Many business divorce practitioners are familiar with a phenomenon one might call “petitioner’s remorse” – an often abrupt abandonment of one’s desire to dissolve a closely-held business entity when the opposing party unexpectedly declines to oppose or consents to dissolution. The dissolution petitioner’s rationale in bringing the claim may have been an expectation that the opposing party would fear the prospect of dissolution, oppose it mightily on the merits, and ultimately be forced into some sort of negotiated or compelled buyout. In that case, when the response is lack of opposition or consent to dissolve, the in terrorem effect and leverage is lost.

A recent decision from a Rochester-based appeals courts, Yehle v Rich, ___ AD3d ___, 2020 NY Slip Op 06631 [4th Dept Nov. 13, 2020], involved an egregious case of petitioner’s remorse, one in which the petitioner sued for dissolution, stipulated with the respondent to much of the relief sought in the petition, and then litigated for years in an attempt to undo the stipulated order of dissolution. Continue Reading An Extreme Case of Petitioner’s Remorse

BCL 626 governs shareholder derivative actions, or suits brought by individual shareholders on behalf of, and for injury to, the corporation. Subsection (e) provides that if the plaintiff—the individual shareholder asserting the right of the corporation—is successful in recovering anything of value for the corporation, the court in its discretion may award reasonable expenses, including attorney’s fees, to be paid from the award to the corporation.

While BCL 626(e) sets forth the fee-sharing framework in derivative actions brought in the name of a corporation, and New York’s Revised Limited Partnership Law section 121-1002(e) mirrors the BCL and applies to partnerships, there is no corresponding fee-sharing statute for derivative suits commenced and litigated on behalf of other entities, such as LLCs. Without a statutory analogue, is the same fee-sharing framework available?

I have not yet seen a case squarely addressing the issue, but the First Department’s recent decision in Bd. of Managers of 28 Cliff St. Condominium v Maguire, 2020 NY Slip Op 06844 [1st Dept Nov. 19, 2020] may open the door for a successful LLC-member derivative plaintiff to argue that the common law includes the right to recover fees from any award rendered in favor of the LLC.

Continue Reading Fee Sharing in LLC Derivative Suits: A Common Law Right and a One Way Street 

Gurney’s Inn is an iconic oceanside resort located in Montauk, New York, on the eastern tip of Long Island’s South Fork affectionately known as “The End.”

The history and growth of Montauk over the last century — from small fishing village to summer hot spot catering to high-end, party-seeking New Yorkers — mirrors the transformation of Gurney’s from a modest 20-unit hotel opened in 1926 by a local resident to its current incarnation as luxury resort, spa and beach club owned by a private equity fund, featuring 109 rooms, suites, and beachfront cottages plus facilities for weddings, conferences, and other special events.

Gurney’s fortunes had faded under prior ownership when the property was operated for decades as a timeshare cooperative. According to a local news report, the resort “was plagued by high maintenance costs and special assessment fees, which led to a shareholder lawsuit against management. At the time, many owners decided to give up their units, leaving those who remained burdened with an ever-burgeoning share of the upkeep.”

In 2013, a supermajority of the remaining timeshare owners entered into an agreement (the “2013 MOU”) under which the new majority owner would invest tens of millions to renovate the resort which would cease operating as a timeshare cooperative after five years. At that point the timeshare owners’ shares would be sold either to a third-party purchaser or to the majority owner at a price based on an independent appraisal of the resort as a going concern plus a premium based on a percentage of gross sale proceeds in excess of $50 million.

In March 2018, again with approval by a supermajority of the timeshare owners, the majority owner completed the de-cooping process via merger and tender offer at $118.81 per share based on the $84 million valuation of the resort property as appraised by CBRE Hotels.

A small group of shareholders who had rejected the 2013 MOU, holding less than 1% of Gurney’s issued and outstanding shares, dissented from the merger and demanded to have the fair value of their shares judicially determined under Section 623 of the Business Corporation Law. This is the story of what happened next. Spoiler alert: it did not end well for the dissenters. Continue Reading Dissenting Shareholders’ Challenge to Appraisal of Famed East End Resort Hits Dead End

The restaurant business is on the skids amid the COVID-19 pandemic. Yelp reports that 60% of closed restaurants won’t re-open.

Apart from the pandemic, the success rate for new restaurants is dauntingly low. Surveys show a 60% failure rate for new restaurants within the first year and 80% within five years of opening. High rents and labor costs, especially in urban centers. High food costs. Byzantine health and safety regulations. Stiff competition. Low profit margins. It’s a tough business by any measure.

It can be even tougher when co-owners of a restaurant have a falling out, as seems to happen with disproportionately high frequency in the restaurant business. With the exception of real estate holding companies, I can’t think of any business category that, over the last 13 years that I’ve been publishing this blog, has racked up more posts about litigation between co-owners than the restaurant business. The reasons are many: divergent interests between outside investors and inside managers and talent, opportunity for siphoning cash receipts, sloppy accounting, poorly drafted or no owner agreement, an owner opening a competitive business, and more.

In the last few months, unrelated to the pandemic, there’s been a mini-surge of reported court decisions in business divorce cases among restaurant owners. Below you’ll find summaries of five such cases — four decided by judges in the Manhattan and Brooklyn Supreme Courts, and one from Delaware Chancery Court. Bon appétit!

Continue Reading Business Divorce on the Menu

A recent decision from Bronx County Supreme Court Justice Llinet M. Rosado, Sebrow v Sebrow, 2020 NY Slip Op 20269 [Sup Ct, Bronx County Oct. 9, 2020], is a stark reminder to corporate shareholders, attorneys who plan their estates, and their prospective beneficiaries, to exercise due diligence before attempting to make, draft, or receive testamentary dispositions of corporate stock.

The Stockholders’ Agreement

In 1997, two father-and-son pairs, Abraham, Joseph, Zvi, and David Sebrow, all four of whom owned 25% of the shares of stock of Worbes Corporation (“Worbes”), entered into a written Stockholders’ Agreement, Section 6 of which imposed the following stock transfer restriction:

No stockholder of . . . Worbes . . . shall sell, transfer, assign, mortgage, [or] hypothecate his shares . . . without the unanimous consent of all the other stockholders with the sole exception that any stockholder may make a testamentary disposition of his shares to his issue in which event his issue shall own the shares of his deceased father but subject nevertheless to any terms and conditions contained in this agreement. Any other attempted transfer of such shares shall be a nullity and unenforceable (emphasis added).

Continue Reading When Estate Plans and Stock Transfer Restrictions Collide

When the management of a closely held business is controlled equally by two owners, it’s wise both to anticipate possible deadlock over major decisions and to provide in the constitutive documents a deadlock breaking mechanism.

One such mechanism is to require informal efforts to resolve the deadlock within a specified period and, if unsuccessful, permitting either side to trigger a mandatory buy-sell transaction.

If the two owners are on comparable financial and informational footings, an effective ex ante, deadlock-breaking, buy-sell agreement can take the form of a “shotgun” provision.  Under such provision, Owner No. 1 tenders an offer to Owner No. 2 either to buy Owner No. 2’s interest at a specified price or to sell Owner No. 1’s interest to Owner No. 2 at the same price (or proportionate price if the percentages differ).

When it comes to implementing a deadlock-breaking shotgun agreement, what’s not wise is to load the initiating offer or the response to it with commercially unreasonable terms not required or anticipated by the agreement.

That’s the hard lesson learned by the 49% LLC member in Lard-PT, LLC v Seokoh, Inc., 2020 NY Slip Op 51208(U) [Sup Ct NY County Oct. 20, 2020], in which Manhattan Commercial Division Justice Andrew Borrok denied the 49% member’s summary judgment motion based on findings that put the 51% member on a winning path. Continue Reading LLC Member Pays the Price For Not Sticking to Deadlock-Breaking Script

  • If a written limited partnership agreement contains detailed provisions governing partner withdrawal and dissolution, can a court nonetheless look to the statutory “default rules” in the Revised Limited Partnership Act (the “RLPA”) to supply additional grounds for withdrawal and dissolution not found in the contract?
  • Under RLPA, is the filing by a limited partner of a petition to dissolve the limited partnership enough, on its own, to automatically dissolve the entity without regard to the merits of whether the entity should, or ought to be, dissolved?
  • Under RLPA, is an order appointing a receiver of a limited partnership enough, on its own, to automatically dissolve the limited partnership?

A recent decision from Manhattan Commercial Division Justice Andrew Borrok, Weinstein v RAS Prop. Mgmt. LLC, Decision and Order [Sup Ct, NY County Oct. 23, 2020], rendered first-impression holdings on each of these issues, raising important questions about the interplay between contractual and statutory withdrawal and dissolution principles for New York limited partnerships, the outcome of which may have enormous impact upon owners of New York limited partnerships. Continue Reading Limited Partnerships and the Self-Fulfilling Dissolution Petition

Unlike states that have enacted the Uniform Revised LLC Act with its provisions for judicial expulsion of an LLC member, New York’s LLC Law contains no such provision. Instead, in New York, only non-judicial expulsion is recognized and only if authorized by the operating agreement.

Until now, New York judicial precedents addressing the expulsion of an LLC member generally fall into one of two categories. First, there are those in which the operating agreement is completely silent on member expulsion, in which event the courts disallow attempts to expel a member. Chiu v Chiu is the leading appellate case for that proposition. Here’s another.

Second, there are cases in which the operating agreement expressly authorizes member expulsion for defined causes involving breach of duty and other misconduct, in which event the disputes center on whether the expelled member’s conduct falls within the defined causes. Harker v Guyther is one of the better examples in this category. Here’s another.

Thanks to a ruling this month by the Brooklyn-based Appellate Division, Second Department, in Garcia v Garcia, we can now welcome a third category of expulsion case, which we’ll dub cases involving a “naked” expulsion clause. Why naked? The LLC agreement includes the single word “expulsion” as an event of member dissociation but contains no provisions expressly addressing the grounds or procedure for expulsion.

In Garcia, the appellate panel affirmed the lower court’s ruling enforcing the majority members’ vote to expel a minority member accused of diverting company funds. The court also affirmed the lower court’s determination of the value of the expelled member’s interest in two LLCs.  Continue Reading Court Enforces LLC Agreement’s “Naked” Expulsion Clause

Five years ago, we wrote about an important decision from the Delaware Chancery Court, In re Carlisle Etcetera, LLC, 114 A3d 592 [2015], in which a court recognized for the first time the existence under Delaware law of a viable cause of action for “equitable dissolution” of an LLC based upon the court’s equity powers, notwithstanding the existence of a statute explicitly setting forth the grounds for judicial dissolution.

In our write up on Carlisle, we noted that creative litigants in New York might “analogize Carlisle’s recognition of equitable LLC dissolution to New York’s recognition of common-law dissolution for closely held corporations.” We concluded our article by commenting that we knew, at that time, of “no New York case addressing” whether there exists in New York a viable claim for “common-law dissolution of an LLC.”

Five years later, we’re pleased to write about a first-impression decision issued last week by Brooklyn Commercial Division Justice Leon Ruchelsman, in which a creative litigant persuaded the Court to become the first in New York to recognize the existence of a viable cause of action for common-law dissolution of an LLC, notwithstanding the existence of the LLC judicial dissolution standard found in Section 702 of the Limited Liability Company Law (the “LLC Law”). Continue Reading First-Impression Decision Recognizes a Cause of Action for Common-Law LLC Dissolution

Interview with Bob Ambrogi on This Week In Legal Blogging

Last week I had the pleasure of being interviewed for a live webcast by blogging pioneer, legal journalist, and LexBlog publisher and editor-in-chief Bob Ambrogi on his program, This Week in Legal Blogging. The webcast (available on YouTube here and available as a podcast here) is the latest in a series of interviews by Bob of veteran law bloggers. During the half-hour interview, among other topics, Bob and I chat about how I gravitated to starting New York Business Divorce back in 2007; the nature of a business divorce law practice; my “value added” approach to writing about business divorce cases; and the power of niche law blogging in building reputation and attracting clients. Hope you like it!

The white glove, prewar cooperative apartment building at 510 Park Avenue and 61st Street in Manhattan is, for those who reside there, an address that shouts out, “I’ve made it to the top!” Located amidst the headquarters of some of the largest banks, private equity firms, multi-national corporations, and law firms, apartments at 510 Park, when they occasionally come to market, go for the many millions. Pets allowed, if you’re interested.

For one of its corporate-titan residents named James Cayne, the former CEO of Bear Stearns, however, the shouting is more along the lines, “I’m being screwed by the co-op’s board!” Or, at least, that’s what Cayne alleged in a lawsuit styled as a books-and-records proceeding seeking co-op records relating to the board’s rejection of a series of prospective purchasers of Cayne’s 5-bedroom, 6-bath apartment.

At its core, Cayne’s unusual books-and-records petition pleaded that the board President’s “personal animus” toward him — the alleged result of a grudge dating from 1999 when the two were involved in litigation and a bidding war over a pair of maid’s rooms in the building — led him and the rest of the board at his behest to turn down a succession of proposed buyers of Cayne’s apartment between 2016 and 2019, and to deny him the ability to sublet the apartment while trying to sell it.

In a decision filed late last month by Manhattan Supreme Court Justice Nancy M. Bannon in Matter of Cayne v 510 Park Avenue Corp., the court dismissed Cayne’s petition on the grounds that his “overly broad” demand for records was “supported only by speculation” of mismanagement by the co-op’s board. The board’s rejection of Cayne’s proposed purchasers did not alone establish a “proper purpose” for the demand under either the books-and-records statute (Business Corporation Law § 624) or under the shareholder’s common-law right of inspection.

Continue Reading Court Bounces Books-and-Records Petition in Feud Over Park Avenue Co-op Board’s Rejection of Prospective Purchasers