Delaware Chancery Court’s contractarian approach to all things LLC, embedded statutorily in Section 18-1101(b) of the Delaware LLC Act (“It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements”), has been no less forceful in its rich body of caselaw tethering LLC members to the text of their operating agreement when addressing applications for judicial dissolution of LLCs under Section 18-802 of the Act.

Section 18-802, which closely resembles New York’s LLC Law Section 702, authorizes Chancery to decree dissolution of an LLC “whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” In a string of seminal decisions including Haley (2004), Silver Leaf (2005), Seneca (2008) Fisk Ventures (2009), and Arrow (2009), Chancery developed a two-prong standard for judicial dissolution either where there exists deadlock that prevents the LLC from operating with no mechanism in the operating agreement to break deadlock, or where the LLC’s purpose as defined in the operating agreement cannot be carried out.

In Vice Chancellor Laster’s 2015 Carlisle opinion, which I wrote about here, the court broke new, not-so-contractarian ground by holding that it could order the dissolution of an LLC under the court’s traditional equity jurisdiction at the behest of a non-member assignee of a membership interest who otherwise lacked standing to seek dissolution under Section 18-802.

But that’s not the sort of equitable dissolution I want to focus on. The sort I have in mind is where the court entertains and grants a statutory claim for judicial dissolution of an LLC where the facts don’t fit neatly or at all the articulated standard yet the equities as between the parties demand dissolution as a matter of good old-fashioned fairness. Delaware’s contractarian LLC jurisprudence does not welcome that definition of equitable dissolution, nor can I point to any examples of Chancery decisions that fit that bill.

Until now, at least arguably.

In a post-trial opinion handed down earlier this month by Vice Chancellor Will in Gibson v Konick, the court ordered dissolution of an LLC formed for the purpose of owning a vacation home. The LLC had two, formerly romantically involved, 50/50 members. The operating agreement named one of them sole manager, hence there was no deadlock as that term is normally used to refer to the contractual inability to exercise managerial authority. The operating agreement’s stated purpose was to acquire, develop, and own residential property. Those purposes either were achieved or remained attainable.

So how did the court conclude grounds for dissolution under Section 18-802? As I see it, in a word: fairness.

Continue Reading Did Chancery Court Just Crack Open the Door to Equitable Dissolution of LLCs?

Buy-sell agreements come in all shapes and sizes. Some are straightforward. Others are outrageously complex, especially purchase price formulas. Some have triggers for death. Others disability. Retirement. Expulsion. Termination of officership, directorship, employment.

Some are mandatory. Others discretionary. Where buy-sell agreements are discretionary, a whole set of additional rules – the law of options – comes into play.

Under the law of options, “strict compliance with terms setting forth the time and manner of an option’s exercise” is indispensable (Agostino v Soufer, 12 AD3d 204 [1st Dept 2004]).

“Not only is strict adherence to the terms of an option ordinarily required, but it is a broadly accepted principle that time is of the essence with this type of contractual provision” (Urban Archaeology Ltd. v Dencorp Investments, Inc., 12 AD3d 96 [1st Dept 2004]). Failure to strictly comply with an option’s terms – especially a contractual closing deadline – can be deadly (see id. [“the court was without the power . . . to extend the buyout option beyond the contractually agreed-upon 90-day period”]).

But “a party to an option contract may waive its right to insist upon strict compliance with those terms, either expressly or by its conduct” (Lamberti v Angiolillo, 73 AD3d 463 [1st Dept 2010]). “A valid waiver” of an option exercise deadline “requires no more than the voluntary and intentional abandonment of a known right which, but for the waiver, would have been enforceable” (Gresser v Princi, 128 AD2d 752 [2d Dept 1987]).

These competing rules of law were at play in a recent appeals court decision in a particularly nasty father-son litigation over a donut franchise empire, Burns v C.R.B. Holdings, Inc. (___ AD3d ___, 2024 NY Slip Op 03609 [4th Dept July 3, 2024]).

Continue Reading Dollars, Donuts, and Buy-Sell Options
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Just a few weeks ago, I commented on a recent uptick in disputes centered on the breakup of professional services firms.  In those disputes, we expect that the demands of the legal, accounting, and medical professions draw individuals with keen attention to detail, focused on documentation, and prepared for all contingencies.  Less expected is the irony that many attorneys, accountants, and medical professionals fail to bring those attributes to the table when organizing their business relationships. 

The result of that failure is a tinderbox—poorly defined “partnership” relationships, mixed with high profit margins, difficult to value businesses, and type A owners willing to litigate their disputes.  The right spark triggers bitter and hotly contested litigation.  That part-legal, part-psychological phenomenon explains why business divorces of professional services corporations—especially law firms—can get complicated fast. 

Motivated by that uptick, Becky Baek and I were pleased to recently present a CLE on the complexities that arise in the dissolution or breakup of law firms.  Here are the highlights.

Continue Reading Special Considerations for Law Firm Breakups

Business divorce and non-judicial (a/k/a voluntary) dissolution of a business entity rarely intersect. But when they do, or even in a non-business divorce setting, if a business owner needs to rescind a certificate of voluntary dissolution allegedly filed improperly by someone else, what recourse is there? Confronted with a meritorious demand, does the secretary of state have authority and discretion to rescind the dissolution certificate and reinstate the entity to active status? Or must the party seeking rescission go to the time and expense of seeking a judicial remedy?

Two recent cases involving LLCs — one decided under New York’s LLC Law and the other under New Jersey’s version of the Revised Uniform LLC Act — arrived at the same conclusion: the respective governing statutes do not authorize the secretary of state to rescind an LLC’s voluntarily filed certificate of dissolution and termination. Only the courts in a civil action may do so.

New York’s LLC Law Expressly Limits State Department Review

If the filing for a newly-formed LLC meets the minimal statutory criteria and the filing fee is paid, the Secretary of State’s job is done. LLC Law § 209 expressly states that “the department shall not review such articles or certificates for legal sufficiency; its review shall be limited to determining that the form has been completed.”

Section 209 was put to an unusual test in a federal court lawsuit brought by the alleged victim of identity theft. In Smith v. New York State Secretary of State, the plaintiff discovered that someone had used her name and credit card without her knowledge or authorization to form and register a new LLC with the department of state. The articles of organization named the plaintiff as the registered agent for service of process at a New York address not belonging to plaintiff. The LLC’s articles of organization were filed and signed by a person unknown to plaintiff at a foreign address.

Continue Reading Dissolution Undone
Cracked,Brick,Wall

About 40 years ago, a son and his mother first teamed up to invest in purchasing and managing over a dozen buildings in New York through 4 co-owned entities, each owned on a 50/50 basis. Fast forward several decades and the successful family business has turned into a bitter family feud.

As is all too often the case particularly with family-owned companies, there was far too little documentation of important items. None of the companies had governing agreements. Loans between the companies were undocumented. The potential for trouble loomed large.

Today’s post jumps in at the tail end of nearly a decade of litigation that recently culminated with a post-trial decision by New York County Commercial Division Justice Melissa A. Crane, (Rosenblum v Rosenblum, Index No 654177/2015), following a 3-day valuation bench trial to determine, under LLCL § 509, the fair value of plaintiff Kenneth Rosenblum’s 50% interest in 2 of the co-owned real estate holding companies.

A Contentious Rift in the Rosenblum Household

As the Court noted in the opening paragraph of its Decision:

This case is notable for being a particularly acrimonious, multi-generational family dispute. It has also been lengthy. The parties have been fighting since 1996. They agree on practically nothing, are uncompromising, and change legal positions as it suits them in the moment. This court is confident this decision will only foster further litigation, both here and on the appellate level. There appears to be no real interest in resolving this matter.

The Court might have been hyperbolic for effect, but not by much.

Continue Reading Fair Value Decision Caps Decade-Long Dispute Over Family-Owned Real Estate Holding Companies
One-of-a-kind

It’s not every day that New York’s highest court considers a question impacting the business divorce cases that we typically litigate.  And even when an interesting business divorce issue does make its way up to Albany, it’s even more rare to see the Court of Appeals, in a case of first impression, fashion a new framework for addressing a complex question.  We recently were treated to both.

When the directors of a foreign corporation headquartered in New York negotiate and consummate (in New York), a merger of the corporation (which derives millions in revenue from New York), which law governs suits arising from that merger?  On this question, we now have Court of Appeals guidance. 

According to Eccles v Shamrock Capital Advisors, LLC, the internal affairs doctrine, by which “matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders” are governed by the law of the state of incorporation, the foreign law applies (2024 NY Slip Op 02841 [Ct App May 23, 2024]).  The Court’s analysis and decision require careful consideration by any owner of a foreign-incorporated entity considering New York litigation. 

Continue Reading Court of Appeals Bolsters the Internal Affairs Doctrine, Takes a Stroll Through Scottish Fiduciary Law

Count ’em: At the time A sued B for judicial dissolution of one of their several jointly owned companies, there are not one, not two, not three, but eight pending lawsuits between the two 50/50 business partners who first teamed up over 20 years ago.

I would guess most people hearing that would think a judge hearing the dissolution case wouldn’t hesitate to grant the petition and appoint a receiver to wind down and liquidate the business. I also would guess a great many lawyers hearing that would think the same, reasoning that a practical-minded judge would find no good reason to perpetuate a badly fractured relationship between two deadlocked, hostile, highly litigious business owners who no longer communicate except through their lawyers.

As evidenced by Manhattan Commercial Division Justice Andrew Borrok’s ruling last month in Matter of Ruham dismissing a petition for judicial dissolution, those guesses would be wrong if the entity is a functioning, viable, single-asset real estate holding company organized as a New York LLC governed by boilerplate articles of organization and without a written operating agreement.

A Decades-Long Business Relationship Goes Kablooey

The antagonists in Ruham went into business together in the mid-1990’s. Their co-owned ventures include a high-end flooring business and restaurants. In 2000, they formed a company called Hoham 932 Grand Street LLC to purchase the property at that Brooklyn address, initially used for the flooring business and later for a restaurant.

Continue Reading It Takes More Than a Litigation Tsunami Between Hostile Members to Obtain Judicial Dissolution of a Realty-Holding LLC

The lion’s share of cases we write about on New York Business Divorce involve consummated business relationships where the warring parties have clearly chosen the particular entity form governing their relations, whether it be partnership, corporation, or limited liability company.

But a sizable minority of cases on our blog are less about consummated business relationships, and more about whether the parties actually formed an enforceable business relationship to begin with, and if so, in what form.

In Kefalas v Pappas (___ AD3d ___, 2024 NY Slip Op 01912 [2d Dept Apr. 10, 2024]), the Court considered both of these questions, including the intriguing question of whether one can form an enforceable joint venture even though the alleged venture’s affairs are handled in separate entities acting as alleged “mere conduits.”

Continue Reading Oral Joint Ventures: The Wild West of Business Associations
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As both a practitioner and a close follower of New York business divorce caselaw, I’ve seen a recent uptick in disputes centered on the breakup of professional services firms and cryptocurrency businesses.  Perhaps the crypto business part is a natural consequence of the industry’s recent rapid expansion.  As for the professional services firms, your guess is as good as mine.    

Whatever the cause of the trend, these disputes present some of the most compelling and difficult valuation questions for lawyers and the valuation experts they rely upon.  How to value an owner’s interest in a professional services firm depends on the nature of the firm’s fee structure.  And the more complex the fee structure of the firm—picture a law firm with contingency-fee and co-counsel engagements in potentially massive, but also wildly uncertain verdicts—the more complicated the valuation.  And the legal world is just beginning to grapple with a basic understanding of blockchain technology, let alone the complex valuation questions that different cryptocurrency assets can raise. 

Based on these complications, a law firm with high-upside contingency-fee cases that accepted payment in cryptocurrency tokens might be one of the most difficult companies to value—a final exam in a business valuation expert’s litigation crash course, so to speak.  For some lawyers and experts, the results are in: Freedman Normand Friedland LLP v Cyrulnik, 21-CV-1746 (JGK) (SDNY May 15, 2024).   

Continue Reading When Law Firms Break Bad: The Valuation Battle Over Contingency Fees and Crypto Tokens
Contract,Danger,And,Unfair,Terms,And,Conditions,Or,Anonymous,Source

Posts about limited partnerships on this blog are far eclipsed by discussions on just about any other form of business entity because, as we’ve noted in the past, limited partnerships are generally on the decline.

So, I was pleased to debut my appearance here with what seemed to be an interesting case out of the Manhattan Commercial Division—Cline v Grodin, et al., Index No. 654095/2022—concerning an action commenced by a limited partner of a Delaware limited partnership alleging that the general partner (an LLC whose membership consists of the other two individual limited partners in the partnership) improperly distributed profits to those two limited partners, disguised as salaries for managerial duties the limited partners were never supposed to be paid for, without corresponding pro rata distributions to the aggrieved limited partner.

In Delaware (as in New York), a limited partnership is comprised of two classes of partner. General partners typically manage the business and affairs of the partnership. Limited partners, on the other hand, have limited liability (hence the name) because they are typically silent investors without a managerial role. A limited partner risks losing the benefit of limited liability if they participate in the control of the business (6 Del. C. § 17-303 [a]).

General partners may delegate management and control of the partnership’s business and affairs to agents, officers, and employees of the general partner or the partnership (6 Del. C. § 17-403 [c]).

What happens when the general partner delegates management and control of the partnership’s business and affairs to one or more of the limited partners? Can a “fee” paid to limited partners hired by the general partner (who is, itself, controlled by the same limited partners receiving the fee) be viewed as circumventing distributions to the other limited partners?

As it turned out, those are questions for another case on another day, because today’s case was resolved with the following finishing-blow delivered by Justice Jennifer G. Schecter, as recently affirmed by the First Department: “[T]he signed, amended, and restated limited partnership agreement that is dated as of October 1 of 2016 [] does utterly refute the claims that are in this complaint in every regard.” Ouch.

Let’s see what went wrong for our aggrieved limited partner, Cline.

Continue Reading You Get What You Get, and You Don’t Get Upset: First Department Boots Limited Partner’s Claims Based on Plain Terms of Limited Partnership Agreement