Over the years I’ve litigated and observed countless cases of alleged oppression of minority shareholders by the majority. Oppression can take endlessly different forms, some more crude than others in their execution, some more draconian than others in their effect.

If there was an award for the crudest and most draconian case of shareholder oppression, Matter of Twin Bay Village, Inc., 2017 NY Slip Op 06024 [3d Dept Aug. 3, 2017], decided earlier this month by an upstate appellate panel, would be a serious contender.

The case involves a bitter dispute between two branches of the Chomiak family over a lakefront resort called Twin Bay Village located on beautiful Lake George in upstate New York. In 1957, the husband-and-wife founders, Stephan and Eleonora Chomiak, opened the summer resort on land they owned. They and their two sons, Leo and Vladimir, together ran the business until 1970 when they transferred ownership of the land and business to newly-formed Twin Bay Village, Inc. owned 26% by each parent and 24% by each son. Continue Reading And the Award For Most Oppressive Conduct By a Majority Shareholder Goes to . . .

Food-Fight1A little over three years ago I reported on the first round of a fascinating “food fight” among four siblings, each of whom is a 25% shareholder of a Brooklyn-based, second-generation food distributor known as Jersey Lynne Farms, Inc. (the “Corporation”), and each of whom also is a 25% member of Catarina Realty, LLC (the “LLC”) which leases its sole realty asset to the Corporation.

The occasion back then was the court’s decision in Borriello v Loconte denying a dismissal motion in a derivative suit brought by Dorine Borriello on the LLC’s behalf in which she alleged that her three siblings breached fiduciary duty by leasing its realty to the Corporation at a drastically below-market rent and by imposing on the LLC certain expenses that ought to be borne by the Corporation as tenant.

In 2011 — the same year her siblings entered into the challenged lease — they ousted Dorine as a director, officer, and employee of the Corporation. In 2012 Dorine and her siblings negotiated a Separation Agreement and General Release setting forth terms for payment of compensation and benefits along with non-compete and non-disclosure provisions. The agreement left intact Dorine’s 25% stock interest in the Corporation.

Dorine’s derivative suit filed in 2013 claimed that the 2011 below-market lease rendered the LLC unprofitable while increasing the Corporation’s income used to pay salaries and other benefits to her siblings. The first round went to Dorine when the court ruled that her General Release did not encompass her derivative claim and enjoined her siblings from advancing their legal expenses from LLC funds.

In the end, however, and subject to any appeals Dorine may bring, it appears that the siblings have won the food fight’s final rounds. Continue Reading “Food Fight” Sequel Ends Badly for Ousted Sibling

HeartWhen a romantic affair evolves into a business relationship, the eventual falling out can be especially messy. Even more so if the former lovers try to keep the business going after the romance ends. That is a theme from a recent post-trial decision by Queens County Justice Timothy J. Dufficy in Shih v Kim, 2017 NY Slip Op 50281(U) [Sup Ct Queens County Mar. 2, 2017].

Among other interesting issues in Shih was whether a capital investment in a business can be considerd a “gift made in contemplation of marriage” under Section 80-b of the New York Civil Rights Law, a statute which requires return of an engagement or wedding gift — often a ring — to the giver if the marriage does not occur. Let’s see how Judge Dufficy ruled on that and the other legal issues in the case. Continue Reading When Love and Business Fails

exitDoes a shareholder have a fiduciary duty not to exercise a contractual right under the shareholders’ agreement to resign and demand a buy-out of his shares by the financially distressed corporation, particularly when the corporation’s default would trigger the other shareholders’ personal guarantees?

That’s the intriguing question posed in an unpublished decision last month by Nassau County Commercial Division Justice Vito M. DeStefano in Mondschein v Badillo, Decision and Order, Index No. 600307/14 [Sup Ct Nassau County Jan. 12, 2017], where a physician resigned from his struggling medical professional corporation amidst ultimately unsuccessful efforts to merge with another practice, and who then brought suit against the P.C., his fellow shareholders, and a related realty company that owned the practice’s medical office, to enforce his buy-out and retirement rights under the various agreements governing the two entities.

The agreements essentially gave senior physician-shareholders the right to retire with an obligatory buy-out by the entities of their equity interests in the practice and the realty, as well as payment of specified retirement benefits. In addition, each shareholder gave a joint-and-several personal guarantee of each other shareholder’s rights to payment. Continue Reading Race to the Exit as Professional Practice Falters

tie-breaker[N.B. Younger readers of this post may be forgiven for not catching the title’s play on the refrain of a certain 1976 hit song by one of the oldest and most hirsute recording groups around. Click here if you’re still stumped.]

LLC deadlock’s been on my mind more than usual of late, after interviewing LLC maven John Cunningham for a podcast and last week co-presenting with John a webinar on the subject for the ABA Young Lawyer’s Division.

During the webinar’s Q&A session, a listener asked about potential liability of an appointed deadlock tie-breaker. I mentioned that I had not seen any cases involving the issue. Lo and behold, several days later up popped a decision by Queens County Commercial Division Justice Martin E. Ritholtz presenting exactly that issue, in which the court denied the tie-breaker’s motion for summary dismissal of a claim brought against her for breach of fiduciary duty by one of two 50/50 members of a family-owned LLC. Fakiris v Gusmar Enterprises LLC, 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016]. Continue Reading She’s a Tie-Breaker, She’s a Risk Taker

Henny YoungmanCan LLC members walk away from fiduciary duties? That was the question posed but not answered in a post I wrote two months ago about a decision by Nassau County Commercial Division Justice Timothy S. Driscoll, denying a preliminary injunction in a case called Gilbert v Weintraub involving a two-member, 50/50 LLC with no written operating agreement.

The defendant member, Weintraub, had sent the plaintiff, Gilbert, a notice stating that he was withdrawing from all management responsibilities and, six days later, formed and began operating a new, competing company. Without commenting directly on the parties’ arguments for and against the ability of a member of a member-managed LLC unilaterally to renounce management responsibility and the appurtenant fiduciary duty of loyalty, the court denied preliminary relief on the grounds that Gilbert had not provided sufficient evidence to establish a likelihood of success on the merits of his claims or a balancing of the equities in his favor.

Two months and one motion to dismiss later, we have the answer to the fiduciary-duty question left open. In his decision dated January 29, 2016 (read here), reconciling the fiduciary’s duty of undivided loyalty with a manager’s right to resign under the LLC Law’s default rule, Justice Driscoll held that “further factual development” was needed to determine whether it was reasonable for Weintraub’s fiduciary duty to extend beyond his resignation as manager and, if so, for how long it should extend. Continue Reading Take My Fiduciary Duty . . . Please!