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Let’s face it. In business divorce, the accounting cause of action doesn’t get a lot of love. It’s not as sexy as the torts (conversion, breach of fiduciary duty, waste, etc). It lacks the oomph of judicial dissolution.

Nonetheless, accounting claims are ubiquitous in business divorce litigation, pleaded practically as a matter of course. Sometimes the claim is tacked on as if by rote, perhaps simply to beef up a petition, complaint, or counter complaint. But other times, like the books and records proceeding, the accounting cause of action can be a vital tool in the closely-held business owner’s litigation toolbox.

Ancient Roots

The accounting cause of action has its roots in a basic, ancient principle of partnership law: partners owe one another fiduciary duties, including the duty to account. The common-law duty of partners to account to one another and to the partnership is codified in Sections 42, 43, and 44 of the New York Partnership Law. Although there are not any quite comparable statutes in the Business Corporation Law (Section 720 provides a narrower right to sue a director or officer for an accounting) or the Limited Liability Company Law, it is well-settled that the obligation of business owners to account to one another is fully applicable to closely-held corporations and LLCs. Continue Reading Accounting Unchained: Is the Closely Held Business Owner’s Right to an Accounting Absolute?

Lady Justice

Welcome to another edition of Winter Case Notes in which I clear out my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

And speaking of digging deeper, if you don’t already know, New York’s e-filing system has revolutionized public access to court filings in most parts of the state. The online e-filing portal (click here) allows searches by case index number or party name. Once you find the case you’re looking for, you’ll see a chronological listing with links allowing you to read and download each pleading, affidavit, exhibit, brief, decision, or other filing. No more trips to the courthouse basement to requisition paper files!

This year’s synopses feature matters that run the gamut, from a claimed de facto partnership, to several disputes pitting minority against majority shareholders, to an LLC case in which the court resolved competing interpretations of a somewhat murky operating agreement. Continue Reading Winter Case Notes: De Facto Partnership and Other Recent Decisions of Interest

shareholderWhat makes a shareholder a shareholder? What makes an LLC member a member?

The simplicity of the questions belies the difficulties and endlessly unique fact patterns encountered in case after case involving close corporations and LLCs in which one faction claims the other has no ownership interest in the entity and therefore lacks standing to seek judicial dissolution or other remedies predicated on violation of owner rights.

That’s not to say there aren’t common characteristics of such ownership contests. Usually they spring from one or more of the following circumstances: lack of shareholder or operating agreement; lack of certificated interests or other formal ownership documents; lack of transparency of tax returns and other business documents requiring owner identification; prior, inconsistent representations in tax returns or court proceedings; and, sometimes, intentional concealment of ownership interests to avoid creditors, tax authorities, ex-spouses, etc.

Last month, in a pair of noteworthy decisions, Nassau County Commercial Division Justice Stephen A. Bucaria rejected challenges to claimed ownership interests in two very different cases, one involving a close corporation and the other an LLC, in both of which one party unsuccessfully claimed to be the sole owner. In the corporation case, Justice Bucaria granted summary judgment upholding the contested 4% stock ownership as evidenced by a stock purchase agreement and stock certificate notwithstanding the shareholder’s sworn testimony in a prior, unrelated case denying that he was a shareholder. In the LLC case, Justice Bucaria granted preliminary injunctive relief in favor of two individuals claiming one-third membership interest each as evidenced by documents provided to a franchisor and municipal agency, notwithstanding an operating agreement naming the adverse party as sole member. Continue Reading Sole Owners of Close Corporation and LLC Discover They’re Not So Sole

tie-breakerThe New York Business Corporation Law offers the 50% shareholder of a close corporation two avenues to judicial dissolution: deadlock at the board or shareholder level or internal dissension under BCL § 1104, and oppressive actions by the directors or those in control of the corporation under BCL § 1104-a.

The 50% petitioner faces an important strategic decision whether to invoke one or the other (or both) of the statutes. That’s because § 1104-a — but not § 1104 — triggers the respondent’s elective right under BCL § 1118 to acquire the petitioner’s shares for fair value. As I’ve written previously, often a 50% petitioner may gain greater negotiating leverage by proceeding solely under § 1104 based on deadlock, thereby depriving the other 50% faction of a statutory buy-out opportunity.

I can only speculate whether a strategic decision of that sort was at work in Matter of Hudson (Pure Lime USA, Inc.), Short Form Order, Index No. 600127/16 [Sup Ct Nassau County June 16, 2016], in which Nassau County Commercial Division Justice Stephen A. Bucaria dismissed the 50% shareholders’ § 1104 dissolution petition that superficially asserted director deadlock, but where the governing shareholders agreement authorized one of the respondent’s designees on the four-member board to cast the deciding vote in case of a tie vote. How can there be deadlock, the winning argument went, when the parties had a tie-break provision specifically designed to avoid deadlock? Continue Reading Tie-Breaker in Shareholders Agreement Defeats Deadlock Dissolution Petition

BreakupIt seems that every time I comment on the dearth of business divorce cases involving partnerships in an era increasingly dominated by limited liability companies, up pops a new and interesting decision in a dispute among partners in a general or limited partnership. In this instance, I’m proven wrong by not one but by three recent decisions involving partnership disputes although, I have to point out in my own defense, two of the three spring from what I call legacy partnerships formed in the 1980’s, i.e., before the advent of LLCs in New York.

Camuso

The first is Camuso v Brooklyn Portfolio, LLC, 50 Misc 3d 1226(A), 2016 NY Slip Op 50273(U) [Sup Ct Kings County Mar. 8, 2016], which is making its second appearance on this blog.

My previous post examined a decision almost two years ago by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in which she determined that a real estate partnership agreement’s transfer restrictions gave way to a marital divorce settlement conveying half of one partner’s 50% interest to his ex-wife where the other 50% partner, who never formally consented to the conveyance as required by the partnership agreement, nonetheless subsequently ratified the transfer in the partnership tax returns and by prior judicial admissions. Continue Reading A Potpourri of Partnership Breakups

cash registerAppellate case law in New York generally prohibits use of company funds to pay for legal defense costs in judicial dissolution proceedings.

The theory supporting the prohibition, as articulated over 50 years ago in Matter of Clemente Brothers, 19 AD2d 568 [3d Dept], aff’d, 13 NY2d 963 [1963], is that the statute authorizing dissolution proceedings “grants to the corporation as a separate entity no authority to determine whether a proceeding shall be initiated to dissolve itself,” thus making the corporation a proper jural party “for the limited and passive purpose of rendering it amenable to the orders of the court” and barring it from assuming a “militant alignment on the side of one of two equal, discordant stockholders.”

The principles animating Clemente and its progeny such as Matter of Rappaport, 110 AD2d 639 [2d Dept 1985], and Matter of Boucher, 105 AD3d 951 [2d Dept 2013], involving deadlock dissolution proceedings between 50-50 shareholders, have been extended to cases brought under the separate statute enacted in 1979 providing a dissolution remedy for oppressed minority shareholders. Continue Reading The Prohibition Against Using Company Funds for Legal Fees in Dissolution Proceedings

Lady JusticeWe’re two-thirds of the way through the official winter season, which thus far has dumped a lot of snow on the Northeast making it a good one for skiers. It’s also been a good season for business divorce aficionados with plenty of interesting decisions in judicial dissolution cases and contested buy-outs.

Each August for the last five years, I’ve published a Summer Shorts edition offering several bite-sized case synopses highlighting decisions that, while not meriting extended analysis, nonetheless offer valuable insights for business owners, transactional lawyers involved in business formation and, of course, business divorce lawyers. I figured it’s time to start the hibernal version, so welcome to the inaugural edition of Winter Case Notes.

First up is a decision by Justice Richard Platkin in which the validity under the operating agreement of an LLC manager’s removal hinged on the parties’ relative capital contributions. Next is Justice Stephen Bucaria’s latest of many rulings in a decade-long litigation saga, dissolving a holding company with an indirect ownership interest in a Massachusetts operating company. Last is a decision by Justice Cynthia Kern in which she denied dismissal of a claim for the belated sale of a LLC membership interest. Continue Reading Winter Case Notes: LLC Manager Removal and Other Recent Decisions of Interest

LLCA couple of interesting things caught my eye about an otherwise garden-variety lawsuit brought by a dissident LLC member in which Nassau County Commercial Division Justice Stephen A. Bucaria issued a decision earlier this month granting a motion to reargue and reinstating the previously dismissed complaint asserting that the controlling members withheld the plaintiff’s pro rata share of distributions.

First, the prior order of dismissal last July in Webster v Forest Hills Care Center LLC (read here) was another in a series of rulings by Justice Bucaria, which I highlighted on this blog a year ago, in which he dismissed lawsuits asserting various and sundry claims among co-owners of close corporations and LLCs while granting leave to file either a new action or an amended pleading seeking judicial dissolution. Justice Bucaria based these rulings on the ancient principle of partnership law barring “piecemeal” adjudications among “squabbling” partners and requiring them, as stated by the Court of Appeals in Gramercy Equities Corp. v Dumont, 72 NY2d 560 [1988], either to “settle their own differences amicably or dissolve and finally conclude their affairs by a full accounting.”

The plaintiff in Webster, a 15% member of two affiliated LLCs that own and operate a nursing home, declined the invitation to sue for dissolution. Instead, she filed a motion asking Justice Bucaria to reconsider and to vacate his dismissal order on the ground that he had “misunderstood” her claims seeking an accounting and damages for withheld distributions (read complaint here) and that, contrary to the court’s characterization of her position, she had not argued that the LLCs were unable to carry on their business in accordance with the operating agreements. The plaintiff disavowed any intention, desire, or grounds to dissolve the LLCs and argued that the partnership rule reflected in Gramercy Equities does not apply to LLCs. Continue Reading LLC “Squabble” Gets Back Its Day in Court

pushLong Island’s dense population and surfeit of privately owned businesses small, medium, and large assure the Commercial Division judges of the Nassau County Supreme Court more than their fair share of disputes between business co-owners. What’s amazing is the range of business divorce cases heard by that court, from AriZona Iced Tea involving a multi-billion dollar, internationally known brand to the smallest mom-and-pop shops where you wonder how the fight can be worth the legal bills.

One thing in common between the high-stakes AriZona Iced Tea case and, on the other end of the spectrum, the pending fight between two co-owners of the Gusto Latino Bar & Restaurant, a neighborhood watering hole located in Hempstead, New York, is that both cases took about five years to resolve. There the similarity ends. And, again, you have to wonder how the Gusto Latino case, in which the invested dollar amounts cited in the court’s decision wouldn’t even qualify as a rounding error in the AriZona Iced Tea case, possibly has justified five years of litigation expense.

So why am I writing about it? Not because there’s anything particularly compelling about its facts or the parties’ claims. Essentially it’s a garden variety case where parties go into business together without a shareholders’ agreement after which there’s a falling out and one side claims the other either is not a shareholder or, at most, holds a minority interest. We’ve all seen dozens of similar cases.

Rather, the Gusto Latino case is noteworthy because of the novel remedy devised by the presiding judge. For those who read this blog regularly, you’ve already guessed correctly that when I mention a novel remedy in a Nassau County Commercial Division business divorce case, chances are I’m referring to a decision by that court’s senior member, Justice Stephen A. Bucaria, who, as I’ve noted before, is not afraid to think outside the box when it comes to creative solutions to intractable shareholder disputes. Continue Reading First a Judicial Nudge, Then a Push to the Buy-Out in Shareholder Dispute

ValuationIf you’ve studied New York dissolution law, you know that, unlike proceedings involving close corporations, there’s no statutory authority for a court-ordered buy-out when a member of a limited liability company petitions for judicial dissolution under LLC Law § 702.

You also know, especially if you follow this blog, that notwithstanding the absence of such authority, on a few occasions New York courts have invoked their common-law powers of equity to compel buy-outs in LLC dissolution cases, or have reached the same result by characterizing the buy-out as a form of liquidation.

The selected valuation date can make a critical difference in determining the value of an equity interest in the business. In dissolution proceedings involving close corporations, the statute authorizing a buy-out election, Business Corporation Law § 1118, stipulates valuation as of the day before the filing of the petition. We don’t have similarly definitive guidance on the LLC side because there’s no enabling statute, but the few LLC cases decided so far suggest some answers. Continue Reading Court-Ordered LLC Buy-Outs: What’s the Valuation Date?