Search results for: partnership derivative

One of the most frequently encountered preliminary skirmishes in shareholder litigation involving closely held business entities focuses on whether the plaintiff’s claims are properly classified and brought either as direct claims for individual relief or as derivative claims for recovery on behalf of the entity. This duality — direct or derivative — has major consequences at the pleading stage and beyond.

Yet, as the Appellate Division, First Department, recently observed in Yudell v. Gilbert, where it expressly adopted Delaware’s formulation for distinguishing between the two based primarily on who suffers the alleged harm, “[s]ometimes whether the nature of the claim is direct or derivative is not readily apparent.”

The line between direct and derivative gets especially blurry when the only two shareholders involved are the aggrieved plaintiff and the defendant whose alleged misconduct results in the wholesale transfer of the corporation’s assets to the defendant or the defendant’s affiliate. Such cases may give rise to direct claims that, in other contexts, might be classified as derivative.

Take, for example, the case of Barmash v. Perlman, 2013 NY Slip Op 31518(U) (Sup Ct NY County July 3, 2013), decided earlier this month by Manhattan Commercial Division Justice Melvin L. Schweitzer. In Barmash, Justice Schweitzer denied a motion to dismiss a complaint brought by a minority shareholder where the claimed breaches by the controlling shareholder, constituting what the court labeled the “de facto liquidation” of the corporation, resulted in harm to the corporation to be pursued derivatively, but also caused injury “uniquely and individually” to the plaintiff minority shareholder permitting direct recovery.  Continue Reading Minority Shareholder’s De Facto Liquidation Claim: Direct, Derivative, or Both?

Note to Readers:

This month marks the 5th anniversary of the New York Business Divorce blog. Every Monday morning, without fail for five years, I’ve posted a new article highlighting a new court decision or other development of interest to lawyers, business owners, business appraisers, and anyone else concerned with broken relationships among owners of closely held business entities.

When I started the blog, my greatest fear was running out of things to write about. After five years of blogging, I can say with great confidence that, the human condition and human relations being what they are, there is an endless stream of business partners falling out of love and into court. Of course, I’m also very grateful to the many judges in New York who take the time and care to write informative decisions in cases involving dissolution and other disputes among business partners.

The most rewarding part of blogging has been the many new relationships it’s led to over the last five years with business owners, other lawyers, other bloggers, accountants, appraisers, and academics. I’ve learned from them that education can be a wonderful, two-way street.

I appreciate the feedback I get from readers. If you’d like to share thoughts about anything I write about, please post a comment, it’s quick and easy to do. If you’re a lawyer (or a judge!) with an unpublished decision that might be of interest to other readers, send it to me. If there’s anything else you’d like me to write about, let me know.

And now, let’s start the next five years.

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I doubt Mark Twain had litigation in mind when he offered the advice, “Always tell the truth. That way, you don’t have to remember what you said.” For litigants, though, failing to remember or, worse yet, negating what was said in a prior lawsuit can have drastic consequences when a judge in a subsequent lawsuit concludes that the same litigant, having succeeded in the prior case by taking one position, is now taking a contrary position simply because his interests have changed.

I’ve previously written several posts on shareholder disputes in which, as it’s known, the doctrine of judicial estoppel against inconsistent positions has been raised successfully as a defense to a corporate dissolution petition or other shareholder suit:

  • In Light v. Boussi (read here), Justice Carolyn Demarest invoked judicial estoppel to dismiss a dissolution petition by a putative 50% shareholder who failed to disclose his alleged stock ownership in his prior bankruptcy proceeding.
  • In Glatzer v. Webster (read here), also decided by Justice Demarest, the court applied judicial estoppel to defeat a claim of ownership in an LLC by an ex-spouse who, in prior divorce proceedings, disclaimed an ownership interest.
  • In Watkins v. J C Land Development, Ltd. (read here), Justice Emily Pines dismissed a shareholder derivative action by a putative 50% shareholder who, in prior federal sentencing proceedings, failed to disclose his alleged stock holding.

The Rubio Lawsuit

Justice Pines had another opportunity to apply judicial estoppel in her decision last month in Rubio v. Rubio, 2012 NY Slip Op 52218(U) (Sup Ct Suffolk County Nov. 26, 2012), involving a shareholder dispute over a family-owned auto dealership. In Rubio, it was the plaintiff’s inconsistent disavowal of a stock ownership interest in prior litigation with his ex-wife that proved fatal to his shareholder derivative claims against his brother and others in the suit before Justice Pines. Continue Reading Court Dismisses Shareholder Derivative Action Due to Inconsistent Stock Ownership Claim in Prior Lawsuit

Last February, in Tzolis v. Wolff, 10 NY3d 100 (2008), the New York Court of Appeals ruled that members of limited liability companies may bring derivative actions on behalf of LLCs notwithstanding the legislature’s deliberate omission of statutory authorization for derivative actions when it enacted the LLC Law in 1994.  (Read my post on Tzolis here).

The dissenting judges in Tzolis objected that the majority had created a common law right of derivative action "unfettered by the prudential safeguards against abuse that the Legislature has adopted when opting to authorize this remedy in other contexts," namely, the statutory provisions imposing demand, contemporaneous ownership, security, attorney fees and settlement restrictions on derivative suits brought on behalf of business corporations and limited partnerships.

The majority responded to this charge, stating that "the right to sue derivatively has never been ‘unfettered’"; that "the limitations on it are not all of legislative origin"; and most importantly:

What limitations on the right of LLC members to sue derivatively may exist is a question not before us today. We do not, however, hold or suggest that there are none.

In Tzolis‘s aftermath, lower courts have taken their cue from the majority’s response by imposing prior demand and contemporaneous ownership requirements on putative LLC derivative plaintiffs.

Continue Reading Post-Tzolis Rulings Address Demand and Contemporaneous Ownership Requirements for LLC Derivative Actions

Under the so-called “American Rule,” litigants usually must pay their own lawyer fees. But in business divorce and other private company disputes between business co-owners, there are a variety of ways for individual defendants to have the business assume payment of their legal fees in defense of a lawsuit. How? The answer depends on several factors – what kind of entity; what kind of claim; in what capacity is one being sued. In this article, we take a close look at the basics of New York’s law of indemnification and advancement.

Advancement Versus Indemnification

“Indemnification and advancement of legal fees are two distinct corporate obligations” (Crossroads ABL LLC v Canaras Capital Mgt., LLC, 105 AD3d 645 [1st Dept 2013]).

“Advancement is a species of loan—essentially simply a decision to advance credit—to a [corporate official] pending later determination of that person’s right to receive and retain indemnification. The corporation maintains the right to be repaid all sums advanced, if the individual is ultimately shown not to be entitled to indemnification” (In re Adelphia Comms. Corp., 323 BR 345 [Bankr SD NY 2005]). Continue Reading Can the Company Pay My Legal Fees?

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, . . .

Of late I’ve been ruminating on New York’s membership in the shrinking pool of states that don’t recognize oppression of an LLC minority member by the controlling members or managers as ground for judicial dissolution.

The point indirectly was brought home by Professor Daniel Kleinberger’s recent article for the ABA’s Business Law Section in which he dissects last year’s decision by a Connecticut appellate panel in Manere v Collins interpreting that state’s Revised Uniform LLC Act which expressly includes oppression as one of the grounds for judicial dissolution. As the good professor highlights, the court’s decision freely borrows from the rich body of case law construing the term “oppression” as used in judicial dissolution statutes for closely held corporations in virtually every state save Delaware.

New York continues to buck the nationwide trend toward harmonization of close corporation and LLC law governing judicial dissolution, as made clear in cases such as Doyle v Icon and Barone v Sowers explicitly holding that New York’s LLC Law § 702 neither mentions nor otherwise accommodates oppression as a basis for seeking judicial dissolution.

Coincidentally, a case decided by the Manhattan-based Appellate Division, First Department, just a few days after Professor Kleinberger posted his article, starkly illustrates the disharmony of New York’s statutory schemes and the resulting disadvantageous position of a minority member of a New York LLC as compared to a minority shareholder of a New York close corporation when confronted with similar, allegedly oppressive behavior by the controlling co-owner. Continue Reading The Money’s There But Out of Reach for the Minority LLC Member

Fine dining and business divorce crossed paths in a recently decided case featuring a lengthy battle between co-equal ownership factions of the corporation that operates Delmonico’s, the renowned Manhattan restaurant established in the early 19th century and famous for its signature dish, the Delmonico steak, among other dining firsts.

Delmonico’s can now lay claim to another first, though not of the edible kind. Last month, a New York Supreme Court judge of the Manhattan Commercial Division entered final judgment granting “equitable dissolution” of the restaurant corporation known as Ocinomled Ltd. — Delmonico spelled backwards — and ordering the respondent shareholders who were found to have engaged in oppressive conduct to forfeit their stock holdings.

What is Equitable Dissolution?

The term equitable dissolution can have different meanings in different contexts. In its most generic usage, the emphasis is on the word “equitable,” describing generally the judiciary’s broad discretion sitting as a court of equity without a jury and where legal remedies (i.e., money damages) are inadequate, to fashion a just resolution of a dispute between business co-owners over the continued existence of the firm. Continue Reading On the Menu: Steak and Equitable Dissolution

What do business divorce litigants have in common with the frill-necked lizard? At the outset of confrontation, they both use in terrorem tactics in an attempt to force their adversary into rapid submission. The lizard spreads its frill to appear more threatening in what’s called a deimatic display. The business divorce litigant packs the initial pleading with the most aggressive legal claims available, designed to cause the adversary maximum fear of business and economic disruption, public embarrassment, and, of course, liability.

I’ve frequently preached that most business divorce litigation is tactical, meaning the lawsuit’s ultimate objective, whether styled as one for judicial dissolution and/or asserting direct and/or derivative claims, is to pressure the adverse business partner into a buyout or other agreement achieving a separation of business interests, without having to litigate to the bitter end.

On the pressure-spectrum of claims by and against business co-owners, starting with the least aggressive, there’s breach of the firm’s constitutive documents, i.e., articles of formation, by-laws, shareholder agreements, partnership agreements, LLC operating agreements, and the like. Taking it up a notch, there’s breach of fiduciary duty and a panoply of other fault-based business torts. Taking it up yet another notch, there’s fraud which, depending on the type of business, its customers and vendors, and its public or private reporting requirements, can threaten detrimental external consequences beyond the stigma of the fraudster label. Continue Reading Civil RICO: A Blunt But Elusive Tool in Business Divorce Cases

For law bloggers, if there’s one thing more satisfying than writing about an important new court decision, it’s writing about an important new court decision that you won for your client.

Last week, the Brooklyn-based Appellate Division, Second Department, unanimously ruled in favor of my clients, construing for the first time at the appellate level two sections of New York’s LLC Law with profound effect on the ability of controlling members of LLCs to oust minority members by means of a cash-out merger.

First, reversing in part the lower court’s order, the appellate panel held that under § 1002 (g) of New York’s LLC Law, an appraisal proceeding is the cashed-out, dissenting member’s sole remedy and that, in contradistinction to the analogous statute applicable to dissenting shareholders under the Business Corporation Law (BCL), no exception exists for alleged fraud or illegality in the procurement of the merger.

Second, affirming in part the lower court’s order, the appellate panel held that LLC Law § 1002 (c), which requires member approval of the proposed merger agreement at a meeting called on at least 20-days notice, is trumped by LLC Law § 407 (a)’s default rule providing generally for member action by written consent in lieu of meeting.

Based on those unanimous rulings, the court in Farro v Schochet, __ AD3d __, 2021 NY Slip Op 00150 [2d Dept Jan. 13, 2021], granted my clients’ request to dismiss an action brought against them by a cashed-out minority member who sought to rescind the merger on grounds of alleged fraud and breach of fiduciary, and who also argued for rescission on the ground that he was not permitted to vote on the merger at a meeting of the members called on 20-days notice. Continue Reading Groundbreaking Appellate Ruling Boosts LLC Cash-Out Mergers

Business divorce clients often arrive in the throes of a crisis, complaining of co-owners siphoning, diverting, depleting, or denying access to company assets and resources for their own personal use or for the benefit of a competing entity at the expense of the business and the client. We usually hear some variation of the question, “How do we stop it?” More often than not, the answer is: “An injunction.”

The Injunction Remedy

An injunction is a kind of court order. It usually comes in the form of a prohibition against a person or entity acting in a particular way (for example, in a business divorce case, from drawing funds from corporate accounts). Less frequently, it can come in the form of a mandate to do or engage in certain conduct (for example, in a business divorce case, to provide ongoing access to corporate books and records). The injunction has three species, each defined primarily by the temporal duration of the relief granted. Continue Reading The Injunction Remedy in Business Divorce Cases