Interim Remedies

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This winter forever will be remembered in the Northeast as the winter of the “bomb cyclone,” which gets credit for the 6º temperature and bone-chilling winds howling outside as I write this. So in its honor, I’m accelerating my annual Winter Case Notes synopses of recent business divorce cases, which normally don’t appear until later in the season.

This year’s selections include a variety of interesting issues, including LLC dissolution based on deadlock; the survival of an LLC membership interest after bankruptcy; application of the entire-fairness test in a challenge to a cash-out merger; an interim request for reinstatement by an expelled LLC member; and a successful appeal from a fee award in a shareholder derivative action.

Deadlock Between LLC’s Co-Managers Requires Hearing in Dissolution Proceeding

Advanced 23, LLC v Chamber House Partners, LLC, 2017 NY Slip Op 32662(U) [Sup Ct NY County Dec. 15, 2017].  Deadlock is not an independent basis for judicial dissolution of New York LLC’s under the governing standard adopted in the 1545 Ocean Avenue case but, as Manhattan Commercial Division Justice Saliann Scarpulla explains in her decision, when two co-equal managers are unable to cooperate, the court “must consider the managers’ disagreement in light of the operating agreement and the continued ability of [the LLC] to function in that context.” In Advanced 23, the co-managers exchanged accusations of bad acts and omissions, e.g., one of them transferring LLC funds to an unauthorized bank account, raising material issues of fact as to the effectiveness of the LLC’s management and therefore requiring an evidentiary hearing, which is just what Justice Scarpulla ordered. Of further note, in a companion decision denying the respondent’s motion to dismiss the petition (read here), Justice Scarpulla rejected without discussion the respondent’s argument that judicial dissolution under LLC Law § 702 was unavailable based on a provision in the operating agreement stating that the LLC “will be dissolved only upon the unanimous determination of the Members to dissolve.” In that regard, the decision aligns with Justice Stephen Bucaria’s holding in Matter of Youngwall, that even an express waiver of the right to seek judicial dissolution of an LLC is void as against public policy. Continue Reading Winter Case Notes: LLC Deadlock and Other Recent Decisions of Interest

Lady Justice

Welcome to another edition of Winter Case Notes in which I clear out my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

And speaking of digging deeper, if you don’t already know, New York’s e-filing system has revolutionized public access to court filings in most parts of the state. The online e-filing portal (click here) allows searches by case index number or party name. Once you find the case you’re looking for, you’ll see a chronological listing with links allowing you to read and download each pleading, affidavit, exhibit, brief, decision, or other filing. No more trips to the courthouse basement to requisition paper files!

This year’s synopses feature matters that run the gamut, from a claimed de facto partnership, to several disputes pitting minority against majority shareholders, to an LLC case in which the court resolved competing interpretations of a somewhat murky operating agreement. Continue Reading Winter Case Notes: De Facto Partnership and Other Recent Decisions of Interest

shareholderWhat makes a shareholder a shareholder? What makes an LLC member a member?

The simplicity of the questions belies the difficulties and endlessly unique fact patterns encountered in case after case involving close corporations and LLCs in which one faction claims the other has no ownership interest in the entity and therefore lacks standing to seek judicial dissolution or other remedies predicated on violation of owner rights.

That’s not to say there aren’t common characteristics of such ownership contests. Usually they spring from one or more of the following circumstances: lack of shareholder or operating agreement; lack of certificated interests or other formal ownership documents; lack of transparency of tax returns and other business documents requiring owner identification; prior, inconsistent representations in tax returns or court proceedings; and, sometimes, intentional concealment of ownership interests to avoid creditors, tax authorities, ex-spouses, etc.

Last month, in a pair of noteworthy decisions, Nassau County Commercial Division Justice Stephen A. Bucaria rejected challenges to claimed ownership interests in two very different cases, one involving a close corporation and the other an LLC, in both of which one party unsuccessfully claimed to be the sole owner. In the corporation case, Justice Bucaria granted summary judgment upholding the contested 4% stock ownership as evidenced by a stock purchase agreement and stock certificate notwithstanding the shareholder’s sworn testimony in a prior, unrelated case denying that he was a shareholder. In the LLC case, Justice Bucaria granted preliminary injunctive relief in favor of two individuals claiming one-third membership interest each as evidenced by documents provided to a franchisor and municipal agency, notwithstanding an operating agreement naming the adverse party as sole member. Continue Reading Sole Owners of Close Corporation and LLC Discover They’re Not So Sole

WillThere’s been very little case law defining the powers of the executor of a deceased LLC member under New York LLC Law § 608, enabling the executor or other estate representative to “exercise all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member.”

Perhaps the dearth of section 608 case law stems from the fact that even the most basic LLC operating agreements usually include provisions governing the disposition of a deceased member’s interest.

For example, the agreement may trigger mandatory redemption or buy-out of the deceased member’s interest. Or, as in the Budis case, it may track the default rules under sections 603 and 604 permitting the assignment of LLC interests to any person who, unless admitted as a member by the surviving members, obtains only an assignee’s right to receive the distributions and allocations of profits and losses the deceased would have received, i.e., receives no voting rights and therefore lacks member standing to participate in management, seek judicial dissolution, sue derivatively, demand access to books and records, etc.

A case from neighboring Connecticut may help to fill in at least some of the gaps in New York’s section 608 case law. A decision last month by the Appellate Court of Connecticut — that state’s intermediate appellate court — in Warren v Cuseo Family, LLC, AC 37239 [May 3, 2016], dealt with an interesting set of facts involving the estate of the majority owner of a family-owned LLC and produced an unusual but not surprising ruling giving the executor extraordinary power as temporary receiver to wind up the LLC’s affairs in order to settle the decedent’s estate. Continue Reading Executor of Deceased Majority Member Appointed Receiver to Wind Up LLC

cash registerAppellate case law in New York generally prohibits use of company funds to pay for legal defense costs in judicial dissolution proceedings.

The theory supporting the prohibition, as articulated over 50 years ago in Matter of Clemente Brothers, 19 AD2d 568 [3d Dept], aff’d, 13 NY2d 963 [1963], is that the statute authorizing dissolution proceedings “grants to the corporation as a separate entity no authority to determine whether a proceeding shall be initiated to dissolve itself,” thus making the corporation a proper jural party “for the limited and passive purpose of rendering it amenable to the orders of the court” and barring it from assuming a “militant alignment on the side of one of two equal, discordant stockholders.”

The principles animating Clemente and its progeny such as Matter of Rappaport, 110 AD2d 639 [2d Dept 1985], and Matter of Boucher, 105 AD3d 951 [2d Dept 2013], involving deadlock dissolution proceedings between 50-50 shareholders, have been extended to cases brought under the separate statute enacted in 1979 providing a dissolution remedy for oppressed minority shareholders. Continue Reading The Prohibition Against Using Company Funds for Legal Fees in Dissolution Proceedings

deadlock1“Finally, while this court is the only court with jurisdiction to dissolve the Company, the parties are advised that further attempts to collaterally evade the lawful orders of the New Jersey court may result in sanctions.”

Strong words, indeed, at the conclusion of a Decision and Order earlier this month by Manhattan Commercial Division Justice Shirley Werner Kornreich in a multi-jurisdictional fight for control of a data marketing company organized as a New York LLC owned by two deeply divided, 50-50 members.

Justice Kornreich’s ruling in Matter of Belardi-Ostroy, Ltd. v American List Counsel, Inc., 2016 NY Slip Op 30727(U) [Sup Ct NY County Apr. 14, 2016], denied injunctive relief and dismissed a dissolution petition which asked her effectively to override an order issued last December by a New Jersey judge appointing a fifth Board member to fill a vacancy on the LLC’s otherwise deadlocked five-member Board of Directors. Continue Reading Court Dismisses Dissolution Petition Amidst Multi-Jurisdictional Battle for Control of LLC

1 2 3

Stratospheric real estate values in New York City have bestowed great wealth on those lucky or wise enough to have invested before or in the early stages of the city’s demographic, cultural, and commercial renaissance over the last 25 or so years.

The dramatic rise in property values also has spawned more than its fair share of business divorce litigation by exacerbating the divergence of interests among co-owners, between those who desire to sell and take their profit and those who prefer to hold and/or develop the property. This phenomenon is especially observable in family-owned real estate holding companies where the potential for intra- and inter-generational conflict is more pronounced.

Take the case of the Kassab brothers, who co-own through two holding companies a nondescript, outdoor parking lot also home to a flea market near downtown Jamaica, Queens. The property consists of three contiguous parcels with a footprint of about 42,000 square feet. Under existing zoning the properties are buildable as of right to about 380,000 square feet. Recent valuation estimates for the undeveloped properties, which were acquired by the Kassabs between 1992 and 2001 at a small fraction of current value, start over $14 million.

In 2013, the younger brother owning 25% sued to dissolve the holding companies — one organized as a corporation, the other as a limited liability company — claiming oppression and freeze-out by his elder brother owning the other 75%. The younger brother claims the freeze-out tactics are designed to force him to sell his interest to his elder brother for a pittance. The elder brother counters that he has no desire to deprive his younger brother of his ownership rights and that his younger brother is attempting to force him to sell the properties due to the younger brother’s supposedly dire financial straits.

Last week, the case produced not one, not two, but three separate appellate decisions addressing a potpourri of rulings on issues of vital interest to business divorce counsel. Summaries follow after the jump. Continue Reading One Parking Lot, Two Brothers, Three Decisions

Lady JusticeWe’re two-thirds of the way through the official winter season, which thus far has dumped a lot of snow on the Northeast making it a good one for skiers. It’s also been a good season for business divorce aficionados with plenty of interesting decisions in judicial dissolution cases and contested buy-outs.

Each August for the last five years, I’ve published a Summer Shorts edition offering several bite-sized case synopses highlighting decisions that, while not meriting extended analysis, nonetheless offer valuable insights for business owners, transactional lawyers involved in business formation and, of course, business divorce lawyers. I figured it’s time to start the hibernal version, so welcome to the inaugural edition of Winter Case Notes.

First up is a decision by Justice Richard Platkin in which the validity under the operating agreement of an LLC manager’s removal hinged on the parties’ relative capital contributions. Next is Justice Stephen Bucaria’s latest of many rulings in a decade-long litigation saga, dissolving a holding company with an indirect ownership interest in a Massachusetts operating company. Last is a decision by Justice Cynthia Kern in which she denied dismissal of a claim for the belated sale of a LLC membership interest. Continue Reading Winter Case Notes: LLC Manager Removal and Other Recent Decisions of Interest

deathThe death of a shareholder amidst a court battle for control of a closely held business can have a dramatic effect on the direction and outcome of the case.

We saw it happen in my post a few weeks ago about the Catalina Beach Club case which started as a deadlock dissolution case between feuding 50/50 factions, but was discontinued abruptly after the petitioning faction gained voting and board control by acquiring an additional 25% interest from the estate of one of the respondent shareholders who died a few months after the suit began, much to the chagrin of the surviving 25% respondent now downgraded to non-controlling, minority shareholder.

Not one but two deaths in another, fractious family-owned business resulted in shifts in control with game-changing consequences for the positions and leverage of the litigants. The resulting travails of two generations of the Lewis family are laid bare in a recent decision by Albany Commercial Division Justice Richard M. Platkin in Heller v Lewis, 2015 NY Slip Op 51867(U) [Albany County Dec. 21, 2015], in which he denied preliminary injunctive relief sought by the majority-turned-minority faction. Continue Reading Death of a Shareholder

UturnIn a post last year entitled “Squabbling Partners with Piecemeal Adjudications Need Not Apply,” I wrote about Nassau County Commercial Division Justice Stephen A. Bucaria‘s creative adaptation of the ancient common-law principle of partnership law, forbidding actions at law between partners prior to dissolution and a final accounting, to cases involving close corporations and LLCs.

Essentially, in a series of cases involving claims among co-owners of close corporations and LLCs for breach of fiduciary duty and the like, Justice Bucaria likened these cases to partnership disputes and either conditioned relief on one side bringing a dissolution claim or dismissed the complaint with leave to replead including a claim for dissolution or buy-out.

The squabbling-partners rule applicable to corporations and LLCs now has a corollary, also courtesy of Justice Bucaria: if you do bring a claim for dissolution, don’t expect you’ll be able to withdraw it later for the purpose of gaining interim injunctive relief against your adversary.

The corollary appears in a recent decision by the judge in PFT Technology LLC v Wieser, Short Form Order, Index No. 8679/12 [Sup Ct Nassau County Apr. 13, 2015]. The case, commenced in 2012, involves a four-member LLC in which the three majority members brought suit in the LLC’s name against the fourth seeking judicial dissolution of the LLC and also asserting claims for breach of fiduciary duty. The defendant member opposed dissolution, demanded a fair-value buy-out of his membership interest, and counterclaimed against the three majority members for breach of fiduciary duty. Continue Reading Court Rebuffs Dissolution Withdrawal in Denying Enforcement of Non-Compete