Dissolution Procedure

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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

They say this summer has been unusually cool in the Northeast, but it’s been a hot one for business divorce litigation, judging from the number of recent court decisions involving various and sundry disputes among co-owners of closely held businesses. So, once again, it’s time for my annual summertime post featuring a few, short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision by Justice Melvin Schweitzer in a battle between 50/50 ownership factions over control of an international translation services company with over 3,000 employees. Next up is Justice Carolyn Demarest’s ruling denying a change of venue in a corporate dissolution case. Last is a decision by Justice Marcy Friedman in which she addressed an interesting statute of limitations defense in a drawn-out dissolution case.

Shareholder of Parent Corporation Has Standing to Sue Derivatively to Remove Subsidiary’s Director But Not for Dissolution

Elting v Shawe, 2014 NY Slip Op 32126(U) [Sup Ct, NY County July 24, 2014]. It’s not everyday you encounter business divorce litigation on the scale of this case, involving a firm with over 3,000 employees and revenues over $350 million. The subject company is a closely held Delaware holding corporation owned 50/50 by two individuals who also comprise its two-director board, and its wholly owned New York subsidiary providing international translation services. One owner-director sued the other for alleged financial and management abuses, asserting direct and derivative claims seeking the defendant’s removal as an officer and director of the subsidiary under BCL §§ 706 (d) and 716 (c), and also seeking deadlock dissolution of the subsidiary under BCL § 1104 (a). Continue Reading Summer Shorts: Director Removal and Other Recent Decisions of Interest

Last week, in Matter of Gould Erectors & Rigging, Inc., 2014 NY Slip Op 05004 [3d Dept July 3, 2014], an upstate appellate panel affirmed in part and reversed in part a lower court’s decision that highlights the special rules governing the filing and service of petitions seeking judicial dissolution of close corporations under Article 11 of the Business Corporation Law.

In an “ordinary” lawsuit, due process as embodied in the rules of civil procedure requires service of the summons and complaint on named defendants to confer personal jurisdiction over them. If service is not effected, or if service is not effected properly, the non-served defendant can appear and move to dismiss, which can have especially drastic consequences if the statute of limitations has expired in the interim. A non-served defendant who doesn’t appear in the case, i.e., who defaults, and against whom a judgment is entered, can later apply to have the judgment vacated.

The rules for corporate dissolution proceedings are different. The first important difference is that each of the statutory grounds for dissolution, including deadlock under BCL § 1104 and shareholder oppression under BCL § 1104-a, authorizes the filing of a “petition” —  not a complaint — in what New York practice refers to as a “special proceeding” governed by Article 4 of the Civil Practice Law and Rules. In general, the rules for special proceedings provide for expedited judicial review in statutorily delimited categories of disputes. One of the other, more frequent uses of special proceedings is for challenges to decisions made by administrative and other quasi-judicial governmental bodies under CLPR Article 78. Continue Reading Special Rules Govern Service in Corporate Dissolution Proceedings

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

It’s hard enough to explain to clients in business divorce cases the complicated statutory and judge-made law governing the substantive rights of the parties, for example, what constitutes shareholder oppression, or what kind of deadlock between 50/50 owners warrants dissolution, or how a stock interest gets valued in a buy-out proceeding.

But try explaining to clients the confoundingly intricate rules of civil procedure that dictate how a lawsuit must be prosecuted and defended, and, well, let’s just say you tend to get a lot of blank stares in return.

Whatever clients do or don’t comprehend, lawyers know that the rules of civil procedure present pitfalls and opportunities that can make or break a case, regardless of the more meaningful questions about who did what to whom, and which side should win or lose on the merits.

So primarily for all you lawyers reading this, I present below a series of short summaries of recent court decisions addressing a potpourri of procedural issues in dissolution cases, including service of the petition, time to answer, consolidation and intervention, and seeking unpleaded relief. Continue Reading A Potpourri of Procedural Issues in Dissolution Cases

As I’ve written before, the question where a corporate dissolution case can be brought, or “venue” as we lawyers call it, has nothing to do necessarily with the physical location of the company’s offices. Rather, the governing provision in § 1112 of the Business Corporation Law, as interpreted by the courts, fixes venue based on the county designated in the company’s certificate of incorporation filed with the secretary of state, regardless where the company’s offices actually are located.

I would wager that in the great majority of instances, a company’s principal place of business coincides with the certificate’s designated county. But businesses move, sometimes without updating the certificate. Or the company may be consist of transient investments with no business office apart from the owners’ residences which also may change without updating the certificate.

For any number of tactical reasons — including the convenience of the petitioner’s counsel and the inconvenience to the adverse party — a shareholder bringing a corporate dissolution proceeding may prefer to bring it in County X even though County Y is designated in the corporation’s certificate. Can the shareholder simply file an amended certificate of incorporation designating County X as the company’s new office location for purposes of filing for judicial dissolution in that county, or will the court reject it as a “sham” designation? Continue Reading Gaming the Venue Game in Dissolution Cases

Time can be your enemy or your friend in business divorce litigation — and sometimes both. (Read here my post entitled “Is Time on Your Side in Dissolution Case?”)

Businesses and the economic climate in which they operate are dynamic. For any number of reasons the value of a business can change significantly in the course of litigating a business divorce case, sometimes for the better and sometimes for the worse. The odds of such change increase as the case lingers.

Perhaps for that very reason, when the New York legislature designed the buy-out election in corporate dissolution cases brought by minority shareholders alleging oppressive conduct by the controlling shareholders, (1) it mandated that the election must be made within 90 days after the petition’s filing and (2) it fixed the valuation date as of the day before the petition’s filing. After the 90 days, an election to purchase can only be made at the court’s discretion and subject to court-imposed conditions.

An interesting decision last month by Albany County Commercial Division Justice Richard M. Platkin in Matter of Ryan (Integra Networks, Inc.),2013 NY Slip Op 51030(U) (Sup Ct Albany County June 11, 2013), brought into sharp relief the competing considerations when, with the passage of time, a dramatic increase in the business value prompts the petitioner to ask the court’s permission to voluntarily discontinue the dissolution proceeding while also prompting the controlling shareholder to make an untimely request for leave to purchase the petitioner’s shares valued as of the day before the petition’s filing. The court’s resolution — permitting the discontinuance but precluding the refiling of a new dissolution proceeding based on the same facts and circumstances — highlights the importance of making an early buy-out election.

Continue Reading Court Chooses Voluntary Dismissal Over Buy-Out in Two-Year Dissolution Case

A recent decision by a Manhattan trial judge in Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), brings into sharp relief the longstanding state of uncertainty surrounding the authority of a New York court to entertain a lawsuit seeking the involuntary dissolution of a New York-based foreign business entity.

Holdrum is a lawsuit brought in Manhattan Supreme Court by a limited partner of a New York-based, Delaware limited partnership formed in 1996 known as Museum Partners L.P.  The general partner is the former corporate raider, Asher Edelman, who, in the late 1980’s, left Wall Street and turned his considerable energies and resources to the fine arts and art financing. (Read here a 2010 Wall Street Journal profile of Edelman entitled The Art World’s Gordon Gekko.)

Holdrum’s Second Amended Complaint (read here) alleges that Museum Partners was formed for the purpose of obtaining an ownership position in a French publicly-traded company controlled by the Taittinger family, whose holdings included banking, hotel and champagne producer interests. Edelman sought either to obtain control of the company or to force the Taittinger family to purchase Museum Partner’s holding at a large profit. Continue Reading Judicial Muddle Persists Over Power to Dissolve Foreign Entities

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