Some of the most complex and hotly-contested business divorce litigation arises from the dissolution of law firms. Perhaps law firm dissolutions are prone to litigation because many are organized as partnerships or LLPs, and New York’s Partnership Law, which governs those entities, is far more archaic (and less intuitive) than the regulatory regimes governing other forms of business association. Perhaps it is because lawyers ironically are unlikely to properly document the intricacies of their own partnership agreements. Or perhaps lawyers simply are more litigious than other business owners.

Whatever the reason, the dissolution of a law firm implicates a host of issues not ordinarily present in most other businesses. Lawyers’ ethical obligations, confidential files, and clients’ unfettered ability to choose their counsel all add to the complexity of the dissolution process, particularly when the process devolves into litigation.

The litigation between Samuel Capizzi (“Capizzi”) and his former law firm, Brown Chiari LLP (“BCLLP”) has already made its mark on business divorce jurisprudence with keystone decisions concerning collateral estoppel and judicial estoppel (discussed in this post). As it approaches its sixth birthday, the case continues to deliver, with Erie County Commercial Division Justice Timothy J. Walker recently authoring two notable decisions concerning Capizzi’s interest in some 1,600 contingency fee cases held by BCLLP at the time of its dissolution.

Continue Reading Disputes Abound When Law Firms Dissolve

The pictured architectural rendering of the sunlit Kings County Supreme Courthouse at 360 Adams Street, completed in 1957, doesn’t quite capture the reality of its dour, hulking presence in downtown Brooklyn. Its design features — the long rows of identical, small, horizontally paned windows set in a monolithic, from-here-to-forever concrete façade — always struck me as more suggestive of a prison than a courthouse.

But behind its stolid exterior, the business of dispute resolution is conducted with no less rigor and integrity than any more architecturally uplifting courthouse in the state. For Manhattan-based business litigators like myself, the expansion of New York’s Commercial Division initiative to Kings County in 2002, and the appointment to that bench of judges with business law backgrounds, made the prospect of a trip across the East River to litigate an important commercial case one that could be taken with confidence of getting a fair shake from an interested, experienced, thoughtful, judge supported by highly competent staff.

There’s been some changes on the Brooklyn Commercial Division bench in recent years, following the retirement of the long-serving, former Justice Demarest and former Justice Ash’s forced departure. With Justice Knipel splitting his time as Brooklyn’s Administrative Judge for Civil Matters as well as taking on a commercial foreclosure caseload, it appears that the lion’s share of new Commercial Division assignments are landing with Justices Leon Ruchelsman and Reginald Boddie. Of those two, at least based on the volume of published decisions I’ve seen since his appointment, Justice Ruchelsman appears to have taken on the heftier share of business divorce cases.

Whether or not I’m right about that, I thought it worthwhile to highlight some of Justice Ruchelsman’s recent decisions in business divorce matters for the benefit of practitioners and business owners who face the prospect of litigating such disputes in Brooklyn Supreme Court’s Commercial Division. So without further ado, I give you summaries of four of his recent decisions, with the recommendation that you read the decisions to capture the full flavor of Justice Ruchelsman’s approach to problem solving.  Continue Reading Business Divorce, Brooklyn Style

A year and a half ago, we blogged about a decision in which Bronx County Supreme Court Justice Llinet M. Rosado ruled that a shareholder’s alleged stock transfer through a bequest in his last will and testament was ineffective to transfer the stock to his widow where a written shareholders’ agreement prohibited transfers except to the shareholder’s “issue” (a legal term of art for children) or to any other person upon “unanimous consent” of all shareholders.

Sebrow v Sebrow (69 Misc 3d 1064 [Sup Ct, Bronx County 2020]), stands for the proposition, expressed by other courts in cases like Matter of Gusman (178 AD2d 597 [2d Dept 1991]), and Isaacson v Beau Label Corp., (93 AD2d 880 [2d Dept 1983]), that written transfer restrictions or buy-sell agreements governing closely-held business interests will trump, and potentially defeat, conflicting testamentary bequests. For that reason, closely-held business owners and their estate lawyers should always satisfy themselves that their estate plans do not contravene any of the decedent’s contracts.

Recently, three separate courts issued a trio of decisions in the ongoing Sebrow litigations both cementing and expanding upon the holdings of the original Sebrow decision. Each decision was a decisive loss for Berry Sebrow (“Betty”), the widow who claimed to have acquired shares of stock from her deceased husband, David Sebrow (“David”), through a residuary clause in David’s will. Continue Reading Three Strikes You’re Out: Sebrow Revisited

The current issue of The Business Lawyer, a quarterly publication of the ABA’s Business Law Section that rightly bills itself as “the premier business law journal in the country,” features a pair of dueling articles of great interest to scholars, practitioners, and other students of the limited liability company. The articles’ authors, whom I’ve had the good fortune getting to know at annual meetings of the LLC Institute and who have guest posted on this blog (here and here) and spoke on my podcast (here), are among the leading authorities in the country on closely held business entities and, in particular, unincorporated entities including partnerships and LLCs.

I’m speaking of Donald J. Weidner (pictured left), Dean Emeritus and Alumni Centennial Professor at Florida State University College of Law, and Daniel S. Kleinberger (pictured right), Emeritus Professor of Law at Mitchell Hamline School of Law.

Among his many accomplishments outside academia, Dean Weidner is co-author of The Revised Uniform Partnership Act published by Thomson Reuters, was the Reporter for the Revised Uniform Partnership Act (1994), and has written numerous articles on partnerships, limited liability companies, and financial accounting (SSRN author page here).

Professor Kleinberger’s extra-curricular contributions are no less impressive, including co-author of a leading treatise on LLCs published by Warren Gorham & Lamont, Co-Reporter and Principal drafter of statutory text and Official Comments to the Revised Uniform Limited Liability Company Act (2006), and author of a host of articles in law reviews and journals (SSRN author page here).

As any long-time reader of this blog knows, and as I wrote not long ago, one of the more common issues litigated at the outset of business divorce litigation involving LLCs as well as close corporations are motions to dismiss a minority member’s direct claims against managers that should have been brought derivatively under the prevailing Tooley test for direct versus derivative claims. The two articles by Dean Weidner and Professor Kleinberger offer a spirited point and counter-point debate between two schools of thought concerning the ability of LLC members to pursue and obtain effective remedies for misconduct claims against LLC managers, either as direct or derivative claims, and the ability (or not) of conflicted LLC managers to gain control of those claims through appointment of a surrogate Special Litigation Committee (SLC) once the claims are characterized either as direct (no SLC) or derivative (yes SLC). Continue Reading LLCs, Direct vs. Derivative Claims, and Special Litigation Committees: A Lively Debate

The emergence of the Limited Liability Company as the preferred form of closely-held business association in New York has spawned a glut of litigation over disputed membership status in LLCs, many of which are covered in the pages of this Blog (here and here, for starters). Non-existent or ignored operating agreements, lack of certificated ownership interests, and the informal deals that seem prevalent among LLC members provide prime conditions for a fight over membership in an LLC.

Disputes over membership in LLCs often feature one faction—the party disputing the claimed membership—citing to the operating agreement or requirements for admission to membership that were not satisfied, and the other faction—the party claiming membership—relying on some other agreement or representation. In Sobel v Tulchiner (covered here), the defendant pointed to an operating agreement declaring himself the sole member, while plaintiff relied on a Department of Health Application stating that he was one of multiple members. In Cupcake v Boomboom (covered here), the plaintiff looked to an operating agreement identifying the members, while defendant relied upon a submission to the State Liquor Authority identifying different members.

That brings us to a recent decision by New York County Justice Borrok, Sherman v Zampella, in which the court considers the plaintiff’s claim that text messages establish that he was a 9.9% member of an immensely valuable cryptocurrency business, despite the plaintiff’s admitted non-compliance with the member-admission requirements of the operating agreement.

Continue Reading Text Messages Trump Formalities in Ownership Dispute Over Cryptocurrency Business

Disputes over capital accounts and equity percentages are frequent fodder for business divorce litigation — especially in LLCs without operating agreements. Exemplars previously treated on this blog include Chiu v Chiu, an LLC appraisal case in which the court found that the 75% member improperly accounted for monies it loaned to the company as capital contribution in an attempt to eliminate or at least diminish the withdrawing 25% member’s ownership percentage, and YMSF Family Partnership LP v Beitel where the court rejected a claim designed to de-equitize a 49.9% LLC member based on an allegation that its capital contribution was a disguised loan.

A pair of recent decisions, in two cases involving disputes between members of realty-holding LLCs, addressed the loan vs. capital contribution conundrum in unusual circumstances:

  • In Moskowitz v Fischer, decided by Suffolk County Commercial Division Justice Elizabeth H. Emerson, a 50% member of a defunct realty-holding LLC (Member #1) sued the LLC’s accounting firm for fraud and malpractice alleging that, in cahoots with the other 50% member who also served as tax partner (Member #2), and without advising Member #1, it amended the LLC’s tax return to convert to equity Member #1’s non-performing $1 million loan made to the LLC many years earlier, for which Member #2 had given his personal guarantee, for the purpose of defeating Member #1’s separate, derivative lawsuit against Member #2 seeking to enforce the loan guarantee.
  • In JDS Fourth Avenue JV LLC v Largo 613 Baltic Street Partners LLC, decided by Manhattan Commercial Division Justice Andrew Borrok, the 51% member of a realty-holding LLC sued the 49% member alleging default on an approximate $1 million, undocumented, demand-loan obligation which, in its defense and the subject of its motion to dismiss based on documentary evidence, the 49% member contended was an equity distribution.

Continue Reading A Loan Is a Loan Is a Loan, Except When It’s Equity

You know you’re in big trouble if the post-trial decision in a lawsuit you filed begins like this:

The court finds the plaintiff, Rowen Seibel, not credible. This is primarily because it appears he fabricated evidence and then compounded that fabrication by using the same evidence to lie to this court.”

That was the inauspicious start for Seibel to a Decision After Trial issued two weeks ago by Manhattan Commercial Division Justice Melissa A. Crane in a litigation between celebrity chef Gordan Ramsay and Ramsay’s former business partner.

Ramsay and Seibel were 50% / 50% owners of a California limited liability company, The Fat Cow, LLC, formed the same day as a Delaware limited partnership, FCLA, LP (an acronym for “Fat Cow Los Angeles”), of which Ramsay and Seibel were 49% / 49% limited partners and The Fat Cow the 2% general partner, to develop, own, and operate a restaurant of the same name in Los Angeles, California. The entities had written operating and limited partnership agreements, the former governed by California law, the latter by Delaware law.

The two-week bench trial preceding Justice Crane’s interesting post-trial decision was of two lawsuits consolidated for trial. Continue Reading Gordon Ramsay’s The Fat Cow: Dishing Up Damages and Dissolution

A number of lawsuits have percolated through New York’s courts over the past five years between Adam Max, son of world-renowned visual artist Peter Max, and Adam’s sister, Libra, over control and management of the family business, ALP, Inc., a corporation Peter formed in 2000 to produce, maintain, market, license, and commercialize his prolific catalogue of artwork.

One of those cases culminated in a recent decision by the Manhattan-based Appellate Division – First Department, Max v ALP, Inc., 203 AD3d 580 [1st Dept 2022], in which the Court brought to conclusion a putative shareholder derivative lawsuit Adam brought against Libra in 2019, which Justice Bannon dismissed in full, the dismissal of which the appeals court then affirmed in full. Continue Reading Principles of Fiduciary Deference: The Business Judgment Rule and Exculpatory Clauses

In 2008, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery — one of the many intellectual giants and gifted writers who’ve occupied seats on that bench — published an article in the Delaware Journal of Corporate Law entitled Goodbye to the Contemporaneous Ownership Requirement.  The article argued that the contemporaneous ownership rule in shareholder derivative actions, embodied in DGCL Section 327 (“In any derivative suit instituted by a stockholder of a corporation, it shall be averred in the complaint that the plaintiff was a stockholder of the corporation at the time of the transaction of which such stockholder complains or that such stockholder’s stock thereafter devolved upon such stockholder by operation of law”) and likewise in New York’s BCL Section 626 (b), should be abolished as “unnecessary,” “incoherent,” “ill-suited to each of the purposes advanced to support it,” and “arbitrarily mandat[ing] the dismissal of potentially meritorious claims.”

At the risk of vastly over-simplifying VC Laster’s multi-pronged argument, the central point he made is that, as long as the derivative plaintiff is a shareholder upon commencing the action and for its duration, it’s meaningless whether the plaintiff owned shares at the time of the challenged corporate action because the claim belongs to the corporation and is being brought for the benefit of the corporation, not the shareholder.

In one of his subsequent opinions questioning the rule’s wisdom, Bamford v Penfold, L.P., VC Laster dropped an intriguing footnote referring to a “provocative article” published in 2010 by Professor of Law Lawrence Mitchell of The George Washington University entitled Gentleman’s Agreement: The Anti-Semitic Origins of Restrictions on Stockholder Litigation (available here).  As the title suggests, Professor Mitchell’s thesis is that the statutory contemporaneous ownership rule and other restrictions on derivative actions including the security requirement for small shareholders, first enacted in New York in 1944 and in Delaware the following year, were promoted by the non-Jewish, corporate defense bar dominated by white-shoe law firms to stymie shareholder suits being brought by predominantly Jewish lawyers.  From the footnote:

In 1944, the New York legislature adopted a suite of statutory limitations on derivative actions that included a security-for-expenses requirement and a contemporaneous ownership requirement. Professor Mitchell has argued that the legislation was influenced by the anti-Semitic prejudices of the predominantly non-Jewish defense bar and their reaction to the perceived prevalence with which predominantly Jewish lawyers represented plaintiffs in stockholder derivative actions challenging the corporate establishment. The New York initiative had widespread influence, as “[p]assage of the New York statute inspired a burst of heated attacks on the derivative suit as an abusive and corrupt device from supporters of business interests throughout the country.” Donna I. Dennis, Contrivance and Collusion: The Corporate Origins of Shareholder Derivative Litigation in the United States, 67 Rutgers U. L. Rev. 1479, 1520 (2015). Delaware notably did not adopt a security-for-expenses statute, but it seems likely that the 1945 enactment of Section 327 was spurred by the New York initiative.

Whatever its origins, VC Laster’s advocacy seeking to eliminate the contemporaneous ownership rule has not spurred its repeal by the Delaware legislature, hence Section 327 remains on the books.  Which brings me to an interesting opinion handed down last week by Chancellor Kathaleen St. J. McCormick in SDF Funding LLC v Fry in which, after remarking that Section 327’s contemporaneous ownership requirement “is not universally beloved” and referring to VC Laster’s scholarship on the issue, she considered and ultimately rejected the argument of a putative derivative plaintiff who ran afoul of the rule, that he should be afforded “equitable standing” to prosecute the action.

Continue Reading Equitable Standing in Shareholder Derivative Suit Bows to the Contemporaneous Ownership Rule

It’s hard not to feel sorry for the petitioner in Fernandes v Matrix Model Staffing, Inc., Decision and Order, Index No. 160294/2021 [Sup Ct, NY County Apr. 20, 2022].

In Fernandes, Manhattan Supreme Court Justice Frank P. Nervo authored a thorough, step-by-step analysis of the legal issues and defenses most commonly raised in support of and in opposition to a petition for corporate dissolution based upon “illegal, fraudulent or oppressive actions” by the entity’s controllers under Section 1104-a (a) (1) of the Business Corporation Law (the “BCL”).

The Court serially ruled that the petitioner stated sufficient grounds to dissolve Matrix Model Staffing, Inc. (“Matrix”), a modeling agency with offices in New York, Florida, and California, and that the respondent entity: (i) failed to demonstrate petitioner’s lack of standing, (ii) failed to raise a genuine issue of fact as to any of the facts in the petition, (iii) failed to demonstrate the existence of an “adequate, alternative remedy” to dissolution, and (iv) failed to forestall dissolution by exercising the buyout election under BCL § 1118. Sounds like a winning petition.

To the hapless petitioner’s undoubted dismay, though, the Court still referred the matter to a referee for an evidentiary hearing. Let’s see why the Court might have felt compelled to order a hearing on a petition for which the respondent failed to show any real defense. Continue Reading The Evidenceless Petition to Dissolve