Partnerships

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Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.

With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.

Three Memorable Decisions from Justice Ramos

For Justice Ramos, we focus on three LLC cases.

In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members. Continue Reading A Fond Adieu to Two Giants of the Manhattan Commercial Division Bench

A basic and well-known principle of partnership law is that, absent an agreement to the contrary, general partners have authority to unilaterally bind the partnership to contracts with third parties.

In New York, the rule is codified in Section 20 (1) of the Partnership Law, which states:

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership . . .

Generally speaking, partners also have the power to unilaterally convey partnership real property, as codified in Section 21 of the Partnership Law which states, “Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name . . .”

Important restrictions exist, though – statutory and potentially contractual – on general partners’ ability to bind the partnership to transactions which may, in effect, cause the dissolution of the business. These restrictions can be a trap for the ill-informed, as emphasized by a recent Brooklyn appeals court decision in Camuso v Brooklyn Portfolio, LLC, 164 AD3d 739 [2d Dept 2018]. Camuso is a reminder that careful due diligence is vital when buying partnership real property. Continue Reading When Dealing in Partnership Owned Real Property, Caveat Emptor

Let’s face it. In business divorce, the accounting cause of action doesn’t get a lot of love. It’s not as sexy as the torts (conversion, breach of fiduciary duty, waste, etc). It lacks the oomph of judicial dissolution.

Nonetheless, accounting claims are ubiquitous in business divorce litigation, pleaded practically as a matter of course. Sometimes the claim is tacked on as if by rote, perhaps simply to beef up a petition, complaint, or counter complaint. But other times, like the books and records proceeding, the accounting cause of action can be a vital tool in the closely-held business owner’s litigation toolbox.

Ancient Roots

The accounting cause of action has its roots in a basic, ancient principle of partnership law: partners owe one another fiduciary duties, including the duty to account. The common-law duty of partners to account to one another and to the partnership is codified in Sections 42, 43, and 44 of the New York Partnership Law. Although there are not any quite comparable statutes in the Business Corporation Law (Section 720 provides a narrower right to sue a director or officer for an accounting) or the Limited Liability Company Law, it is well-settled that the obligation of business owners to account to one another is fully applicable to closely-held corporations and LLCs. Continue Reading Accounting Unchained: Is the Closely Held Business Owner’s Right to an Accounting Absolute?

The dog days of August are upon us, a perfect time as I do each year to offer vacationing readers some lighter fare consisting of summaries of a few recent decisions of interest involving disputes between business co-owners.

This year’s summaries include a partnership appraisal case from Nebraska in which the usual “battle of the experts” turned into a romp for one side, a New York case in which one side insisted that a written “Shareholder Agreement” was not really a shareholder agreement, and a federal court decision from Illinois in which the court rejected the argument that it should abstain from hearing a statutory dissolution claim.

A Train Wreck of a Valuation Case

If you want a lesson in how not to litigate an appraisal proceeding, look no further than Fredericks Peebles & Morgan LLP v Assam, 300 Neb. 670 [Sup Ct Aug. 3, 2018], in which the Nebraska Supreme Court recently affirmed the appraisal court’s determination, pursuant to the buy-out provisions of a law firm partnership agreement, of the $590,000 fair market value of a withdrawn partner’s 23.25% partnership interest. Continue Reading Summer Shorts: Partnership Appraisal and Other Recent Decisions of Interest

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

Lawyers are famous for arguing seemingly inconsistent positions at the same time. We practitioners lovingly refer to the technique as “arguing in the alternative.” The famous Texas trial lawyer, Richard “Racehorse” Haynes, gave a vivid example:

Say you sue me because you say my dog bit you. Well, this is my defense: My dog doesn’t bite. And second, in the alternative, my dog was tied up that night. And third, I don’t believe you really got bit. And fourth, I don’t have a dog.

A litigator’s stock in trade, arguing multiple positions at once can be vital to advance the client’s interests and to preserve arguments for later appellate review. Sometimes, though, one comes across arguments so seemingly in tension that they don’t quite seem able to coexist. A recent appellate decision, Alam v Uddin, 2018 NY Slip Op 02763 [2d Dept Apr. 25, 2018], involved a rather odd array of apparently conflicting arguments on both sides. Continue Reading Corporate Frankenstein “Partnership to Form a Corporation” Lives Another Day

There’s a lot to digest in last week’s decision by the Court of Appeals — New York’s highest court — affirming and modifying in part the intermediate appellate court’s ruling in Congel v Malfitano, a “wrongful dissolution” case I previously covered here and here, in which a minority partner in a general partnership that owns a shopping mall, whose former 3% interest had a stipulated top-line, pro rata value of $4.85 million, after massive valuation discounts and a seven-figure damages award for the majority’s legal fees, ended up with a judgment against him for about $1 million.

Let’s begin with a synopsis of Judge Eugene M. Fahey’s opinion for the court:

  • Instead of focusing, as did the lower courts, on whether the partnership met Partnership Law § 62 (1) (b)’s durational criteria of “definite term” or “particular undertaking,” the court decided the wrongfulness of the minority partner’s unilateral dissolution without recourse to the statute, and instead employed a purely contractual approach in affirming the lower courts’ finding of wrongful dissolution based on the partnership agreement’s “clear and unequivocal terms” providing the exclusive means by which the partnership could be dissolved.
  • The court affirmed the lower courts’ application of 35% marketability, 66% minority, and 15% goodwill discounts, which collectively erased around 80% of the stipulated top-line valuation. As to the minority discount, based on the objectives and policies underlying the “terminological difference” between the statutes, the court refused to read into Partnership Law § 69 (2) (c) (II) — which requires the court to determine the “value” of the partner’s interest when the remaining partners elect to continue the business following a wrongful dissolution — the case law disallowing any minority discount under the “fair value” standard found in sections 1118 and 623 of the Business Corporation Law governing buyouts in shareholder oppression and dissenting shareholder cases. Two of the panel’s seven judges dissented from this part of the court’s decision and would have disallowed the minority discount as a matter of law.
  • In the one bright spot for the minority partner, the court’s opinion struck the approximately $1.6 million (plus 9% interest) damages award for the majority’s legal fees, holding that the award contravened the so-called American Rule under which each side pays its own litigation expenses absent a contractual or statutory fee-shifting provision, and that the damages recoverable under Partnership Law § 69 are only designed to compensate for legal fees or other losses “incurred in carrying out separate acts necessitated by the breach.”

The court remitted the case to the trial court to recalculate damages (I’ll explain below). As best as I can tell, the likely net effect of the rulings will be to swing the judgment from around $1 million against the minority partner to around $1 million in his favor — still a jaw-dropping reduction from the pro rata value of the partnership interest he gave up.

Continue Reading New York’s High Court Takes Fresh Approach to Wrongful Dissolution, Sustains Valuation Discounts, Limits Damages in Partnership Case

Almost always there are elements of acrimony and intense emotion in litigation between co-owners of closely held business entities. The degree of toxicity can vary widely from case to case, although it tends to show up more conspicuously in litigation involving family-owned ventures.

Claims by non-controlling shareholders accusing controlling shareholders and directors of financial or other managerial abuses frequently are styled as derivative claims seeking recovery on the corporation’s behalf for harm to the corporation. In such suits, under the right circumstances the accused may challenge the accuser’s standing to pursue derivative claims based on conflict of interest.

Conflict of interest usually entails some tangible pecuniary interest held or asserted as a direct claim by the accuser that is adverse to the corporation or otherwise at odds with the claims asserted on behalf of the corporation. But a number of court decisions in New York also have cited as a factor in the analysis the accuser’s “animus” or “retaliatory” motive directed against the accused. The legal theory, akin to that applied in class actions, is that the accuser’s personal hostility and the resulting acrimony undermine the accuser’s ability to fairly and adequately represent the interests of the shareholders and the corporation.

Last year I posted about the decision in Pokoik v Norsel Realties in which a trial judge dismissed for lack of standing derivative claims brought by individuals holding an aggregate 11% interest in a realty-holding limited partnership. Among the reasons cited by the judge was that the plaintiffs “failed to demonstrate on this record that they are free from personal animus” as evidenced by the lead plaintiff’s “litigious nature” including several prior lawsuits against the defendants (including family members) alleging similar mismanagement claims, leading the court to conclude that the lawsuit was being wielded by the plaintiffs as “‘a weapon in the total arsenal’ so as to gain leverage in the other disputes.”

If, based on that decision, anyone thought freedom from personal animus is now part of the required showing by a derivative plaintiff, think again. Last week, the Manhattan-based Appellate Division, First Department, reversed the lower court’s decision and reinstated the derivative claims against some (but not all) of the named defendants. Continue Reading Appeals Court Reinstates Derivative Claims Dismissed for Conflict of Interest Where Parties’ Relationship Not “Especially Acrimonious”

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