Receivership

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nu•cle•ar op•tion (noun): the most drastic or extreme response possible to a particular situation

The litigation arsenal of business divorce lawyers contains weapons of varying firepower. The choice of weapon for any particular assignment will depend on many factors including the type and size of the business; whether the client is a controlling or non-controlling owner; the nature of the dispute; the form of the business entity (LLC, close corporation, partnership); the character and magnitude of the adverse owner’s complained-of actions and whether the claimed injury is to the owner directly or derivatively; the likelihood or not of reconciling the co-owners’ differences; the impact of litigation on the company’s business and employees; the client’s time horizon and ability to finance the litigation; and the client’s ultimate divorce preference, be it selling the company or its assets on the open market, buying out the other owner, being bought out, or dividing the company’s assets when possible.

The Books and Records Proceeding

The basic weapons in the arsenal are threefold, the lowest caliber one being a lawsuit by a non-controlling owner to compel access to company books and records that the controlling owner refuses to make available. This weapon is designed to gather information of managerial and financial abuse by the controlling owner that, in a best case scenario for its wielder, provides ammunition for a negotiated outcome without necessarily having to air, much less prove in a public forum, specific allegations of malfeasance by the controller. When handled properly, it can be a relatively simple, expeditious, and cost-effective exercise. Continue Reading Judicial Dissolution as the Nuclear Option When Other Means Falter

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

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?

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

The steady flow and scholarly character of Delaware Chancery Court opinions in company valuation contests provide an important resource and learning tool for business divorce practitioners, appraisers, and judges in New York and elsewhere.

Over the years, I’ve reported on a number of Chancery Court decisions in statutory fair value cases arising from dissenting shareholder proceedings. In this post, I highlight two recent post-trial opinions by Vice Chancellors Sam Glasscock (photo left) and Tamika Montgomery-Reeves (photo right) addressing valuation and what I’ll call quasi-valuation in more atypical settings.

In the first case, Vice Chancellor Glasscock applied a fair value standard to resolve a buy-out settlement agreement between ex-spouses who co-owned two operating companies and a real estate holding company. In the second case, Vice Chancellor Montgomery-Reeves determined whether a biotechnology start-up company was insolvent for purposes of appointing a receiver under Section 291 of the Delaware General Corporation Law. Continue Reading Delaware Chancery Court Rulings Address Valuation and Insolvency Disputes

A dissolution petitioner received the judicial equivalent of the old quip “Where’s the beef?” in a Brooklyn appeals court decision last week reversing an order dissolving a limited liability company under Section 702 of the Limited Liability Company Law. In Matter of FR Holdings, FLP v Homapour, 2017 NY Slip Op 07439 (2d Dept Oct. 25, 2017), the Appellate Division, Second Department, sent the case back to the drawing board, despite the LLC having been in receivership for more than two years, because the petitioner “offered no competent evidentiary proof” in support of his petition for dissolution.

A Common Fact Pattern

FR Holdings involved a common fact pattern. 3 Covert LLC (“Covert”) was formed to own and operate a mixed-use apartment and commercial building in Brooklyn.  Under the operating agreement, the purpose of the member-managed LLC was “to purchase and sell residential and commercial real estate and to engage in all transactions reasonably necessary or incidental to the foregoing.” Section 6.01 (a) of the operating agreement permitted most actions by “the vote or consents of holders of a majority of the Membership Interests.” As alleged in the petition, the LLC had five members, four of whom each held 12.5% interests. The fifth member, FR Holdings, owned a 50% interest. Continue Reading “Where’s the Beef?” Says Appeals Court, Reversing LLC Dissolution

As many judges and lawyers know, Superstorm Sandy has been used in litigation over the years as an excuse for things ranging from the seriously bad, like destroyed evidence, to the more mundane, like blown court deadlines. In Cardino v Peek-A-Boo, Inc., 2017 NY Slip Op 31657(U) [Sup Ct, Suffolk County July 28, 2017], a litigant did his best to try to persuade Suffolk County Supreme Court Justice James Hudson that Sandy made it “impossible” for him to comply with a post-dissolution order to turn over all merchandise of an adult bookstore, appropriately named “Peek-A-Boo, Inc.,” to a court-appointed receiver. Cardino provides some guidance on a rarely litigated issue – the potential consequences of violating a post-dissolution receivership order.

The Dissolution Decision

As recounted in an earlier decision, Peek-A-Boo was a New York corporation formed by a father and son, the Lombardos, to own and operate an adult shop. The petitioner, Cardino, sued the Lombardos to dissolve Peek-A-Boo under Section 1104-a of the Business Corporation Law, claiming he was “shut out” of the business. Suffolk County Supreme Court Justice Jeffrey Arlen Spinner held that the Lombardos oppressed Cardino and dissolved the corporation. Continue Reading Superstorm Sandy Unable to Wash Away Sin of Contempt

Brothers1Like most civil cases, the vast majority of business divorce disputes get resolved before trial, which is disappointing for us voyeurs since only at trial with live witnesses undergoing cross examination does one get the full flavor of the case’s factual intricacies, credibility issues, and the emotional undercurrents.

Even rarer are written post-trial decisions by judges with detailed findings of fact and conclusions of law, which is why I was so pleased recently to come across a trio of expansive post-trial decisions by Queens County Justice Timothy J. Dufficy in three business divorce cases involving family-owned businesses.

One of them, Shih v Kim, was featured in last week’s post on this blog, in which a romantically-involved couple started a business while engaged and continued as business partners even after the engagement broke off — until the defendant went rogue by diverting cash to himself and diverting business to a competing company.

The two other cases form interesting bookends, metaphorically speaking. Both involve businesses run by brothers. Both involve challenges to the documented ownership of the business. In one case, Justice Dufficy rejected a bid to establish an undocumented, de facto partnership interest and dismissed the case. In the other, Justice Dufficy upheld the documented, 50/50 ownership of an LLC, granted dissolution, and appointed a receiver. Let’s take a closer look. Continue Reading A Pair of Unbrotherly Business Altercations Go to Trial

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

tie-breaker[N.B. Younger readers of this post may be forgiven for not catching the title’s play on the refrain of a certain 1976 hit song by one of the oldest and most hirsute recording groups around. Click here if you’re still stumped.]

LLC deadlock’s been on my mind more than usual of late, after interviewing LLC maven John Cunningham for a podcast and last week co-presenting with John a webinar on the subject for the ABA Young Lawyer’s Division.

During the webinar’s Q&A session, a listener asked about potential liability of an appointed deadlock tie-breaker. I mentioned that I had not seen any cases involving the issue. Lo and behold, several days later up popped a decision by Queens County Commercial Division Justice Martin E. Ritholtz presenting exactly that issue, in which the court denied the tie-breaker’s motion for summary dismissal of a claim brought against her for breach of fiduciary duty by one of two 50/50 members of a family-owned LLC. Fakiris v Gusmar Enterprises LLC, 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016]. Continue Reading She’s a Tie-Breaker, She’s a Risk Taker