Leo and Vladimir, together ran the business until 1970 when they transferred ownership of the land and business to newly-formed Twin Bay Village, Inc. owned 26% by each parent and 24% by each son. Continue Reading And the Award For Most Oppressive Conduct By a Majority Shareholder Goes to . . .

abstentionCivil litigation in federal court can be a luxury experience. The quality of the judiciary is superb. Federal judges often give their cases substantial individualized attention. Lawsuits progress relatively quickly. The procedural rules in federal court have been litigated nationwide, so lawyers can easily find case law on almost every procedural nuance. Yet, business divorce cases are almost never litigated in federal court. Why?

The Friedman Decision

In 1994, the United States Court of Appeals for the Second Circuit all but sealed the courthouse door to business dissolution cases in federal court, at least in the territorial jurisdiction of the Second Circuit, which includes New York. Continue Reading Federal Court No Mecca for Business Divorce Litigants

Not VerifiedIn one of my first posts on this blog I warned about the dire consequences (i.e., dismissal) of bringing a summary proceeding for corporate dissolution under Article 11 of the Business Corporation Law by filing a petition verified by the petitioner’s attorney rather than by the petitioner, unaccompanied by the petitioner’s sworn affidavit attesting to the merits of the petition’s alleged grounds for dissolution.

What about the other way around, that is, when a respondent opposing a dissolution petition files an answer to the petition verified only by his or her attorney, also unaccompanied by a sworn affidavit of the respondent attesting to the facts offered in opposition to dissolution?

Not surprisingly, the consequences are equally dire — for the respondent, anyway — as illustrated by the court’s recent decision in Matter of Salcedo (Hispanos Car Service, Inc.), 2016 NY Slip Op 31143(U) [Sup Ct Richmond County May 11, 2016], granting a dissolution petition in the absence of “admissible evidence” contradicting the petition’s allegations. Continue Reading How Not to Oppose a Dissolution Petition

Catalina

An “anomalous situation” is how Nassau County Commercial Division Justice Vito M. DeStefano described what happened in a deadlock dissolution case involving the owners of the Catalina Beach Club in Atlantic Beach, New York (pictured).

As summed up by the judge in his decision last month in Carasso v Pauline J. Perahia Revocable Trust, Decision and Order, Index No. 606702/14 [Sup Ct Nassau County Dec. 28, 2015], the anomaly boiled down to this:

Petitioners and Respondents have changed their initial positions regarding dissolution in that the Petitioners, who initially sought dissolution, now move to discontinue the dissolution proceeding; and, the Respondents, who  initially opposed dissolution by filing objections in law, now oppose discontinuance of the dissolution proceeding and, in fact, seek dissolution.

Continue Reading A Doozy of a Discontinuance in Deadlock Dissolution Case

surviveRare is the petition for LLC dissolution not immediately greeted by a motion to dismiss by the non-petitioning members.

Don’t get me wrong. Pre-answer motions to dismiss are a staple of all kinds of litigation including business disputes. It’s just that, in my experience, as compared to more pedestrian matters such as contract disputes based on nonpayment or delivery of defective goods, the open-endedness of the standard for judicial dissolution of LLCs gives the non-petitioning member greater room and incentive to argue that the petition does not adequately allege grounds for relief and therefore should be dismissed out of the gate.

The member seeking dissolution and his or her counsel have choices to make that can affect the odds of surviving an early dismissal motion:

  • File for dissolution by summons and complaint in a plenary action, or by petition in a special proceeding?
  • If utilizing a special proceeding, commence it by order to show cause or by notice of petition?
  • Whether using a complaint or petition, allege the bare minimum facts or lay out detailed testimonial and documentary evidence as if it were a summary judgment motion?

Continue Reading Surviving a Motion to Dismiss in LLC Dissolution Cases

Minority Shareholder alleging oppressive acts by Majority Shareholder sues for judicial dissolution of ABC Co. under § 1104-a of the Business Corporation Law. Majority Shareholder elects to purchase Minority Shareholder’s shares under BCL § 1118, thereby converting the case to a valuation proceeding. After numerous adjournments, Minority Shareholder discharges his counsel and fails to appear at court conferences. The court marks the proceeding “off calendar” without prejudice to restore it by motion. Minority Shareholder never moves to restore. The buy-out never takes place.

Several years later, during which Minority Shareholder has had no involvement in ABC Co.’s business, up pops a new lawsuit by Minority Shareholder, not for dissolution but, rather, asserting individual and derivative claims against Majority Shareholder for taking excessive compensation and seeking damages for breach of shareholders’ agreement and to recover Minority Shareholders’ ongoing percentage of profits. Majority Shareholder opposes the new lawsuit, contending that Minority Shareholder ceased being a shareholder of ABC Co. upon the Majority Shareholder’s election to purchase years earlier in the dissolution case, and that Minority Shareholder’s sole remedy is to pursue the buy-out in that prior proceeding.

Is Minority Shareholder still a shareholder of ABC Co. with the right to assert shareholder claims in the new action, or is he limited to a buy-out remedy in the prior dissolution proceeding? Should the court grant Majority Shareholder’s dismissal motion based on the pendency of the prior dissolution proceeding? Continue Reading Buy-Out Interruptus: Court Okays New Suit Five Years After Unconsummated Election to Purchase in Prior Dissolution Case