Interim Remedies

Subscribe to Interim Remedies

When you think about protecting a business firm’s intellectual property (IP), usually you think about protecting it from infringement by external actors.

But there also are internal threats — even mortal ones — to the business when the owners don’t take adequate steps to allocate and memorialize ownership rights in the business-related IP as between the company and those responsible for its creation.

Two recent cases illustrate the point.

What’s In a Name?

The first, from New York, involves a popular Manhattan restaurant serving Southern cuisine, called Root & Bone, operated by the eponymously named Root & Bone LLC. The company was formed in October 2013 by its three members, the plaintiff Freedman and defendants McInnis and Booth, each holding a one-third membership interest. Continue Reading Dissension Follows When Business Owners Don’t Put Their IP House in Order

Article 11 of the Business Corporation Law features multiple provisions giving judges broad authority and discretion to impose interim remedies designed to preserve corporate assets and otherwise to protect the petitioning minority shareholder’s interests pending judicial dissolution and buy-out proceedings involving closely held New York corporations. They include appointment of a temporary receiver, injunction, setting aside certain conveyances, and bonding the eventual buy-out award.

As in any type of civil litigation, an application for one or more of Article 11’s interim remedies can be motivated by tactical as well as strategic goals, namely, to paint the adverse party as the “bad guy” and to gain leverage for settlement purposes.

Matter of Hammad v Al-Lid Food Corp., Decision and Order, Index No. 518406/17 [Sup Ct Kings County May 29, 2018], decided last month by Brooklyn Commercial Division Justice Sylvia G. Ash, looks like one of those cases in which tactical ambitions overshadowed strategic merit, resulting in the court’s denial of the minority shareholder-petitioner’s motion to impose multi-faceted interim, coercive remedies against the controlling shareholders, well after the corporation elected to purchase the petitioner’s shares for fair value. Continue Reading You Sued for Dissolution, They Elected to Buy You Out, What Else Do You Want?

The Lowbet Realty saga, featuring the dissolution court’s rarely used authority to rescind an unauthorized sale of the corporation’s realty under Business Corporation Law § 1114, has finally ended after six years with a decision by the Appellate Division, Second Department, affirming the lower court’s order letting stand the realty’s sale to a bona fide purchaser for value. Matter of Hu (Lowbet Realty Corp.), 2018 NY Slip Op 03529 [1st Dept May 16, 2018].

Title companies across the city undoubtedly breathed a sigh of relief.

Lowbet Realty involves one of the most brazen, contemptuous heists of corporate assets amidst a dissolution proceeding you’ll ever encounter. The shorter version — click here and here for more detailed accounts in my two prior posts about the case — is the story of an estranged husband and wife who co-owned a single-asset realty holding company known as Lowbet Realty Corp. formed in 1980 and managed solely by the 25% shareholder-wife as the titular president after the 75% shareholder-husband in 1995 returned to live in China permanently.

In 2006, the husband removed his wife as president and named himself and his son as sole officers, even while his wife continued for years afterward to control the property consisting of a 19-unit residential apartment building. In 2011, after the corporation was administratively dissolved for failure to file franchise reports, the husband filed a petition for judicial supervision of the corporation’s winding up and liquidation, at which time the court issued an order prohibiting both husband and wife from participating in the management of the realty or removing corporate assets absent court approval. Continue Reading Bona Fide Purchaser Avoids Rescission of Minority Shareholder’s Unauthorized Sale of Corporation’s Realty

Transactional lawyers who assist clients in the formation and restructuring of business entities, and the litigators who clean up the transactional lawyers’ occasional messes, each have lessons to learn from last week’s appellate ruling in 223 Sam, LLC v 223 15th Street, LLC, 2018 NY Slip Op 03118 [2d Dept May 2, 2018].

The lesson for transactional lawyers is, when you go to the time, trouble and client expense of negotiating and preparing a shareholders or operating agreement, every time you transmit via email or other means a copy of the unsigned agreement, no matter how preliminary or advanced the draft, include a proviso that there is no binding agreement until the parties exchange fully signed copies. Or better yet, put the proviso in the body of the agreement. Or both.

For litigators, the lesson is twofold. First, litigation, like a prize fight, usually goes a number of rounds before there’s a victor (or, more likely, a settlement). An early round win, such as defeating the adverse party’s bid for a preliminary injunction, is no guaranty the other side won’t prevail, with or without an assist from a panel of appellate judges. Second, if you’re litigating a governance or ownership dispute between putative co-owners of a realty holding entity, it’s usually not a good idea to file a lis pendens against the real property unless you (or your client) are prepared to pay the other side’s legal fees to secure its cancellation. Continue Reading If LLC Agreement Must Be in Writing, Must it Be Signed?

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