In many if not most lawsuits between discordant business partners there comes a time when they launch settlement negotiations for a buy-out of one partner by the other. Sometimes this occurs early in the lawsuit and sometimes later, after one or more rounds of inconclusive motion practice and discovery proceedings.

The parties’ lawyers normally orchestrate and conduct settlement negotiations and are at their clients’ side at any face-to-face settlement meetings. Lawyers also are trained to ensure that any binding and enforceable settlement agreement entered into is fully baked, that is, it contains all the material terms and conditions necessary to effectuate the struck bargain, including appropriate representations and warranties, security and tax-related provisions, releases, and other necessary “boilerplate.” By the same token, lawyers are trained to flag any term sheet or other preliminary accord, that is, one that requires further fleshing out and negotiation, with an appropriate written acknowledgement that the stated terms are non-binding unless and until formalized in a future, comprehensive, signed agreement.

Sometimes, however, clients engage in direct settlement discussions without the lawyers. This can happen for many different reasons, with or without the lawyers’ approval and guidance. Clients have been known to initiate or take over settlement discussions directly with the other side when they feel lawyer ego or clash of personality are impeding the process. It also can happen when one or both clients believe their settlement demands and sentiments have been distorted or otherwise not communicated effectively by the other side’s lawyer to his or her client.  Continue Reading Trouble Looms When Clients Negotiate Their Own Shareholder Buy-Out Settlement Agreements

In the last two weeks this blog featured an interview with a law professor about his scholarly writings on the subject of disputes within family-owned businesses (read here and here). Coincidentally, in the same two weeks I was engaged in a trial of a lawsuit pitting brother against brother concerning a substantial business started over 40 years ago by their recently deceased father.

The trial judge was Supreme Court Justice Alan D. Scheinkman  (pictured). Justice Scheinkman is Administrative Judge for the Ninth Judicial District and also presides over the Westchester County Commercial Division. The case settled after two days of testimony, with substantial assistance from Justice Scheinkman who, when negotiations foundered and with the parties’ consent, took on a mediator’s role.

From the outset Justice Scheinkman emphasized that the stakes in disputes involving family-owned businesses go beyond dollars and cents. After the parties reached settlement, Justice Sheinkman made some impromptu remarks on the record about the difficulties peculiar to business disputes among family members, and about the benefits of reaching accord through negotiation. I thought his words were wise. I thought his words were worth sharing with others who might be involved, either as business owners or as lawyers, in lawsuits over family-owned businesses. Continue Reading A Judge’s Wise Words on Disputes in Family-Owned Businesses

Settlements of corporate dissolution cases based on buy-out agreements come about in many different ways. Sometimes they’re the carefully designed product of weeks or even months of painstaking negotiation and drafting with coordinated input from clients, lawyers, bankers and tax advisors culminating with a formal set of closing documents that address every foreseeable contingency for buyer and seller. In such cases, most if not all the action occurs outside the courtroom, in the offices of lawyers and accountants, with the luxury of time to review, revise and perfect the deal documents before the litigation is formally discontinued.

At the other end are impromptu buy-out agreements forged on the fly in courthouse hallways or in chambers with the judge or law secretary on the day of trial or at the argument of a motion. There may be a sense of urgency on one or both sides or pressure from the judge to seize the moment, that is, not to walk out of the courtroom without a legally enforceable agreement so that the parties won’t or can’t change their minds when they get back to home or office.

The impromptu buy-out agreement can be a perilous undertaking, especially if counsel are not fully aware of the many things that can go wrong with half-baked stipulations verbally placed on the record in open court.

Take, for example, the recent case of Matter of D’Angelo (D’Angelo Funeral Home, Inc.), Mem. Decision, Index No. 13427/11 (Sup Ct Queens County Nov. 1, 2012), involving a corporate dissolution petition brought by the 50% shareholder of a family-owned funeral home business in Flushing, New York. The petitioner, Louis D’Angelo, filed for dissolution in June 2011. The other 50% shareholder, Robert D’Angelo, filed opposition. After a number of adjournments the parties appeared at a court conference in January 2012 at which they reached agreement for Robert to purchase Louis’s shares for $1.3 million. The agreement’s only memorialization was a short, simple statement read in open court on the record, as follows: Continue Reading The Perils of Impromptu Buy-Out Settlement Agreements

You’re an attorney.  It’s the year after you and your client happily settled via buy-out a dissolution case you brought on behalf of a minority shareholder in a close corporation.  Your former client leaves you a voice mail asking for a return call.  Her voice sounds upset.  When you call back, she tells you she just received a Schedule K-1 tax form from her old company for last year and, her voice rising with anxiety, that it allocates to her a substantial net income sum that she never received.  Surely, she says, it’s a mistake that must be corrected if she’s to avoid owing taxes on money she never got.  Isn’t it outrageous, she insists, that her former business partners are shifting taxes to her on earnings that stayed with the company for their benefit.

Outrageous or not, whether the client gets saddled with personal taxes on such “phantom” income likely will depend on the terms of the buy-out agreement.  If the selling shareholder and her counsel did not foresee the possibility of a positive net income allocation for that portion of the tax year preceding the buy-out’s effective date, and did not negotiate a tax payment in the buy-out agreement to the extent of any non-distributed allocation of net income, the former client likely will be writing a bigger check to Uncle Sam, and the attorney likely will not be getting repeat business from the client.  The likelihood of being stuck with a tax bill is even higher if, in addition, the parties exchanged general releases.

Case in point:  Troy v. Carolyn D. Slawski, CPA, P.C., 2011 NY Slip Op 30476(U) (Sup Ct NY County Feb. 28, 2011), decided earlier this year by Manhattan Supreme Court Justice Judith J. GischeTroy involves a law firm of four brothers organized as a P.C. (professional corporation) which, as is typically done, elected for pass-through partnership tax treatment as a subchapter “S” corporation.  The plaintiff was a 25% shareholder of the P.C.  In 2007, the majority shareholders filed a dissolution proceeding which was resolved by a stipulation and order of settlement.  Under the stipulation, plaintiff received $150,000 in exchange for surrendering his interests in the P.C. and a real estate holding company also owned by the brothers.

Continue Reading Beware Taxes on Phantom Income When Entering Into Shareholder Buy-Out Agreement