Kim Kardashian’s marriage last summer to Kris Humphries famously lasted only 72 days. Their divorce proceeding even more famously is now in its seventh month. A less celebrated but similar fate may befall the short-lived business marriage of two partners in a Long Island restaurant/deli business, who are now embroiled in three lawsuits with one another including a proceeding to dissolve their limited liability company (LLC). Alas, a pair of rulings last month prefigures a divorce that likely will last longer and cost more than the marriage.

The S’s in S&S Eatery, LLC are Elaine Shure and Anthony Spota who in mid-2010 agreed to go into business together as 50/50 co-owners and operators of a new restaurant/deli on Rockaway Avenue in Valley Stream, New York. They decided to situate the restaurant in a vacant unit in a commercial building owned by a trust set up by Ms. Shure’s late husband, of which she was the trustee. In retrospect, the decision at the outset to invest in space indirectly owned and controlled by one of the members may have been the beginning of the end of the business relationship.

Spota and Shure agreed that he would manage the restaurant operations and she would oversee bookkeeping, other administrative responsibilities, and food pickup and delivery. In July 2010, Spota commenced renovation of the space after they agreed to invest equally in the construction expenses. In August 2010 they entered into a 10-year lease between the trust and S&S Eatery, and they also signed an operating agreement providing for management of the LLC by its members. In September 2010 they signed an amendment which included a provision requiring them to devote equal time to the business which opened in January 2011.

Continue Reading LLC Dissolution Case Highlights Divergent Interests When One Member is Also the Landlord

It’s not surprising that the ancient adage, “Never mix family and business,” is more honored in the breach than the observance. After all, as the late Professor Larry Ribstein observed in his terrific 2010 research paper entitled “Close Corporation Remedies and the Evolution of the Closely Held Firm” (reviewed here):

The earliest small firms were partnerships, which began as intimate, usually family, relationships. They were referred to as ‘compagnia,’ which means those sharing bread, reflecting their origins in households. Kinship ties were an important mechanism for controlling agency costs. As Kerim told James Bond in From Russia with Love, “all of my key employees are my sons. Blood is the best security in this business.”

Blood may be the best security in some family-owned businesses, but in many others the same bonds of kinship and trust that induce family members to enter into a business association in the first place, when abused or perceived to be abused, can and often do instigate conflict, entropy, and ultimately the dissolution of the firm and destruction of family ties. In other words, the emotional ties that encourage family members to dispense with diligence and formalities when starting and operating a business can also drive them apart with even greater force when things go wrong, in no small part due to those very dispensations.

For this column I’ve chosen three recent, illustrative cases presenting dissolution and related claims involving family-owned businesses. The substantive issues in each case are interesting and informative, if not novel. I wasn’t involved in any of the cases, so I can’t really say to what extent the blood relations of the parties contributed to the outbreak of hostilities or the underlying problems. But I think it’s fair to say that each case in its own way shows tell-tale signs of the dysfunctional circumstances and dissension peculiar to business divorce, family style.

The case summaries follow after the jump.

Continue Reading A Toxic Mix of Family and Business

Back in 2008, I wrote a couple of posts about the Youngwall case in which the court ordered involuntary dissolution of a commercial real estate limited liability company (LLC) owned 50/50 by two brothers who also were involved in a bitter dispute over their father’s will, based on the personal animosity between the brothers and because the vacant building was losing money (read here and here).

Youngwall foreshadowed the landmark decision in 2010 by the Appellate Division, Second Department, in the 1545 Ocean Avenue case, which redefined the standard for judicial dissolution of LLCs under §702 of the LLC Law as requiring the petitioner to show “in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.”

I emphasize the disjunctive “or” in the quoted passage because the cases involving judicial dissolution petitions based solely on financially failing LLCs are few and far between, as opposed to the more common scenarios involving management and/or money disputes between members of otherwise profitable ventures. The explanation may well be that most business people don’t like to pay lawyer’s fees fighting over a corpse.

LLCs being the entity of choice for real estate holding companies, and the real estate market having remained in a slump the last four years, it was only a matter of time before another Youngwall case appeared. And so it has, in the form of Mizrahi v. Cohen, 2012 NY Slip Op 50030(U) (Sup Ct Kings County Jan. 12, 2012), decided last week by Brooklyn Commercial Division Justice Carolyn E. Demarest.

Continue Reading Court Orders Dissolution of Unprofitable Real Estate LLC

Who doubts that pizza runs in the veins of New York City inhabitants? According to one recent study by the NYC Economic Development Corporation, the city’s five boroughs have almost 1,300 pizzerias. Which neighborhoods have the most? An EDC survey published last week gives top honors to the East Village in Manhattan, Ridgewood in Queens, and Williamsburgh in Brooklyn. Highest per capita concentration? Manhattan’s East Harlem and Lower East Side.

There have been many stories about the intense competition and even litigation among the city’s warring pizza purveyors, such as the lengthy court battle between the owners of the names “Famous Ray’s” and “Original Famous Ray’s.” With so many pizza businesses, it’s inevitable that some of them also fall victim to disputes among co-owners resulting in petitions for judicial dissolution.

Such is the case in Matter of DiMaria (JJM Pizza Corp.), 2011 NY Slip Op 33151(U) (Sup Ct Nassau County Nov. 28, 2011), involving a dispute between minority and majority shareholders of a small pizzeria chain located in northeast Queens known as Cascarino’s Brick Oven Pizza. In a decision last month by Nassau Commercial Division Justice Ira B. Warshawsky, the court ruled that the parties’ conflicting allegations concerning petitioner’s claim of oppression and respondents’ “unclean hands” defense prevent a summary determination of the petition. Justice Warshawsky also denied the petitioner’s request for appointment of a temporary receiver. 

Continue Reading Pizza Wars of the Shareholder Kind

The highly competitive and lucrative market for premium vodka has spawned some of the most creative advertising and promotional campaigns known to consumers (think Absolut). A new market entrant offering vodka imported from Holland under the brand name Medea, sold in special bottles designed with an interactive LED ticker display, has spawned a different kind of competition, of the litigious sort, involving a fight for control between an angel investor and the managing member of the company.

An appellate court decision issued last week in Lehey v. Goldburt, 2011 NY Slip Op 08670 (1st Dept Dec. 1, 2011), reinstated the managing member whom the lower court had removed and replaced with the investor on the latter’s application for interim relief. The decision reinforces the constraints lower courts face in granting provisional remedies without holding an evidentiary hearing to resolve conflicting allegations. The decision also addresses an interesting issue of contract construction arising from an arguable inconsistency between the operating agreement’s provisions for the appointment and removal of managers.

Continue Reading Appellate Court Reinstates LLC Manager in Dispute with Investor in Vodka Venture

Of all the types of small, closely held businesses caught in the maelstrom of a judicial dissolution proceeding, in my experience the one that’s most likely to go all the way to liquidation — as opposed to a buyout settlement — is the real estate holding company.  Probably that’s because there’s an active, ready market to sell real estate assets, unlike the situation facing many other sorts of businesses with relatively few hard assets whose going concern value lies to a large degree in the good will derived from the individual talents and efforts, and customer relations, of the disputing owner-managers.

When a court orders dissolution of a real estate holding company whose owners are not cooperating with each other, the court may appoint a receiver to wind up the business and sell the realty.  Can the receiver sell the realty in a private sale transaction, or must the receiver conduct a public auction sale to maximize the liquidation proceeds?

Even though the answer lies in plain sight in the governing statutes, the question nonetheless prompted a noteworthy decision earlier this month in a deadlock dissolution case that I highlighted last year called Matter of Darvish.  The decade-old case involves a fight between two 50/50 shareholders of several single-asset real estate holding companies, all of which eventually were ordered dissolved and placed in receivership.  In an August 2010 decision by Manhattan Supreme Court Commercial Division Justice Melvin L. Schweitzer, the court imposed a disproportionate share of the receiver’s fees against the distributive share of one of the two shareholders based on his “vexatious litigation tactics” (read here my prior post on the decision).   

Following that decision, the receiver filed a motion for authority to sell one of the properties by negotiated private sale rather than at public auction as stipulated in the court’s original order of appointment.  The property at issue is a valuable four-story building on Manhattan’s Upper East Side.  One of the shareholders, Lavian, objected to a private sale while the other, Darvish, agreed with a private sale but objected to the receiver’s proposed $2.8 million asking price which Darvish believed should be higher based on a $3.9 million valuation estimate he obtained from his own broker.    

Continue Reading Liquidation of Real Estate Holding Company: Public Auction or Private Sale?

I’m pleased to present my third annual list of the year’s top ten business divorce cases.  This year’s crop includes some very important decisions concerning the standard for LLC dissolution, expulsion of LLC members, buyouts triggered by dissolution petitions, stock valuation, and much, much more.  All ten were featured in this blog previously; click on the case name to read the full treatment.  And the winners are: 

1.  Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121, 2010 NY Slip Op 00688 (2d Dept Jan. 26, 2010), in which the Second Department differentiated dissolution of LLCs from business corporations and pronounced a contract-based standard for judicial dissolution of LLCs giving primary weight to the terms of the operating agreement.

2.  Jain v. Rasteh,  Decision and Order, Index No. 109920-09 (Sup Ct NY County Feb. 1, 2010), where the court upheld the right of the LLC’s majority member to expel a minority member for breach of the operating agreement.

 

3.  Chiu v. Chiu, 71 AD3d 646, 2010 NY Slip Op 01768 (2d Dept Mar. 2, 2010), holding that courts have no statutory authority to order expulsion of an LLC member for alleged misconduct, absent language in the operating agreement expressly providing for an expulsion remedy. 

 

4.  Matter of Superior Vending, LLC, 71 AD3d 1153, 2010 NY Slip Op 02801 (2d Dept Mar. 30, 2010), in which the court upheld as an "equitable method of liquidation" the return of the petitioner’s capital contribution in exchange for his membership interest in the LLC.

  

5.  Matter of Eklund Farm Machinery, Inc., 73 AD3d 1319, 2010 NY Slip Op 04097 (3d Dept May 13, 2010), in which the court construed BCL Section 1217 to limit the commission payable to receivers in corporate dissolution cases.

 

Continue Reading Top 10 Business Divorce Cases of 2010

In 1997, the controlling shareholders of three affiliated fire and burglar alarm companies sold all the company assets to an outside buyer for $4.2 million.  They did so without informing, or sharing any of the sales proceeds with, another 5% shareholder.  Thirteen years later, the chickens have come home to roost in the form of a court order against the controlling shareholders and their lawyer, granting common-law dissolution of the companies and awarding the 5% shareholder damages totaling almost $1.2 million — and that’s before adding prejudgment interest at 9% which more than doubles the principal amount.  Collins v. Telcoa International Corp., Short Form Order, Index No. 23796/97 (Sup Ct Queens County Nov. 5, 2010).

The Collins case made a splash almost ten years ago, when an appeals court was called upon to decide whether the plaintiff, Joseph Collins, was limited to an appraisal and other equitable remedies as opposed to the money damages he sought.  The Appellate Division, Second Department, in an opinion reported at 283 AD2d 128 (2001), sided with Collins in ruling that, since he was not told of the asset sale much less afforded his statutory right to dissent and bring a  shareholder appraisal proceeding, “nothing prevents him from maintaining a cause of action for money damages against [the controlling shareholders] based on their alleged breaches of fiduciary duty.”

The case went to trial in late 2007 before Referee Leonard Livote, who issued his report in December 2009.  The report and its recommendations were confirmed in a brief order issued last month by Queens County Supreme Court Justice Martin J. Schulman.  Fortunately for us, Justice Schulman’s order attaches a copy of the Referee’s report which contains a detailed set of factual findings and conclusions of law.

Continue Reading Court Grants Common-Law Dissolution and Awards Damages for 5% Shareholder Excluded From Sale of Company Assets

A petitioner for judicial dissolution of a close corporation often sees fit to bring a separate, companion action against the controlling shareholder, or against another 50% shareholder, asserting derivative claims on the corporation’s behalf to recover sums allegedly misappropriated or seeking damages for diversion of corporate opportunity.  Under bedrock corporate law applicable to private and public corporations alike, the complaint in a derivative action must allege either that the plaintiff made a prior demand upon the corporation’s board of directors to bring the action, and that the board declined to do so, or that making such demand would have been futile because a majority of the board is disabled by conflict or otherwise.  Demand futility is usually satisfied easily in the close corporation setting where the alleged wrongdoer either controls the board or has blocking power as a co-equal director.

But what happens when a close corporation shareholder starts a derivative action after the court already has appointed a receiver in a prior-commenced proceeding for judicial dissolution?  Can demand futility be alleged on the theory that the board retains authority to file suit in the corporation’s name, or does the authority pass to the receiver to whom demand must be made in the board’s stead?

The answers are provided in a recent decision by Nassau County Commercial Division Justice Timothy S. Driscoll in Koenig v. Koenig, 2010 NY Slip Op 32617(U) (Sup Ct Nassau County Sept. 17, 2010), and in an unreported prior ruling in the same case dated April 6, 2010.

Continue Reading Court Requires Demand Upon Receiver for Derivative Action in Dissolution Case

Last week’s post on the Deblinger case examined a first-impression decision in a corporate dissolution proceeding concerning the court’s authority under Section 1008 of the New York Business Corporation Law to compel a shareholder to present a derivative claim against another shareholder-director.  The same statute occupies center stage in yet another novel decision handed down last month in Matter of Darvish (Haslacha, Inc.), 2010 NY Slip Op 32339(U) (Sup Ct NY County Aug. 23, 2010).  This time, the issue is whether Section 1008 authorizes the court to assess against one shareholder’s distributive share of the liquidation proceeds the court-appointed receiver’s legal fees incurred as a result of the shareholder’s misconduct.

You can tell Darvish is one of those protracted, rancorous shareholder disputes just from the “01” suffix in the case’s index number — indicating the case is nine years old — and from the most recent motion sequence number indicating that the parties have filed over 50 separate motions since the case began.

The petitioner, Darvish, as 50% shareholder filed for judicial dissolution of three single-asset real estate companies based on deadlock and dissension with the other 50% shareholder, Lavian, under BCL Section 1104.  In 2004, Manhattan Commercial Division Justice Herman Cahn (since retired) granted the petition as to two of the three corporations, named Urban Homes, Inc. (“Urban”) and Primary Residence, Inc. (“Primary”).  Justice Cahn directed further proceedings with respect to the third corporation, Haslacha, Inc. (“Haslacha”), based on Lavian’s assertion that he was sole shareholder of that entity.  (Read Justice Cahn’s decision here.)

Continue Reading Court Charges Receiver’s Legal Fees in Corporate Dissolution Against 50% Shareholder’s Distributive Share Based on Misconduct