DRAFTING ERRORS, ANYONE? A MESSAGE FROM PROFESSOR KLEINBERGER

At the Spring meeting of the ABA Business Law Section in Vancouver, on Thursday, March 28, 2019 from 2:30pm – 4:30pm, the Committee on Limited Liability Companies, Partnerships, and Unincorporated Entities is sponsoring a panel entitled, “Lessons from the Trenches for Transactional Lawyers.”  Here is a brief description:

Avoiding errors in transactional documents — insights from attorneys who have seen errors play out in litigation:  two litigators (including one who defends attorney malpractice claims), a transactional lawyer who often plays clean up, and an expert witness who frequently testifies in cases arising from problematic language in deal documents.

If you have some examples of problematic language, favorite (or disfavored) cases, or “occasions of sin” to share in, the panel would be grateful.  The presentation will not be merely war stories.  Instead, the panelists will present various categories of errors and occasions for error, as well as practical suggestions for avoiding error.  However, the more examples the panel has from which to work, the more useful the categorizations will be.

Redact as you see fit or transform examples into illustrations.  Please send info to:  daniel.kleinberger@mitchellhamline.edu .  We will not identify the sources of examples unless you ask for attribution.


What’s become known as the bad-faith petitioner defense in judicial dissolution proceedings first emerged in Matter of Kemp & Beatley, 64 NY2d 63 [1984], where the Court of Appeals in a minority stockholder oppression case wrote that “the minority shareholder whose own acts, made in bad faith and undertaken with a view toward forcing an involuntary dissolution, give rise to the complained-of oppression should be given no quarter in the statutory protection.”

It took several decades, but eventually the bad-faith petitioner defense made a salutary species jump to deadlock dissolution cases involving 50/50 shareholders as a result of Justice Vito DeStefano’s thoughtful analysis in Feinberg v Silverberg.

Kemp and Feinberg both involved judicial dissolution of closely held corporations governed by Article 11 of the Business Corporation Law. As I noted in a post a couple of years ago describing a Tennessee case in which the court found that the petitioner seeking dissolution of a Delaware LLC had “manufactured” the alleged impasse between 50/50 members, I’ve patiently been awaiting another species jump to dissolution proceedings under Section 702 of New York’s LLC Law.

My patience was rewarded last month, when Manhattan Commercial Division Justice Saliann Scarpulla confirmed a special referee’s report and dismissed a Section 702 dissolution petition by a 50% co-managing member of a realty holding LLC based on his own conduct in breach of the operating agreement designed to “force dissolution” and “push” the other husband-and-wife members “out of the building.” Advanced 23, LLC v Chambers House Partners, LLC, 2019 NY Slip Op 30173(U) [Sup Ct NY County Jan. 22, 2019]. Continue Reading The Bad-Faith Petitioner Defense Makes Successful Debut in LLC Dissolution Case

This winter forever will be remembered in the Northeast as the winter of the “bomb cyclone,” which gets credit for the 6º temperature and bone-chilling winds howling outside as I write this. So in its honor, I’m accelerating my annual Winter Case Notes synopses of recent business divorce cases, which normally don’t appear until later in the season.

This year’s selections include a variety of interesting issues, including LLC dissolution based on deadlock; the survival of an LLC membership interest after bankruptcy; application of the entire-fairness test in a challenge to a cash-out merger; an interim request for reinstatement by an expelled LLC member; and a successful appeal from a fee award in a shareholder derivative action.

Deadlock Between LLC’s Co-Managers Requires Hearing in Dissolution Proceeding

Advanced 23, LLC v Chamber House Partners, LLC, 2017 NY Slip Op 32662(U) [Sup Ct NY County Dec. 15, 2017].  Deadlock is not an independent basis for judicial dissolution of New York LLC’s under the governing standard adopted in the 1545 Ocean Avenue case but, as Manhattan Commercial Division Justice Saliann Scarpulla explains in her decision, when two co-equal managers are unable to cooperate, the court “must consider the managers’ disagreement in light of the operating agreement and the continued ability of [the LLC] to function in that context.” In Advanced 23, the co-managers exchanged accusations of bad acts and omissions, e.g., one of them transferring LLC funds to an unauthorized bank account, raising material issues of fact as to the effectiveness of the LLC’s management and therefore requiring an evidentiary hearing, which is just what Justice Scarpulla ordered. Of further note, in a companion decision denying the respondent’s motion to dismiss the petition (read here), Justice Scarpulla rejected without discussion the respondent’s argument that judicial dissolution under LLC Law § 702 was unavailable based on a provision in the operating agreement stating that the LLC “will be dissolved only upon the unanimous determination of the Members to dissolve.” In that regard, the decision aligns with Justice Stephen Bucaria’s holding in Matter of Youngwall, that even an express waiver of the right to seek judicial dissolution of an LLC is void as against public policy. Continue Reading Winter Case Notes: LLC Deadlock and Other Recent Decisions of Interest