Grounds for Dissolution

Last week, this blog wrote about a decision by Manhattan Commercial Division Justice Saliann Scarpulla in the burgeoning Yu family melee, in that case pitting one brother against the other and their sister over dissolution of two single-asset real estate holding LLCs. In her decision, Justice Scarpulla denied dissolution of the LLCs, despite the plaintiff’s allegations that his brother and sister had a personal “vendetta” against him, which they carried out by amending the operating agreement to remove the plaintiff as a manager, authorizing a mandatory capital, and, when he was unable to meet the capital call, foreclosing on his membership interest.

This week, we look at a companion decision by Justice Scarpulla, issued the same day as the first, expanding the intra-family brouhaha to include the three siblings’ parents. In Matter of Yu v Bong Yu, 2018 NY Slip Op 32009(U) [Sup Ct, NY County Aug. 15, 2018], the court considered the important but novel question of what impact, if any, does a shareholder’s assignment of voting rights under a stock pledge agreement have on his or her standing to sue for statutory dissolution of the business as well as under the common law. Continue Reading Stock Pledge Agreement Defeats Minority Shareholder’s Standing to Sue for Statutory But Not Common-Law Dissolution

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

In the judicial dissolution case that John (“Jake”) Feldmeier brought after resigning as the highly paid president of the family-owned business, the central issue over which he and his opposing siblings fought was whether the siblings’ subsequent refusal to issue shareholder distributions, as Jake claimed, was the discontinuation of a longstanding practice of awarding de facto a/k/a disguised dividends to shareholders in the form of bonuses or, as the siblings contended, was the continuation of a company policy over which Jake himself presided for many years whereby the owners and managers made good-faith business judgments to award merit-based bonuses to officers and employees.

In support of his claim, and in opposition to his siblings’ summary judgment motion, Jake invoked the granddaddy of all New York minority shareholder oppression cases, Matter of Kemp & Beatley, Inc., in which the state’s highest court upheld an order of judicial dissolution in favor of terminated employee-shareholders who similarly complained about the non-issuance of dividends where the evidence showed, prior to their departures, that the company historically awarded de facto dividends based on stock ownership in the form of “extra compensation bonuses.”

In opposition to Jake’s claim, and in support of their summary judgment motion, the siblings argued, on the law, that the reasonable-expectations standard for oppression formulated in Kemp, a case brought under Section 1104-a of the Business Corporation Law, did not apply to Jake’s non-statutory claim for common-law dissolution — Jake, as a 12% shareholder, lacked standing under Section 1104-a’s 20% minimum — and, on the facts, that Kemp was distinguishable because, unlike in that case, prior to Jake’s departure and with his active participation and approval as company president, bonuses were paid disproportionately to stock ownership and not at all to non-employee shareholders.

So who prevailed? Continue Reading Past is Prologue: Refusal to Adopt Dividend Policy After Petitioner Resigns Not Ground for Dissolution

Very few and very far between are cases in which the holder of a minority membership interest in a New York LLC — with or without a written operating agreement — prevails in an action brought under section 702 of the New York LLC Law for judicial dissolution. Mainly that’s because the statute’s “not reasonably practicable” standard as interpreted by the courts is limited to a showing of the LLC’s failed purpose or financial failure, and thus excludes as grounds for dissolution oppression, fraud, or other overreaching conduct by the majority directed at the minority.

Last week, in one of the rare exceptions to the general rule, Nassau County Commercial Division Justice Timothy S. Driscoll handed down a post-trial decision granting the judicial dissolution petition of two individuals holding a collective 42% membership interest in an LLC that operates a gymnastic facility. In Matter of D’Errico (Epic Gymnastics, LLC), Decision & Order, Index No. 610084/2016 [Sup Ct Nassau County Aug. 21, 2018], Justice Driscoll held that dissolution under section 702 was warranted where, after dissension arose, the majority members formed a new, similarly named entity to collect the subject LLC’s revenues and to dole them out to the subject LLC if, as, and when the majority members saw fit, thereby reducing the subject LLC to a “marionette to be manipulated at will by [the new LLC].”

The decision deserves attention, not only in respect of its navigation of the prevailing dissolution standard articulated by the Appellate Division, Second Department, in the 1545 Ocean Avenue case, but also as a cautionary lesson for business divorce counsel about the potential backfire of overly aggressive self-help measures undertaken by controllers in response to perceived acts of disloyalty or abandonment by minority members. Continue Reading Gymnastics Business Falls Off the Beam in LLC Dissolution Case

Douglas K. Moll, Professor of Law at the University of Houston Law Center, is well known to business divorce aficionados for his many scholarly articles examining minority oppression and fiduciary duty in close corporations and LLCs, and as co-author with Robert Ragazzo of one of the leading treatises on closely held business organizations. He’s also familiar to regular readers of this blog, having been featured previously in an online interview and in Episode #8 of the Business Divorce Roundtable podcast.

Professor Moll recently published yet another, terrific article entitled Judicial Dissolution of the Limited Liability Company: A Statutory Analysis (19 Tennessee Journal of Business Law 81 [2017]) in which he brings some much-needed perspective to the statutory landscape of the diverse grounds for judicial dissolution of LLCs found among the fifty states, the District of Columbia, and the several uniform and model acts promulgated since the 1990s. From the article’s abstract:

This article, prepared for the Business Law Prof Blog 2017 Symposium, examines the statutory grounds available to members who seek judicial dissolution of an LLC in all fifty states plus the District of Columbia. I also examined the judicial dissolution grounds in five model statutes: the 1992 Prototype LLC Act, the 2011 Revised Prototype LLC Act, the 1996 Uniform LLC Act, the 2006 Revised Uniform LLC Act, and the 2013 Revised Uniform LLC Act. Two charts are provided – one that provides the judicial dissolution grounds for each statute, and one that tabulates the different approaches.

Part I summarizes the methodology used and highlights the frequency of various statutory provisions. Part II analyzes two particular provisions—dissolution if it is not reasonably practicable to carry on the LLC’s business in conformity with its governing documents, and dissolution as a result of oppressive conduct by those in control. With respect to the “not reasonably practicable” language, the article argues that the impracticability of carrying on the business in conformity with either the certificate or the operating agreement should result in dissolution, but there is confusion over which statutory articulation is consistent with this result. With respect to the oppressive conduct ground, this article provides some possible explanations for why oppression-related dissolution statutes are less common in the LLC setting than in the corporation context.

Happily, Professor Moll accepted my return invitation to the podcast to discuss his findings. In the interview, a link to which appears below, Professor Moll highlights some surprising variations among the statutory expression of the prevailing not-reasonably-practicable dissolution standard. He also discusses some of the reasons for the relative scarcity — compared to close corporation statutes — of minority oppression as ground for judicial dissolution of LLCs, and the competing forces of freedom of contract and judicial paternalism that continue to shape the evolving statutory and common-law jurisprudence governing internal relations among LLC members.

Give it a listen. I guarantee you’ll be glad you did.

 

The hard-fought business divorce litigation between Nissim Kassab and his brother Avraham has provided plenty of fodder for this blog over the last several years (here, here, here, and here) with more to come, as evidenced by Queens County Supreme Court Justice Timothy J. Dufficy’s decision earlier this month dismissing Nissim’s second attempt to plead a claim for judicial dissolution of the brothers’ realty-holding company known as Mall 92-30 Associates LLC (“Mall”), which owns an unimproved lot in a prime development location in downtown Jamaica, Queens, valued around $10 million.

Justice Dufficy’s ruling in Matter of Kassab v Kasab, 2018 NY Slip Op 50934(U) [Sup Ct Queens County June 11, 2018], comes on the heels of a post-trial decision last year in a related case brought by Nissim in which Justice Dufficy conditionally ordered dissolution of their corporation known as Corner 160 Associates, Inc. (“Corner”) which owned two unimproved lots adjoining Mall’s lot. Justice Dufficy’s order gave Avraham the option to buy out Nissim’s 25% interests in both Corner and Mall at fair values determined by the court, but Avraham took a pass and subsequently failed to obtain an appellate stay of the dissolution order, leading to a public auction sale of Corner’s realty two weeks ago by the court-appointed receiver for $18 million.

Nissim’s second shot at dissolving Mall, like the first unsuccessful one, illustrates anew the hurdles faced by a minority member of a solvent, realty-holding LLC, particularly when there’s no operating agreement giving the minority member additional management rights, in satisfying the prevailing standard for judicial dissolution of LLCs as articulated in the 1545 Ocean Avenue case, namely, the LLC’s management “is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved” or that “continuing the entity is financially unfeasible.” Continue Reading Court Denies Second Bite at Dissolution Cherry in Kassab Brothers Business Divorce

“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

We call it deadlock dissolution when a 50% shareholder of a close corporation, who claims to be at an impasse with the other 50% shareholder, asks the court to dissolve and liquidate the corporation. New York’s deadlock dissolution statute, unlike its statutory cousin for minority shareholder oppression petitions, does not give the non-petitioning 50% shareholder the right to avoid dissolution by acquiring the petitioner’s shares for “fair value” as determined by the court, nor do the courts have statutory or common-law authority to compel a buyout. Absent a settlement, the litigation outcomes are binary: either dissolution is granted, in which case the court usually will appoint a receiver to sell the corporation’s assets, or it’s denied, in which case the co-owners continue indefinitely their fractious co-existence.

There’s one particular subspecies of deadlock dissolution that may not be motivated primarily by the usual disputes over finance, personnel, owner compensation, budget, distributions, or other such operational issues. Rather, sometimes a deadlock dissolution petition is brought when the two owners disagree whether to dissolve or continue to operate a functioning business. The petitioner may need the liquidity for unrelated financial reasons, or in contemplation of retirement, or because he or she believes the optimal time to sell the business or its assets is at hand. Perhaps the two owners also discussed a buyout but couldn’t agree on terms. Over time, as resentments fester and pressures grow, one or both owners typically undertake unilateral actions affecting the business, or block management actions advanced by the other, that push the standoff to crisis mode and into the hands of lawyers and judges.

A recent decision by Manhattan Commercial Division Justice Saliann Scarpulla shows how a deadlock dissolution petition of this existential sort can play out. Continue Reading One 50% Shareholder Wants to Sell or Liquidate the Business. The Other Wants to Keep It Going. Is That Deadlock?

The test for judicial dissolution of LLCs under LLC Law § 702, as laid down in 1545 Ocean Avenue, initially asks whether the managers are unable or unwilling to reasonably permit or promote realization of the LLC’s “stated purpose” as found in its operating agreement.

I would venture to say that the overwhelming majority of operating agreements, in their purpose clauses, use the phrase “any lawful business” which, not coincidentally, mirrors the enabling language found in LLC Law § 201, authorizing LLCs to be formed for “any lawful business purpose.” Boiler-plate or not, using “any lawful business” in the purpose clause can be a prudent drafting technique to avoid future conflict or need to amend the operating agreement should the LLC’s business model change in response to future events. Of course, there are some circumstances, often involving single asset real estate holding companies, when stating a specific purpose is the more prudent technique.

Which is why last summer’s decision by the Appellate Division, Second Department in Mace v Tunick was such an eye opener. In Mace, the court held that the “any lawful business” purpose clause in the operating agreement at issue did not state any purpose, and on the basis that the lower court had engaged in impermissible fact-finding on a pre-answer dismissal motion, reversed the lower court’s summary dismissal of the minority member’s dissolution suit and remanded the case for further proceedings.

If “any lawful business” states no purpose, I queried in my prior post on the case, does “the primary focus of the judicial dissolution standard under 1545 Ocean Avenue — whether the LLC’s managers are willing or able to achieve its stated purpose under the operating agreement — merely becomes a waystation on the road to more protracted litigation proceedings requiring discovery and evidentiary hearings”?

I still don’t have the definitive answer to that question, but I can tell you what happened in Mace on remand to the lower court, and after the lower court conducted a trial. Continue Reading The Purposeless Purpose Clause Makes a Comeback — Or Does It?

As LLCs have become the dominant form of closely-held business in New York, cases involving dissolution of partnerships have become more and more rare. Section 63 of the Partnership Law is the statute governing judicial dissolution of New York general partnerships. The last time this blog wrote about a general partnership dissolution under Partnership Law § 63 was Summer 2015, a testimonial to how uncommon they have become.

After a lengthy interlude, along comes Magid v Magid, 2017 NY Slip Op 32603(U) [Sup Ct NY County Dec. 14, 2017].

Magid involved a fact pattern familiar to this blog’s regular readers – an entity owned by siblings, an income-producing property, a rising real estate market, some family members who want to sell, others who do not. Litigation ensues. Usually, the various dissolution statutes under the Business Corporation Law (BCL) or the Limited Liability Company Law (LLC Law) provide the standards to resolve the dispute.

In Magid, Manhattan Commercial Division Justice Eileen Bransten considered the applicable standards for judicial dissolution – particularly based on deadlock – under Partnership Law § 63. Magid raises the question – is the standard for judicial dissolution based on deadlock under Partnership Law § 63 any different than under BCL § 1104, the deadlock statute for corporation dissolutions? Continue Reading Rare Partnership Dissolution Decision Applies Deadlock Standard to Dissolution Under Partnership Law