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.

 

A few weeks ago, this blog – in the first of a three-part series about business valuation proceedings – addressed the various statutory triggers by which owners of New York partnerships, corporations, and limited liability companies can wind up in a contested business appraisal proceeding.

So you, or your client, have found yourself in an appraisal proceeding. The question then becomes: What are the legal rules, principles, and standards that apply in the valuation proceeding itself? That is the subject of today’s article.

“Value” Versus “Fair Value”

The ultimate purpose and objective of an appraisal proceeding is to determine the correct “value,” the term found in the Partnership Law (i.e. Sections 69 and 73), or “fair value,” the term used in both the Business Corporation Law (i.e. Sections 623 and 1118) and Limited Liability Company Law (i.e. Sections 509, 1002, and 1005), of an owner’s interest in a business for the purpose of a buyout of liquidation of that ownership interest.

The interplay of the “value” and “fair value” standards raises a trio of threshold questions. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 2

Last month, seasoned business appraiser Andy Ross of Getty Marcus CPA, P.C., and I made a presentation at the Nassau County Bar Association about appraisal proceedings in business divorce cases. With the subject of business valuations front of mind, this article – the first in a three-part series – is a treetops summary of the rules governing how business owners may wind up in an appraisal proceeding. Later articles will address the legal and accounting principles that apply in the valuation proceedings.

But before we get started, some context. What exactly is a valuation proceeding? A valuation proceeding is a special kind of lawsuit in which the owners of a business litigate the “value” (the relevant standard under New York’s Partnership Law) or “fair value” (the standard under the New York Business Corporation Law and Limited Liability Company Law) of a partnership, stock, or membership interest in a business for the purpose of a potential buyout or liquidation of that owner’s interest. Appraisal proceedings may be forced, or they may be voluntary. They may involve a variety of different accounting approaches or methodologies to value an ownership interest. They are always heavily dependent upon expert testimony of accountants. For that reason, the “determination of a fact-finder as to the value of a business, if it is within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” (Matter of Wright v Irish, 156 AD3d 803 [2d Dept 2017]).

What are the ways in which a business owner can wind up in a valuation proceeding? The statutory paths, or routes, to a litigated appraisal depend on the kind of entity involved. This article discusses three basic entity forms: partnerships, corporations, and LLCs, and provides a non-exhaustive list of the most common ways to get to a valuation proceeding. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 1

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

With a genuine sense of loss, we bid adieu to Manhattan Commercial Division Justice Shirley Werner Kornreich, who retired at the end of May after more than three decades of service on the bench, including nearly ten years as a Justice of the Commercial Division. Her accomplishments are many and varied. She is a detailed and scholarly writer. She ran an orderly and efficient part. Invariably well prepared, she asked probing questions at oral argument, arriving quickly at the “nub” of the issue. It was a pleasure and a luxury to be a litigant in her part.

Justice Kornreich also knew and understood as well as any judge the complexities and dynamics of business divorce cases.

As a testament to Justice Kornreich’s quality as a jurist, this blog has written about her opinions on many an occasion, with some of her decisions receiving repeat treatment. Rather than quantify her massive body of work, this week’s post will summarize a half dozen or so of Justice Kornreich’s more memorable decisions in the area of business divorce. You can click on the case name to read the earlier post. Continue Reading A Trip Down Business Divorce Lane with Recently Retired Justice Shirley Werner Kornreich

Mediation, as commonly understood in the context of alternative dispute resolution, employs a neutral third party to facilitate negotiation and voluntary agreement between the parties. Unlike arbitration, the mediator does not conduct an evidentiary hearing, is able to “caucus” separately with each side, and does not impose a solution or issue a legally binding award.

Or so I thought, until I came across last week’s appellate ruling in Korangy v Malone, 2018 NY Slip Op 03767 [1st Dept May 24, 2018], in which the court affirmed an order dismissing claims by one 50% LLC member against the other 50% member based on the outcome of a prior, “binding mediation” conducted pursuant to a provision in the LLC’s operating agreement addressing member deadlock.

When I did a little online research, I found commentary about binding mediation — in which mediators usually impose a legally enforceable resolution only after they fail to produce a voluntary settlement — both negative (“a trap for the unwary”) and positive (“more cost effective than arbitration”). I also got the sense that the inclusion of mandatory, binding mediation clauses in commercial contracts, insofar as it has achieved any significant level of acceptance, mostly is confined to standardized transactions such as construction and reinsurance contracts.

Whatever their utility in those contexts, does it make sense to include an ex ante provision for binding mediation as a deadlock-breaking device in a shareholders or operating agreement, such as the one in Korangy v Malone? I doubt it, but let’s first take a look at the case. Continue Reading Anyone Think Binding Mediation to Break Deadlock Is a Good Idea?

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?

You know there’s something unusual going on in a case involving a dispute between co-members of an LLC — a form of business entity that didn’t exist in New York until 1994 — when the key legal precedents cited in the parties’ briefs date from the nineteenth and early twentieth centuries.

By any measure, Horowitz v Montauk U.S.A., LLC, No. 16-3912 [2d Cir. Apr. 20, 2018], is an unusual case, stemming from a fiercely contentious battle between 50/50 co-owners for control of a highly successful restaurant and night spot called The Sloppy Tuna located on the beach in Montauk, New York, a popular summer resort on the eastern tip of Long Island. The dispute, which is still going strong after four years, has spawned at least a half dozen lawsuits in state and federal courts in New York and Georgia, and landed operational control of The Sloppy Tuna in the hands of a court-appointed receiver.

Horowitz is a lawsuit brought in federal court by one of The Sloppy Tuna’s 50% members (Member #1) seeking injunctive relief and damages against the restaurant entity, a New York LLC (Restaurant), for trademark infringement based on the alleged unauthorized use of various trademarks and domain names related to The Sloppy Tuna that Member #1 registered in the name of his solely-owned company (Montauk).

The threshold issue teed up for the court in Horowitz — this post won’t address the several other issues addressed in the court’s opinion — and the reason I call the case unusual, is whether the Restaurant’s other 50% member (Member #2), who was not named as a party to the trademark action and who did not move to intervene in the action personally, under governing New York law has the right to defend the suit derivatively on behalf of the Restaurant. Continue Reading Court Grants 50% LLC Member Derivative Right to Defend Action Brought by Other 50% Member’s Solely Owned Company

Recently, in two separate cases, two New York judges construing two LLC agreements of two LLCs formed under the laws of two different states — Delaware and Nevada — came to the same conclusion when faced with the same argument by the LLCs’ controllers who contended that minority members waived the right to institute litigation asserting derivative claims based on provisions in the agreements requiring managerial or member consent to bring an action on behalf of the company.

In both cases, the judges rejected the waiver argument after finding that the language of the provisions upon which the controllers relied did not expressly prohibit derivative claims. The more interesting question not reached, at least in the case of the Delaware LLC for reasons I’ll explain below, is whether the statute authorizing derivative claims is mandatory or permissive.

Talking Capital

The first case, Talking Capital LLC v Omanoff, 2018 NY Slip Op 30332(U) [Sup Ct NY County Feb. 23, 2018], involves a New York-based, three-member Delaware LLC in the factoring business, providing financing to telecommunications firms that route international calls. The suit was filed by one of the members against the other two and their principals, at heart alleging derivative claims for usurpation of business opportunity, breach of the LLC agreement, and breach of fiduciary duty by forming a competing entity in league with the LLC’s third-party lender. Continue Reading Can LLC Agreement Waive Right to Sue Derivatively? Not in These Two Cases