Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.

With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.

Three Memorable Decisions from Justice Ramos

For Justice Ramos, we focus on three LLC cases.

In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members. Continue Reading A Fond Adieu to Two Giants of the Manhattan Commercial Division Bench

Last month, seasoned business appraiser Andy Ross of Getty Marcus CPA, P.C., and I made a presentation at the Nassau County Bar Association about appraisal proceedings in business divorce cases. With the subject of business valuations front of mind, this article – the first in a three-part series – is a treetops summary of the rules governing how business owners may wind up in an appraisal proceeding. Later articles will address the legal and accounting principles that apply in the valuation proceedings.

But before we get started, some context. What exactly is a valuation proceeding? A valuation proceeding is a special kind of lawsuit in which the owners of a business litigate the “value” (the relevant standard under New York’s Partnership Law) or “fair value” (the standard under the New York Business Corporation Law and Limited Liability Company Law) of a partnership, stock, or membership interest in a business for the purpose of a potential buyout or liquidation of that owner’s interest. Appraisal proceedings may be forced, or they may be voluntary. They may involve a variety of different accounting approaches or methodologies to value an ownership interest. They are always heavily dependent upon expert testimony of accountants. For that reason, the “determination of a fact-finder as to the value of a business, if it is within the range of testimony presented, will not be disturbed on appeal where the valuation rests primarily on the credibility of the expert witnesses and their valuation techniques” (Matter of Wright v Irish, 156 AD3d 803 [2d Dept 2017]).

What are the ways in which a business owner can wind up in a valuation proceeding? The statutory paths, or routes, to a litigated appraisal depend on the kind of entity involved. This article discusses three basic entity forms: partnerships, corporations, and LLCs, and provides a non-exhaustive list of the most common ways to get to a valuation proceeding. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 1

How can majority business owners legally rid themselves of a problematic minority owner? Not by transferring the business’s assets to another entity for no consideration. That was the conclusion of Manhattan Commercial Division Justice Shirley Werner Kornreich last month in a lawsuit over a minority shareholder’s stake in Bareburger, Inc., owner of its namesake restaurant chain.

The Bareburger Litigation

In Stavroulakis v Pelakanos, 2018 NY Slip Op 50180(U) [Sup Ct NY County Feb 13, 2018], Bareburger had no written shareholders agreement. Stavroulakis owned 16% of the corporation. He and his co-owners were friends before founding the business. After Bareburger took off, Stavroulakis’ co-owners complained that he was not involved enough to justify his ownership so, as related by Justice Kornreich, they did something rather drastic:

Unbeknownst to him and without his consent, after plaintiff moved to Greece, the defendants, who collectively owned the rest of the Company, transferred all of the Company’s assets to other entities in which defendants (but not plaintiff) have an interest. They did so for no consideration either to plaintiff or the Company, rendering the Company an empty shell.

Continue Reading The Cash-Out Merger Solution to the Problem Minority Owner

Freeze-out2Unless otherwise provided in the operating agreement, majority members of LLCs formed under New York law — and under the LLC laws in most other states — effectively can expel a minority member by implementing a merger with another company owned by the majority members. The so-called freeze-out merger (a/k/a cash-out merger) compels the minority member to accept cash for his or her membership interest in lieu of equity in the surviving entity. The statutes generally protect the frozen-out member to the extent of providing the right to dissent from the merger and to demand a fair-value judicial appraisal.

As best as I can tell, until last month there were exactly four reported court decisions in New York involving challenges to LLC freeze-out mergers, each of which I’ve covered on this blog. In three of them — the Stulman case, the Alf Naman case, and the Slayton case — trial judges rejected various procedural and substantive objections to the mergers by the minority members. In the fourth case (SBE Wall), the trial judge denied a motion to dismiss an action seeking to invalidate a freeze-out merger, but the merger was never enjoined or rescinded and the case eventually settled.

Along comes a fifth case decided last month by Manhattan Commercial Division Justice Charles E. Ramos — who also decided the Stulman case — in which he denied the frozen-out minority members’ preliminary injunction motion seeking to enjoin the merger’s implementation after finding no basis for the minority members’ claim that the merger breached the operating agreement. Huang v Northern Star Management LLC, 2016 NY Slip Op 32194(U) [Sup Ct NY County Oct. 24, 2016]. Continue Reading Court Finds No Breach of Operating Agreement, No Basis to Enjoin LLC Freeze-Out Merger