As I wrote here, in 2016 the Manhattan-based Appellate Division, First Department decided Raharney Capital LLC v Capital Stack LLC, overruling its own precedent and joining appellate rulings by the other Departments holding that New York courts lack subject matter jurisdiction over petitions to dissolve foreign business entities.

New York courts are not the only ones to come to that conclusion, albeit not necessarily expressed in terms of subject matter jurisdiction. For those interested in the topic, I highly recommend a 2015 article in The Business Lawyer by Peter B. Ladig and Kyle Evans Gay entitled Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out? The article examines doctrinal underpinnings and highlights court rulings from a number of states holding that the power to judicially dissolve a business entity belongs exclusively to courts in the state of its formation.

You’d think we’d seen the last of the issue, at least in New York, after Raharney closed the door five years ago. But there’s one wrinkle that Raharney and its kindred decisions didn’t address: Where should a business owner seeking judicial dissolution of a New York-based foreign business entity bring suit when the governing shareholder, partnership, or operating agreement includes a broad forum selection clause consenting to the exclusive jurisdiction and venue of New York courts in any litigation among the signatories?

Manhattan Commercial Division Justice Jennifer G. Schecter gave the answer in her decision last month in Durst Buildings Corp. v Edelman Family Co. Continue Reading Business Divorce Alert: Forum Selection Clauses Do Not Confer Subject Matter Jurisdiction in Foreign Entity Dissolution Cases

The right of shareholders to elect a corporation’s directors is one of the most valuable rights attendant to share ownership.  Election of directors is where shareholders can directly exert their influence on the corporation, and few matters are more central to a corporation’s governance than its ability hold valid elections of directors.

Because the fair election of directors—especially in closely-held corporations—is critical to their orderly functioning, New York’s BCL § 619 authorizes the courts to entertain challenges to board elections, hear proofs, and confirm or deny them.  Under BCL § 619, any “shareholder aggrieved by an election” may bring a proceeding in Supreme Court to challenge the election, and the court “shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require.”

New York courts, I suspect due to both their deference to shareholder voting rights and the existence of an after-the-fact remedy in BCL § 619, historically have been reluctant to enjoin duly-called shareholders meetings for the purpose of electing directors.  Why interfere by injunction with a bedrock right of shareholders when the court can hear a fuller challenge to the election under BCL § 619 after the results, or so conventional wisdom goes.  Plus, given the existence of BCL § 619, it is the rare case where an election itself will constitute irreparable harm of the type necessary for injunctive relief.

Despite these factors, in a decision of apparent first impression last month, Justice Nancy Bannon of the Manhattan Supreme Court issued an injunction against the holding of a corporate election under BCL § 619. The case is ALP, Inc. et ano. v Moskowitz, et al., Index No. 652326/2019 [Sup Ct NY County, June 14, 2021].

Continue Reading Stop the Vote: Injunction Halts Shareholders Meeting Pursuant to Courts’ Broad Power to Review Corporate Elections

Recently, we’ve written two articles focusing on the brewing dispute over whether New York law recognizes a viable cause of action for “common-law” or “equitable” dissolution of a limited liability company.

In October 2020, I blogged about a pre-answer dismissal decision in Pachter v Winiarsky, in which a New York court for the first time upheld a claim for common-law LLC dissolution, even where the court in the same decision held that the petition failed to state a claim for statutory dissolution under Section 702 of the Limited Liability Company Law.

In May 2021, Peter Mahler blogged about a second pre-answer dismissal decision in the Pachter case, in which the court considered the sufficiency of an amended petition / complaint filed after issuance of the original dismissal decision. In the second Pachter decision, the court essentially reversed itself, dismissed the common-law / equitable dissolution claim, but reinstated the Section 702 dissolution claim.

On July 12, 2021, Brooklyn Commercial Division Justice Leon Ruchelsman issued the third decision in the knock-down-drag-out Pachter litigation addressing whether common-law / equitable dissolution of an LLC exists as a viable cause of action in New York. This decision came via a motion by Pachter for leave to reargue the prior dismissal. Continue Reading Common-Law and Equitable LLC Dissolution: Going, Going, . . .

The Cummins Nursery in upstate New York grows, harvests, plants, and grafts fruit trees — mainly apple trees — which along with scions and rootstocks it sells by the tens of thousands each year. There’s also a farm stand and apple picking during the harvest season. According to its website, owner Steve Cummins acquired the 40 acre farm and nursery in the 1990’s to carry on the work of his father, an apple breeder and rootstock scientist affiliated with Cornell University who, in the 1960s and ’70s, made major strides in the development and propagation of disease-resistant apple trees.

According to Alan Leonard and the complaint he filed in the Tompkins County Supreme Court, Steve Cummins does not own Cummins Nursery. Rather, Leonard contends that the tree farm business and the property on which it operates is owned by a 50/50 partnership between him and Cummins formed in 2004 pursuant to an oral partnership agreement. Leonard now wants the partnership dissolved and a receiver appointed to sell the business and realty, and to distribute the net proceeds equally to himself and Cummins.

Last week, the Albany-based Appellate Division, Third Department, handed down a ruling in Leonard v Cummins reversing the lower court’s partial dismissal of Leonard’s claims. While court decisions involving disputes over the validity of oral partnership agreements are a dime a dozen, the Leonard case being no exception, the Leonard case also raised two atypical issues of interest:

  • Leonard’s complaint alleged that he demanded as early as 2009 that Cummins reduce to writing their partnership agreement and transfer the realty to the partnership, and that Cummins demurred. Is Leonard’s lawsuit filed in 2019 for enforcement of the agreement and dissolution of the partnership barred by the statute of limitations?
  • Cummins raised a statute of frauds defense to Leonard’s claim that the farm property belongs to the alleged partnership. Does Leonard’s partial performance of the alleged oral partnership agreement get around the statute of frauds governing conveyances of realty?

Continue Reading Betting the Farm On An Oral Partnership Agreement

Unless you’ve been living under a rock, you’ve probably heard that a little over two months ago, New York State Governor Andrew M. Cuomo signed legislation reform advocates and stoners alike have dreamt of for decades, finally legalizing the recreational possession and use of marijuana in New York. Though recreational sale of marijuana will not be legal until at least 2022, the legislation’s passage sets the stage for rapid development of a brand new, multi-billion-dollar, legal cannabis industry in the state.

With big business comes big business divorce. Even before Governor Cuomo signed the new law, legal disputes among marijuana industry entrepreneurs were percolating through the lower courts of the New York State Unified Court System. In this week’s New York Business Divorce, we’re excited to write about what seems to be the very first New York appellate court decision in a marijuana industry business divorce dispute.

The new decision, CIP GP 2018 v Koplewicz, 194 AD3d 639 [1st Dept 2021], addresses a subject we’ve addressed on this blog many times: enforceability under New York law of oral partnership or joint venture agreements. With marijuana investors suddenly flocking to New York in droves – and I suspect often entering into deals with co-owners without adequate documentation to back it up – many similar disputes in the coming years seem likely. New York’s nascent legal marijuana industry may be a bumper crop for business divorce litigators. Continue Reading A Bumper Crop: Cannabis Meets Business Divorce

Managing members of manager-managed New York LLCs owe default fiduciary duties of loyalty and care to non-managing members. Those duties can be modified by the operating agreement. Lawsuits brought by non-managing members against managing members require the courts in each instance to measure claims of fiduciary breach against the interplay of the default rules with the operating agreement’s provisions setting forth contractual duties and/or displacing default duties.

I have no empirical evidence to back it up, but from what I see in my business divorce travels, the proportion of realty holding LLCs that are manager-managed vs. member-managed is higher than other LLCs operating sales and service businesses. That may be because realty holding LLCs have greater attraction for passive investors. It’s also characteristic of many inter-generational family owned realty firms.

Whenever you have closely held, joint business ventures combining the capital of passive outside investors with the management of active inside investors, there’s greater potential for clashes over real or perceived management conflicts of interest and self dealing, more broadly referred to as agency costs. That, plus the fact that realty holding companies these days overwhelmingly are organized as LLCs, plus the fact that the New York metro area has one of the largest and most active real estate development markets in the country, may explain the frequency of lawsuits in the courts of New York brought by non-managing members against managing members of realty holding LLCs involving allegations of conflict of interest and self-dealing.

Without further ado, below I discuss two recent, noteworthy decisions by state and federal appellate courts in Manhattan in which non-managing members of realty holding LLCs sued managing members over allegedly improper self-dealing transactions. In both cases, the courts ruled in favor of the managing members. Continue Reading Managing Members of Realty Holding LLCs Vanquish Self-Dealing Claims

Like the Energizer bunny, some business divorce lawsuits keep going and going and going. Years of protracted litigation, brutal though they may be upon the parties, are a bonanza for voyeuristic business divorce practitioners when the result is thoughtful, precedential decisions that clarify prior rules of law, or better yet, announce new ones. Kassab v Kasab is a perfect example.

Begun nine years ago, Kassab involves two brothers so at odds they seem to disagree how to spell their own last name. For years, 75% owner Avraham and 25% owner Nissim battled over their interests in two entities, one a corporation referred to “Corner,” the other a limited liability company referred to as “Mall,” each of which owned an adjacent parcel of vacant land operated together as a parking lot in Jamaica, Queens.

Over the years, Kassab has spawned no less than five separate lawsuits, five appearances on this blog (read here, here, here, here, and here), and five published appeals court decisions, the latest two issued just last week by the Brooklyn-based Appellate Division – Second Department.

Last week’s companion decisions are Kassab v Kasab, ___ AD3d ___, 2021 NY Slip Op 03837 [2d Dept June 16, 2021], and Kassab v Kasab, ___ AD3d ___, 2021 NY Slip Op 03836 [2d Dept June 16, 2021]. The former emanated from a post-trial decision granting a petition for corporate dissolution. The latter emanated from a pre-answer decision dismissing a petition for LLC dissolution. Polar opposite outcomes.

Side-by-side, last week’s Kassab decisions perfectly illustrate a point we have made on this blog many times: the legal standards for judicial dissolution of corporations and limited liability companies are very different, the standards to dissolve an LLC in some ways more exacting and difficult to prove, and so allegations that might suffice to dissolve a corporation may not even come close to dissolve an LLC. Certain language from the latter Kassab decision addressing LLC dissolution may also have implications for another important issue no New York appeals court has addressed: whether New York law would recognize a viable cause of action for “common-law dissolution” of an LLC. Continue Reading To Dissolve or Not to Dissolve, that is the Question. The Answer is Both.

Iowa was one of the first states to adopt the 2006 Revised Uniform Limited Liability Company Act.  As of this year, 21 others have done so not including New York which continues to limp along with its creaky LLC Law enacted in 1994.

Iowa’s statute governing judicial dissolution of LLCs is based on RULLCA Section 701 which in the main carried forward the provisions in Section 801 of the predecessor Uniform Limited Liability Company Act (1996). The statute authorizes judicial dissolution upon application by a member on the principal grounds (1) that it is not reasonably practicable to carry on the LLC’s business affairs in conformity with its organizational documents, or (2) the controlling managers or members are acting in an “oppressive” manner that is directly harmful to the member seeking dissolution.

I’ve previously written about several interesting decisions by Iowa’s intermediate appellate courts in LLC dissolution cases (here, here, and here). Last month, in its first foray into LLC dissolution, the Iowa Supreme Court interpreted and applied Iowa’s LLC dissolution statute in a fascinating case called Barkalow v Clark. The case involves a dispute among family members who formed an LLC to acquire rental properties near the University of Iowa football stadium in Iowa City.

The court’s lively and scholarly opinion, authored by Justice Edward Mansfield, agreed with the lower court that the petitioning member did not establish oppression, but reversed the lower court’s dissolution order where the LLC was fulfilling its intended contractual purpose. For business divorce practitioners and others who study closely held business entities, Barkalow is a case well worth reading and understanding. Continue Reading Judicial Dissolution of LLCs Under RULLCA: Iowa Supreme Court Takes the Stage

Last week, Peter Mahler blogged about a recent decision holding that a minority shareholder’s claim against its majority co-owners for breach of fiduciary duty in connection with a sale of the business to a third party overcame for pleading purposes a broad general release delivered by the minority shareholder as part of the deal documents. In that case, Shilpa Saketh Realty, Inc. v Vidiyala, 191 AD3d 512 [1st Dept 2021], the court reversed dismissal and reinstated the plaintiff’s claims.

This week, we consider a variation on the theme of fiduciary duty claims overcoming contractual provisions limiting or eliminating those very duties, this time in the context of a so-called “exculpatory” clause in an LLC operating agreement and an appeal from a post-trial judgment of dismissal.

Reminiscent of Shilpa, in John v Varughese, 2021 NY Slip Op 03026 [2d Dept May 12, 2021], the appeals court partially modified dismissal of the minority member’s derivative complaint and directed entry of a money judgment in the company’s favor on one narrow aspect of its fiduciary duty claim, notwithstanding the existence of the operating agreement’s exculpatory clause. Before we get to particular facts of Varughese, though, let’s take a look at the law of LLC operating agreement exculpatory clauses. Continue Reading “Intentional” Breach of Fiduciary Duty Defeats Operating Agreement’s Exculpatory Clause

The New York Court of Appeals’ 2012 opinion in Pappas v Tzolis, decided in the wake and spirit of that court’s rulings the year before in the Centro Empresarial v America Movil and Arfa v Zamir cases, raised the bar for claims of fraud and breach of fiduciary duty brought by non-controlling shareholders and LLC members in connection with buyout transactions. In so doing, the Centro-Arfa-Pappas trilogy rejected a line of cases decided by the Appellate Division, First Department, which seemingly held that a fiduciary involved in a self-interested transaction with another owner can almost never rely on a release or fiduciary waiver to avoid liability against allegations of non-disclosure and fraudulent inducement.

The plaintiffs-sellers in Pappas filed a post-buyout suit against the defendant-buyer after learning that, at the time of the buyout, he had an undisclosed deal with a third party for the sale of the company’s primary asset at a price exponentially higher than the value paid for the plaintiffs’ shares. The First Department sustained the fiduciary breach and fraud claims as pleaded.

The Court of Appeals reversed and dismissed the suit based on the buyout agreement’s explicit waiver of fiduciary duty. The Court of Appeals focused on the complaint’s allegations that the plaintiffs’ relationship with the buyer, Tzolis, “had become antagonistic to the extent that plaintiffs could no longer reasonably regard Tzolis as trustworthy” and that “reliance on Tzolis’s representations as a fiduciary would not have been reasonable.” The court’s opinion also noted that the plaintiffs were “sophisticated businessmen represented by counsel.”

A recent appeal to the First Department in Shilpa Saketh Realty, Inc. v Vidiyala put to the test that court’s application of the principles laid down by the Court of Appeals in Pappas. As best as I can tell, Shilpa is only the second post-Pappas First Department decision in which it entertained a shareholder dispute involving claims of fiduciary breach and fraud connected to a stock purchase agreement that included a fiduciary waiver and/or release.

On the prior occasion, in Malta v Gaudio, the court cited Pappas in a decision affirming the dismissal of a fiduciary breach claim as barred by a broad release provision. The court noted that the plaintiff was a “sophisticated principal represented by independent counsel” who admitted that he no longer trusted his co-owner at the time of the transaction — seemingly a slam-dunk application of Pappas.

The First Department also cited Pappas in last February’s Shilpa ruling. In contrast to Malta, however, the court in Shilpa reversed the dismissal of fraud and fiduciary breach claims notwithstanding the presence of a broad release and a fiduciary waiver-like provision in the transaction documents involving the sale of the company to a third party for $500 million. Why the different outcome? Read on.

Continue Reading Appellate Ruling Puts Pappas v. Tzolis to the Test