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?

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

Over 100 years ago, in Lord v Hull, 178 NY 9 [1904], the New York Court of Appeals — the state’s highest court — drew upon English common law to establish what has become a bedrock principle of American partnership law, that courts generally will not entertain lawsuits between partners except in the setting of a dissolution or final accounting. As the court wrote:

If the members of a firm cannot agree as to the method of conducting their business, the courts will not attempt to conduct it for them. Aside from the inconvenience of constant interference, as litigation is apt to breed hard feelings, easy appeals to the courts to settle the differences of a going concern would tend to do away with mutual forbearance, foment discord and lead to dissolution. It is to the interest of the law of partnership that frequent resort to the courts by copartners should not be encouraged and they should realize that, as a rule, they must settle their own differences or go out of business. [Emphasis added.]   

Many decades later, in another partnership case called Gramercy Equities Corp. v Dumont, 72 NY2d 560 [1988], the same court expressed the same sentiment thusly:

[C]ourts are generally loath to intercede in squabbles between partners that result in piecemeal adjudications, preferring that partners either settle their own differences amicably or dissolve and finally conclude their affairs by a full accounting.

In the modern era, partnerships have been eclipsed by other forms of business associations including close corporations and, more recently, limited liability companies. Each form has fundamentally different characteristics and is governed by a fundamentally different statutory scheme. Yet, if we focus on the internal dynamics and turmoil that can afflict shareholders of a close corporation or members of an LLC — especially the smaller, owner-operated firms — the above-quoted partnership rationale, expressed so long ago in Lord v Hull and more recently in Gramercy Equities, seems equally apropos of these modern forms.

One judge who both has made that connection and put it into practice is Nassau County Commercial Division Justice Stephen A. Bucaria (pictured). Over the years this blog has featured many decisions by Justice Bucaria demonstrating, as described here, his willingness to think outside the box when it comes to devising practical and sometimes novel solutions to intractable problems in business divorce cases.     Continue Reading Squabbling Partners with Piecemeal Adjudications Need Not Apply