Welcome to our 17th annual edition of the Top 10 business divorce cases featured on this blog over the past year.

This year’s selections buck the trend of previous years in which cases involving limited liability companies dominated by far. The cases highlighted this year include co-owner disputes involving five corporations, one general partnership, and only four LLCs. Meaningful? Probably not. This year’s crop also stands out as mostly (six out of ten) featuring decisions by New York appellate courts which, as all litigators know, carry more precedential clout.

All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

Weinstein v Wallace Among this year’s Top 10, to this observer Weinstein is the case that packs the biggest punch. There, the Appellate Division, Second Department with little fanfare held that LLC Law Section 608 gives an executor or other representative of the estate of a deceased member “all of the rights of a member for the purpose of settling or managing its estate, which would include a member’s voting rights.” Without saying so the court effectively negated lower court precedent treating estate representatives as mere assignees or economic interest holders, i.e., without standing to assert derivative claims. Weinstein also removed lingering doubts about the jurisprudential basis for the Second Department’s 2023 enigmatic ruling in the Andris case where it revived a petition for judicial dissolution of an LLC brought by the estate representative of a deceased member. Petitions for judicial dissolution, petitions to inspect books and records, lawsuits asserting derivative claims — going forward we can expect to see those and other litigations brought on behalf of estates that previously were thought to be off limits for lack of standing.

Continue Reading Top 10 Business Divorce Cases of 2024

To prevail on a cause of action in a business divorce lawsuit, the plaintiff has many essential boxes to check. Pleading requirements vary from one claim to another, but all business divorce cases have one thing in common. The first box any pleader must check – and the one often challenged at the outset – is standing to sue.

Standing is well-suited for pre-answer dismissal motions, so courts often resolve standing disputes early. But sometimes, a lawsuit will go all the way, including though trial and judgment, only for the plaintiff to get the rug pulled out from underneath at the appellate level. Such was the painful outcome of Talking Capital Windup LLC v Omanoff (___ AD3d ___, 2024 NY Slip Op 06283 [1st Dept Dec. 12, 2024]).

Continue Reading Check Your Footing: $36 Million Money Judgment Eviscerated in Brutal Appellate Standing Loss
dfe62b65-6faf-4f8e-b917-6bb4efa030d4

We frequently see a partner’s “fiduciary duties” expressed as the union of the duty of loyalty and the duty of care.  The duty of loyalty requires fiduciaries to avoid elevating the interests of any other person or entity (including their own) above the interests entrusted to their care.  The duty of care requires fiduciaries to exercise their authority with reasonable diligence and prudence.  

Though stated with disarming simplicity, business divorce litigation has a way of exploiting the often-blurry edges of those duties.  Consider the “quiet quitting” phenomenon, where an employee does their job, but gives no more effort or enthusiasm than is absolutely necessary.  If a partner or LLC manager did the same thing, how long before it rises to a breach of fiduciary duty? 

That’s one of several difficult questions that New York County Commercial Division Justice Margaret Chan was called to answer in Metcalf v Safirstein Metcalf, LLP, 2024 NY Slip Op 34380 (NY County 2024), an early-stage summary judgment decision amid (another!) law firm breakup that highlights just how messy—and fact dependent—breach of fiduciary duty claims asserted between business owners can get.  

Continue Reading When Less Effort Leads to More Trouble: Quiet Quitting and Fiduciary Accountability
concession

Evidence of ownership. Necessary in business divorce. Not always so easy to prove.

Today’s case— Xiaoyan Lu v Sagewood SFF III LLC, 2024 NY Slip Op 05895 (1st Dept 2024)—gives an example of how far (or not) the doctrines of equitable estoppel, tax estoppel, and collateral estoppel can take a plaintiff in answering that threshold question, “Am I a member of the LLC?” (a topic we’ve previously covered in the partnership context)

Spoiler alert: The “torrent of admissions” by defendants in this case left the court little choice but to find that plaintiffs were, indeed, members of the defendant LLC.

As Justice Cohen notes, “[T]he facts, the good, the bad and the ugly are all pretty much agreed.” Good, bad, and ugly facts, they are. Let’s dive in.

Sagewood KT II, LLC (“Fund II”) & Sagewood SFF III LLC (“Fund III”)

The plaintiffs in this case are four friends who, in 2017, invested $200,000 each into a real estate investment fund (Fund II)—in the business of flipping residential properties—managed by defendant Jingying Wu. Fund II was also co-managed by non-party Kenneth Tse.

Continue Reading To be or Not to Be (a Member). That is the Question… That Estoppel Can Help Answer.

Almost exactly one year ago, we wrote about the go-to line of New York case law for business divorce litigants hoping to secure injunctions: a substantial and ever growing body of authority holding that involuntary loss or deprivation of equity ownership, management, or control rights in a closely-held business typically qualifies as “irreparable” harm, for which money damages are insufficient and injunctive relief appropriate (see e.g. Yemini v Goldberg, 60 AD3d 935 [2d Dept 2009] [“because control and management . . . were at stake, money damages were not sufficient. Thus, the defendants established the element of irreparable injury”] [citation omitted]).

A far less frequently invoked line of case law originating not from business divorce law, but the law of lottery, holds that an injunction movant may demonstrate “irreparable” harm where a “substantial amount of money may be dissipated or otherwise unavailable for recovery” without an injunction (Ma v Lien, 198 AD2d 186 [1st Dept 1993]).

Albany County Commercial Division Justice Richard Platkin relied upon both lines of case law in a recent decision resolving a closely-held business owner’s injunction application over her co-owner’s sale of a solar power business and dissemination of the sale proceeds.

Burt v Jerez (2024 NY Slip Op 51613(U) [Sup Ct, Albany County Nov. 20, 2024]), is a fascinating example of how commercial judges resolve sharply conflicting factual accounts in injunction motion papers.

Burt features not one, but two rarities: a full-blown evidentiary hearing complete with post-trial briefing; and a thorough, exceptionally thoughtful, written Decision and Order chock full of legal analysis and credibility determinations.

In a world where injunction motions more and more often seem to get resolved in a transcript with little or no value to anyone but those involved in the case itself, Burt is a delightful breath of fresh air.

Continue Reading Fact Issues and Credibility Determinations on Injunction Motions
Fall NYC Roundup

November was a whirlwind month for New York LLC litigation.  It featured disputes over how to wind up a judicially dissolved LLC, a bitter intra-family emergency indemnification/advancement injunction, and the finale of a decade-long battle over the enforceability of a partially baked operating agreement.  Some of these recent cases add clarity to the growing body of New York LLC caselaw. Others add confusion.  But all add precedential footholds for future arguments in disputes between members of New York LLCs. Members and their counsel take note.

Continue Reading A Leaf Through a Busy November in New York LLC Litigation

There’s a ton of Delaware caselaw enforcing Section 18-1101 (c) of that state’s LLC Act as amended in 2004, authorizing LLC agreements to eliminate the members’ and managers’ liability for breach of fiduciary duty, the only specified carve-out being the narrowly construed implied contractual covenant of good faith and fair dealing.

In New York, which at least superficially offers the same contractual shield, not so much.

New York’s analog to the Delaware statute is found in Section 417 of the LLC Law. Section 417 (a) (1), like the Delaware statute, authorizes members to adopt an operating agreement “eliminating or limiting the personal liability of managers to the limited liability company or its members for damages for any breach of duty in such capacity.”

Unlike Delaware’s statute, however, an expansive proviso immediately follows the quoted language, stating that no such provision shall eliminate or limit

the liability of any manager if a judgment or other final adjudication adverse to him or her establishes that his or her acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he or she personally gained in fact a financial profit or other advantage to which he or she was not legally entitled or that with respect to a distribution the subject of subdivision (a) of section five hundred eight of this chapter his or her acts were not performed in accordance with section four hundred nine of this article.

The cross-referenced Section 508 (a) preserves member liability for knowing receipt of distributions which, in so many words, render the LLC technically insolvent — not of interest for present purposes.

Of greater interest is the other cross-referenced statute, Section 409. It provides that a manager “shall perform his or her duties as a manager . . . in good faith and with that degree of care that an ordinarily prudent person in a like position would use under similar circumstances.” As I’ve previously written, Section 409’s language is lifted almost verbatim from the standard for director conduct in Section 717 of the Business Corporation Law, and the courts have construed both statutes as imposing traditional fiduciary duties of loyalty and care.

Between Section 417 (a) (1)’s express carve-out for bad faith acts or omissions, intentional misconduct, etc., plus the cross reference to Section 409 which looks like nothing so much as the exception swallowing the rule, what efficacy does the statute retain as a means of insulating LLC managers and members from having to litigate through discovery and trial their personal liability for alleged managerial misconduct?

As it turns out, very little if any.

Continue Reading Diving Into the Shallow Waters of New York Law Permitting Elimination of LLC Managers’ Liability for Breach of Fiduciary Duty

Is a limited liability company a party to and bound by its own operating agreement?

Many folks would say, “Yes, of course.” But it turns out the answer varies depending upon the law of the company’s state of incorporation.

In Delaware, an LLC is bound by its operating agreement regardless of whether the company itself executed the contract. 6 Del. Code § 18-101 (9) provides than an LLC is “not required to execute its limited liability company agreement,” and that it is “bound” by the contract “whether or not” it “executes the limited liability company agreement.”

In a recent decision about the binding effect – or lack thereof – of an arbitration provision in an operating agreement upon the LLC itself, Manhattan’s Appellate Division – First Department announced that New York follows the opposite rule: an LLC is not bound by its operating agreement unless it signs the agreement separately from the members themselves.

Wythe Berry LLC v Goldman (230 AD3d 1081 [1st Dept 2024]), offers an unambiguous lesson to corporate transactional lawyers: in New York, if you wish to bind the LLC to its own operating agreement, including an arbitration provision, the LLC must sign the contract. If it does not, the members will be bound by the arbitration agreement, but the LLC will not, leading to potential litigation before two separate tribunals, undermining the conventional rationales favoring alternative dispute resolution – efficiency, speed, and reduced legal cost.

Continue Reading Is an LLC Bound by its Own Operating Agreement?

The limited liability company is relatively young.  Though origin research is always a dubious task, my efforts tell me that the first LLC was created in 1977 in Wyoming, followed by other LLCs in Florida in 1982.  The years since then have witnessed the LLC’s rise to the closely held entity of choice among business owners.

One benefit of the LLC’s youthful age is that many of the minds that were most influential in its early-stage development are still teaching, practicing, and studying, all while continuing to lend their expertise on LLC formation, regulation, and litigation.  And your best chance of catching all those prominent minds in one place is at the American Bar Association’s annual LLC Institute.

For those interested in learning the intricacies of the LLC laws directly from the experts, I highly recommend attending the two-day conference.  While a single-post recap inevitably won’t do justice to the many presentations, panels, and discussions at the Institute, this week’s post attempts to sample some of the best business divorce topics highlighted in the 2024 LLC Institute.

Continue Reading Greetings from the American Bar Association’s 2024 LLC Institute

It wasn’t long ago that my partner, Peter Sluka, posted about the Andris case where the Appellate Division, Second Department, reinstated an LLC judicial dissolution proceeding brought by the estate of a deceased member.

Andris was a enigmatic ruling that raised as many questions as it answered, not least of all because, notwithstanding a number of prior lower court rulings denying non-economic member rights to estates of deceased members, such as the right to sue derivatively on the LLC’s behalf, the respondent never contested the estate’s standing to seek judicial dissolution under LLC Law 702, which can only be brought by a member.

Adding to the uncertainty, the decision failed to clarify or even address how the right to seek dissolution meshes with the language of LLC Law 608, which gives the estate of a deceased member the right to exercise “all of the member’s rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member” (italics added).

Whatever doubts Andris left behind, are no more. Last week, in a case called Weinstein v Wallace, the Second Department squarely held that the rights granted to the estate of a deceased LLC member by LLC Law 608 “include a member’s voting rights.”

Continue Reading Appellate Division Construes LLC Law 608 as Giving Voting Rights to a Deceased Member’s Estate