During her many years as Presiding Justice of the Brooklyn Commercial Division, New York Supreme Court Justice Carolyn E. Demarest (Ret.) decided numerous important and challenging business divorce cases. I should know, having featured on this blog in the last 10 years no less than 19 of her decisions.

Among them, and likely the one with the most lasting impact, is the Mizrahi case in which Justice Demarest issued two major post-trial decisions granting dissolution of an LLC based on financial infeasibility and ordering a closed auction between the two 50/50 members, before the Appellate Division on appeal by the petitioner made new law by ordering an “equitable buy-out” of the respondent member.

Another of my favorites is the Cortes case, also a post-trial decision, in which Justice Demarest granted common-law dissolution of a restaurant business conditioned on a buy-out of the minority shareholder reflecting his share of millions in cash “skimmed” by the controlling shareholders from a restaurant business as established by sophisticated forensic analysis.

I was among many lawyers saddened by Justice Demarest’s decision last year to hang up her robes. She truly was one of the best trial court judges around, not to mention losing one of my most prolific sources of blog fodder.

The good news is, soon after leaving the bench Justice Demarest joined the Manhattan office of JAMS where she serves as an arbitrator and mediator in complex commercial cases. With 34 years on the bench, a deep understanding of the substantive law governing relations among co-owners of closely held business entities, and equally extensive experience with business valuation, it’s hard to imagine a more qualified neutral in business divorce matters.

I recently had the pleasure of interviewing Justice Demarest for my Business Divorce Roundtable podcast. You can hear the interview by clicking on the link at the bottom of this post.

The interview features Justice Demarest’s thoughts on the many challenges presented by business divorce cases. Naturally I had to ask her about the Mizrahi case and a few others she decided. We also talk about the mediation of business divorce cases.

So give it a listen and if you like it, I’d be grateful if you post a good review on iTunes which will help spread the word.

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

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?

purpose4Judicial dissolution statutes for limited liability companies in New York, Delaware, and many other states use the contract-centric language drawn from limited partnership law, namely, whether it is reasonably practicable to carry on the business in conformity with the articles of organization and operating agreement.

Court decisions in both Delaware and New York have construed their respective LLC statutes as authorizing judicial dissolution when the purpose of the entity, as defined in the operating agreement, can no longer be achieved. For instance, former Vice Chancellor Chandler of the Delaware Chancery Court in his 2008 Seneca Investments decision, and then-Vice Chancellor Strine in his 2009 Arrow Investment Advisors decision, both used language suggestive of the LLC agreement as the sole source to which a court should look in determining the LLC’s purpose. In New York, Justice Austin, writing for the Appellate Division, Second Department, in the seminal 1545 Ocean Avenue decision, similarly crafted a dissolution standard keyed to the frustration of the LLC’s “stated purpose” in the context of its operating agreement.

Does that mean courts never look outside the LLC agreement when determining if its purpose no longer is achievable? And how should a court determine purpose when the LLC has no written agreement? Recent decisions from Delaware and New York provide some clues to the answers. Continue Reading Finding Purpose Outside the LLC Agreement

I’ve often said that business owners don’t fight over corpses, meaning that no one in their right mind would incur the trouble and expense of bringing or contesting a judicial dissolution petition over a business that has no value.

Well, like most generalities, there are exceptions. Seven years ago, among this blog’s inaugural posts, I wrote about a Manhattan Supreme Court case called Matter of Giraud in which an allegedly oppressed minority shareholder petitioned under BCL § 1104-a for judicial dissolution of an art consignment business, the majority shareholder elected to buy him out under BCL § 1118, the majority shareholder’s unopposed appraisal expert testified that the indebted, money-losing business with a short remaining term on its lease had no positive value, and the court ordered the majority shareholder to tender a symbolic $1 to acquire the petitioner’s shares.

Now there’s another one. Earlier this month, in Matter of Markowitz, 2014 NY Slip Op 51739(U) [Sup Ct, Kings County Dec. 10, 2014], Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest, citing the Giraud case, ordered the two respondent shareholders, who had elected to purchase the shares of the two petitioning shareholders, to pay the nominal sum of $1 to each of them. Easing the pain somewhat, Justice Demarest also ordered the purchasing shareholders to provide releases and an indemnification and hold harmless personal guarantee against any claims made against the petitioners relating to the business.   Continue Reading Dissolution Battle Over Heavily Indebted Business Yields $1 Buy-Outs

Are books-and-records proceedings on a roll?

Last September I wrote about an important appellate ruling that month in a books-and-records proceeding against the McGraw-Hill publishing company, in which the court held that the petitioning shareholder’s allegations of mismanagement and breach of fiduciary duty by board members constituted a proper purpose for the inspection demand, regardless whether the inspection ultimately establishes that no wrongdoing occurred. I referred to the ruling as a boost for New York’s under-utilized books-and-records proceeding under Section 624 of the Business Corporation Law, especially for minority shareholders of closely held corporations who, unlike shareholders in public companies with reporting duties, are sometimes shut out completely from any information concerning the company’s business dealings and financial affairs.

Sure enough, less than two months after the McGraw-Hill decision, Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest cited it as precedent for her ruling in Novikov v Oceana Holdings Corp., 2014 NY Slip Op 24332 [Sup Ct, Kings County Nov. 3, 2014], granting a close corporation minority shareholder’s petition to inspect an array of financial and corporate records to investigate possible wrongdoing by the controlling shareholders. Continue Reading Minority Shareholder’s Investigation of Management Misconduct is Proper Purpose for Books & Records Demand

The under-reporting of cash receipts a/k/a skimming by restaurant owners and other cash-intensive businesses costs many billions of dollars in lost tax revenues each year and, when detected by audit, can lead to stiff penalties and even criminal prosecution. When the business has multiple owners, not all of whom are in on the skimming, it also can constitute grounds for judicial dissolution, as illustrated in a fascinating post-trial decision last week by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in Cortes v 3A N. Park Ave. Rest Corp., 2014 NY Slip Op 24329 [Sup Ct, Kings County Oct. 28, 2014].

Any publicly aired business divorce involving allegations of looting can be a nasty affair. Throw into the litigation mix the specter of under-reported taxes and it becomes positively toxic, which is the flavor I got from reading Justice Demarest’s detailed findings of fact and conclusions of law in her 24-page ruling which, ultimately, found that the controlling shareholders skimmed about $3.7 million and conditionally ordered dissolution of the corporation, contingent upon the controllers’ buy-out of the plaintiff’s shares for over $1.2 million.

Background

The Cortes case involves a 150-table Mexican restaurant, bar, and nightclub called Cabo, located in Rockville Center on Long Island. In 2003, the plaintiff, Porfirio Cortes, acquired for $50,000 a 16.67% stock interest in the restaurant’s operating company, in which the remaining shares were owned equally by defendants Angelo Ramunni and Domenick DeSimone. The purchase agreement gave the corporation the right to repurchase Cortes’s shares in the event he resigned his designated position as managing partner though, oddly, it did not specify a price or a pricing mechanism. Continue Reading Restaurant’s Cash-Skimming Majority Owners Forced to Buy Out Minority Shareholder or Face Dissolution

They say this summer has been unusually cool in the Northeast, but it’s been a hot one for business divorce litigation, judging from the number of recent court decisions involving various and sundry disputes among co-owners of closely held businesses. So, once again, it’s time for my annual summertime post featuring a few, short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision by Justice Melvin Schweitzer in a battle between 50/50 ownership factions over control of an international translation services company with over 3,000 employees. Next up is Justice Carolyn Demarest’s ruling denying a change of venue in a corporate dissolution case. Last is a decision by Justice Marcy Friedman in which she addressed an interesting statute of limitations defense in a drawn-out dissolution case.

Shareholder of Parent Corporation Has Standing to Sue Derivatively to Remove Subsidiary’s Director But Not for Dissolution

Elting v Shawe, 2014 NY Slip Op 32126(U) [Sup Ct, NY County July 24, 2014]. It’s not everyday you encounter business divorce litigation on the scale of this case, involving a firm with over 3,000 employees and revenues over $350 million. The subject company is a closely held Delaware holding corporation owned 50/50 by two individuals who also comprise its two-director board, and its wholly owned New York subsidiary providing international translation services. One owner-director sued the other for alleged financial and management abuses, asserting direct and derivative claims seeking the defendant’s removal as an officer and director of the subsidiary under BCL §§ 706 (d) and 716 (c), and also seeking deadlock dissolution of the subsidiary under BCL § 1104 (a). Continue Reading Summer Shorts: Director Removal and Other Recent Decisions of Interest

The pictured apartment building on Franklin Street in Brooklyn was acquired in 1991 by Mr. and Mrs. Jozef and Wieslawa Sokolowski, and Arkadiusz Wodkiewicz. The deed of conveyance was in their individual names, with handwritten inter-delineations recording that the Sokolowskis together hold a “50% interest” and Wodkiewicz the “remaining 50% interest”. The same three persons in their individual names also mortgaged the property in 2005.

If those were the only facts, we’d have to conclude that, after Mr. Wodkiewicz’s death in 2009, his estate would have the rights of a tenant in common, including the right to bring a partition action forcing a sale of the property. But those were not the only facts, which is how the Sokolowskis and the estate’s fiduciary found themselves embroiled in litigation over the ownership and disposition of the Franklin Street property.

Here are the additional facts: Concurrently with the 1991 deed, the three owners signed and filed a Business Certificate of Partnership in the name of J&J Real Estate Partnership, and also signed a Partnership Agreement providing:

  • J&J’s purpose is to “hold real estate and at this time, it owns 223 Franklin Street and 225 Franklin Street, Brooklyn, New York.”
  • The two Sokolowskis are deemed “one partner” holding a 50% “undivided interest in the partnership’s holdings.”
  • All profits and losses are to be “equally divided between Sokolowski and Wodkiewicz” and all deductions for expenses and “carrying charges of partnership holdings including mortgage interest” are to be split 50/50.
  • In the event of the “death of one of the Partners or the purchase of a partner’s interest by the other Partner, the value of such shall be the fair market value” based on the average of two appraisals obtained from “two independent business brokers.” Continue Reading Court Determines Realty is Partnership Asset in Dispute Between Surviving Partner and Estate

One of three, equal shareholders in a family-owned business licensed by the state liquor authority was convicted of a felony. Under state law the felony conviction of an owner jeopardizes the company’s license and with it, the entire business. The other two shareholders therefore adopted a resolution terminating his employment and simultaneously exercised the company’s option, set forth in their shareholders’ agreement, to redeem his stock at a value to be determined by appraisal.

Problem solved? Not quite. For one thing, the termination of employment was made retroactive about three months, arguably contrary to a provision in the shareholders’ agreement requiring that the purchase option be exercised within 30 days of termination. For another, the company did not obtain the required appraisal or propose a closing until about a year after the termination, whereas the agreement required that the company close on its option to redeem the shares within 90 days of the termination.

The ousted shareholder refused to tender his shares, contending that the company forfeited its purchase option by failing to exercise it in a timely fashion. The company, under pressure of a threatened de-licensing, sued to enforce the buy-out.

Probably you won’t be surprised to learn that, last week, an appellate panel in A. Cappione, Inc. v Cappione, 2014 NY Slip Op 05230 [3d Dept July 10, 2014], affirmed the trial court’s decision in favor of the company, ordering the ousted shareholder to convey his shares but also allowing him to contest the appraised value offered for his shares. The court’s ruling is particularly important in that it ordered the conveyance even assuming the option to purchase was not timely exercised, based on the manifest intent of the shareholders’ agreement to retain managerial control within the family, and the risk to the company of losing its critical license. Continue Reading Stockholder Fired, Forced to Sell Shares After Felony Conviction