Under the right set of facts, New York courts occasionally find remedies for LLC owners not explicitly authorized in the Limited Liability Company Law (“LLC Law”). Judges have a natural inclination to try to find solutions for legal problems where existing law falls short, which is part of how the common law came to be.

One striking example is the LLC derivative cause of action. In Tzolis v Wolff, 10 NY3d 100 [2008], the Court of Appeals ruled that members of an LLC “may bring derivative suits on the LLC’s behalf, even though there are no provisions governing such suits in the Limited Liability Company Law,” and even though the Legislature considered, but rejected, including a derivative right of action in the LLC Law.

Another remedy not found in the LLC statutes is the so-called “equitable buyout” in LLC dissolution proceedings.

In a nutshell, an equitable buyout grants an LLC member the possibility upon dissolution of the company (under circumstances yet to be well defined by the courts) of the ability to purchase the other member’s interest as an alternative to liquidation and sale of the company’s assets at auction. An equitable buyout results in one member involuntarily selling his or her equity to the other, and the other member becoming the business’s sole owner. The entity’s existence continues post-buyout – despite ostensibly being “dissolved.” Continue Reading The LLC Equitable Buyout: Past, Present, Future

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Stratospheric real estate values in New York City have bestowed great wealth on those lucky or wise enough to have invested before or in the early stages of the city’s demographic, cultural, and commercial renaissance over the last 25 or so years.

The dramatic rise in property values also has spawned more than its fair share of business divorce litigation by exacerbating the divergence of interests among co-owners, between those who desire to sell and take their profit and those who prefer to hold and/or develop the property. This phenomenon is especially observable in family-owned real estate holding companies where the potential for intra- and inter-generational conflict is more pronounced.

Take the case of the Kassab brothers, who co-own through two holding companies a nondescript, outdoor parking lot also home to a flea market near downtown Jamaica, Queens. The property consists of three contiguous parcels with a footprint of about 42,000 square feet. Under existing zoning the properties are buildable as of right to about 380,000 square feet. Recent valuation estimates for the undeveloped properties, which were acquired by the Kassabs between 1992 and 2001 at a small fraction of current value, start over $14 million.

In 2013, the younger brother owning 25% sued to dissolve the holding companies — one organized as a corporation, the other as a limited liability company — claiming oppression and freeze-out by his elder brother owning the other 75%. The younger brother claims the freeze-out tactics are designed to force him to sell his interest to his elder brother for a pittance. The elder brother counters that he has no desire to deprive his younger brother of his ownership rights and that his younger brother is attempting to force him to sell the properties due to the younger brother’s supposedly dire financial straits.

Last week, the case produced not one, not two, but three separate appellate decisions addressing a potpourri of rulings on issues of vital interest to business divorce counsel. Summaries follow after the jump. Continue Reading One Parking Lot, Two Brothers, Three Decisions

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?

What are the current, hot topics in the law of business divorce? I’ve been thinking about this in preparation for a speaking engagement later this month, and thought I’d preview my choices for the hot-topic list in the hope that some interested readers might offer their own ideas about unsettled areas of the law governing dissolution cases and other types of disputes among co-owners of closely held business entities.

Not surprisingly, a majority of the topics I’ve come up with concern limited liability companies, which first came into being in New York in 1994. Case law applying the LLC Law got off to a tepid start — it wasn’t until 2010 that an appellate court authoritatively construed LLC Law § 702 governing judicial dissolution — but the pace of court decisions concerning LLCs has quickened in recent years as the LLC slowly but surely has supplanted the traditional business corporation as the preferred form of entity for privately-owned companies.

So, without further ado, here’s my list of hot topics in business divorce:

Equitable Buy-Out in LLC Dissolution Cases.  In contrast to oppressed minority shareholder dissolution petitions involving closely-held corporations (see Business Corporation Law § 1118), the LLC Law has no provision authorizing courts to compel a buy-out of the complaining or respondent LLC members as a remedy in judicial dissolution cases brought under LLC Law § 702. There nonetheless have been several appellate decisions affirming or ordering a compulsory buyout as an “equitable” remedy, of which the most notable is the Second Department’s 2013 ruling in Mizrahi v. Cohen where the court compelled a buy-out requested by the petitioner of the respondent member’s 50% interest. These few cases, each involving their own, peculiar set of facts, provide little guidance as to the circumstances under which courts will or won’t grant an equitable buy-out, or as to the interplay between equitable buy-out and LLC agreements that may limit dissolution remedies. It also remains to be seen whether buy-out awards in LLC cases will be based on the fair value standard used in statutory buy-outs of oppressed minority shareholders. Continue Reading Hot Topics in Business Divorce

The Mizrahi v. Cohen case, about which I’ve posted twice before, took a surprising turn last week when an appellate court granted the plaintiff’s request to compel a buy-out of the defendant’s interest as an equitable remedy in an LLC dissolution fight between 50/50 members.

Last week’s ruling by the Brooklyn-based Appellate Division, Second Department, in Mizrahi v. Cohen, 2013 NY Slip Op 02056 (2d Dept Mar. 27, 2013), resolved an appeal and cross-appeal from a January 2012 post-trial order by Brooklyn Commercial Division Justice Carolyn E. Demarest. The trial court’s order granted the plaintiff’s request to dissolve the subject LLC which owns a mixed-use, four-story building that houses Mizrahi’s dental office and Cohen’s optometry office along with other tenants. (Read here my post about the January 2012 decision.)

The Appellate Division affirmed Justice Demarest’s determination that dissolution under LLC Law § 702 was warranted based on the LLC’s financial infeasibility caused largely by the defendant 50% member’s refusal to make additional capital contributions. It also affirmed Justice Demarest’s rulings allowing parol evidence of the parties’ course of dealings to assist the interpretation of the LLC agreement, and dismissing plaintiff’s contract and fiduciary breach claims.

The Appellate Division disagreed with Justice Demarest on one issue only, albeit one with potentially great precedential importance in LLC dissolution cases: Did the plaintiff establish a right to compel a buy-out of the defendant’s membership interest as an equitable remedy in lieu of winding up the LLC and liquidating its realty asset?

Continue Reading Appellate Court Orders Equitable Buy-Out in LLC Dissolution Case

The contractarian recoils at the notion of equitable remedies in LLC dissolution cases. Allowing judges to grant relief ex post facto based on principles of equity untethered to the parties’s operating agreement, the contractarian argument goes, erodes the contract-based nature of the LLC — that which makes LLCs fundamentally different from corporations — and breeds moral hazard by rescuing LLC members from their shortsighted failure to bargain for desired rights and remedies in the LLC agreement.

One would be hard pressed to find a more powerful rejoinder to the contractarian argument than the case of Mizrahi v. Cohen, 2013 NY Slip Op 50092(U) (Sup Ct Kings County Jan. 15, 2013), decided last month by Brooklyn Commercial Division Justice Carolyn E. Demarest (pictured). What’s more, Justice Demarest’s opinion, in which she ordered a Lyons-style auction sale of LLC membership interests (I’ll explain below), is refreshingly candid about the court’s necessary employment of its equitable powers to avoid the glaring injustice that would have resulted in Mizrahi had the court stayed within the strict confines of the LLC agreement.

Mizrahi may sound familiar to regular readers of this blog. About a year ago I wrote about Justice Demarest’s prior decision in the case (read here) ordering dissolution of an LLC co-owned 50/50 by brothers-in-law. The LLC was formed to own, renovate and operate a small commercial building in Brooklyn used by the two members for their separate dental and optometry practices and to rent additional space to third-party tenants. Justice Demarest dissolved the LLC on the ground that continuing it was financially unfeasible due to the defendant member’s failure to provide needed financial support and his undermining of the LLC’s financial integrity by withholding rent and taking unauthorized cash withdrawals. Continue Reading Court Decision Boosts Equitable Buy-Out Remedy in LLC Dissolution Case

The title of this week’s post is inspired by two recent decisions in LLC dissolution cases in which courts crafted remedial measures that appear to venture into new territory in an effort to achieve efficient and equitable resolution of the parties’ dispute.

In one case, the court ordered an appraisal proceeding for a buyout of the petitioning member’s interest after denying his request to dissolve the LLC. In the other, involving a dispute between 50/50 managing members, the court appointed a temporary receiver with limited powers to monitor the LLC’s financial activity.

The appraisal remedy was ordered by Commercial Division Justice Stephen A. Bucaria in Matter of Gold (Cosmo Holdings LLC), Short Form Order, Index No. 6722/11 (Sup Ct Nassau County Oct. 26, 2011). The petitioner in Gold is a 25% member and the respondent Kanter is a 75% member of a member managed LLC called Cosmo Holdings LLC formed in 2007 to invest in other companies. Each member made an initial capital contribution over one-half million dollars. The operating agreement provides that a member who wishes to sell his or her interest must first make an offer to the other member to sell at a mutually agreed upon price.

Continue Reading Judges Thinking Outside the LLC Dissolution Box

It’s the perfect LLC storm:  Accusations by the minority member of overreaching and breach of fiduciary duty by the controlling members, no operating agreement, and an LLC statute that affords neither party a judicial means of achieving the separation they each want.

The case, Matter of Koutelos (Mouhlas Realty, LLC), was decided last month by Queens County Supreme Court Justice Patricia P. Satterfield (read decision here).  The petitioner, Mary Koutelos, holds approximately 15% membership interest in Mouhlas Realty, LLC which was formed in 2000 as a member-managed LLC.  The decision doesn’t describe the LLC’s business or tell us if Koutelos is actively involved in running it.  All we can glean is that Koutelos filed a petition under LLC Law Section 702 for judicial dissolution of the LLC based on allegations of overreaching and breach of fiduciary duty by two of the other three members, apparently involving a capital call and/or loan to be used for compensation of one or more member-managers; the members have no operating agreement; and the other members refused Koutelos’s request to adjourn a meeting.

The decision also tells us that the "respondent" — we don’t find out if this refers to the LLC or one of the other members individually — filed an answer with a counterclaim for an "equitable buyout" conditioned on the court applying a 30% discount for lack of marketability in valuing the petitioner’s interest.

Continue Reading A Case of Mutual Frustration: Minority Member of LLC Can’t Compel Dissolution, Majority Can’t Compel Buyout