Notwithstanding we’ve had no more than a dusting of snow thus far in my downstate New York neck of the woods, welcome to another edition of Winter Case Notes in which I visit my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

This year’s synopses feature cases involving minority shareholder oppression claims in a father-daughter dispute previously reported on this blog; an appellate decision affirming the dismissal of a books and records action involving Delaware LLCs; one case granting and another denying claims for advancement and indemnification of legal expenses; the dismissal of claims alleging wrongful transfer of the plaintiff’s LLC membership interest; and a decision compelling arbitration of a claim for wrongful removal of the plaintiff as a manager and member of an LLC.

Oppression of the “Gifted” Minority Shareholder

By “gifted” I’m referring not to the natural talents or intellect of a minority shareholder, but to her ownership of shares by way of a gift from a family member. Under the governing reasonable-expectations standard, can such a shareholder, who made no investment and has no involvement in the company’s business affairs, successfully petition for dissolution based on a claim of oppression by a majority shareholder based on the latter’s denial of her shareholder status? Continue Reading Winter Case Notes: Oppression of the “Gifted” Minority Shareholder and Other Recent Decisions of Interest

Martini2Oh, the things that can happen when the LLC members identified in the company’s operating agreement differ from those identified in official documents submitted to government agencies.

Recently, this blog reported on one case in which the court found in favor of two individuals on their claimed LLC membership interests as evidenced by an application for a food service permit filed by the LLC with the New York City Health Department naming them and the defendant as members, notwithstanding an operating agreement that identified the defendant as the LLC’s sole member. That case involved ownership of a hot dog franchise.

From hot dogs we move to martinis. On an interesting set of facts, Brooklyn Commercial Division Justice Lawrence S. Knipel recently ruled the other way. In the whimsically captioned Cupcake & Boomboom, LLC v Aslani, 2016 NY Slip Op 32310(U) [Sup Ct Kings County Nov. 22, 2016], the outcome was anything but whimsical for the defendant. Justice Knipel discredited documents the LLC submitted to the New York State Liquor Authority (“SLA”) as part of an application to obtain a liquor license, including an operating agreement intentionally misidentifying the members. Instead, the court credited an earlier, inconsistent operating agreement as determinative of the members’ ownership status, thereby reducing the defendant’s claimed interest from 50% to 10%. Continue Reading Operating Agreement Trumps Falsified Liquor License Application In Dispute Over LLC Membership

4CThe case I’m about to describe involves an unusual clash of two fundamental principles of corporate governance for closely held corporations:

Principle No. 1:  Stock transfer restrictions may be used to preserve continuity of ownership and management within a family or other control group, without violating the common law rule against unreasonable restraints on alienation of property.

Principle No. 2:  Controllers owe a fiduciary duty to treat all shareholders fairly and evenly when authorizing and issuing new shares, and must have a bona fide business purpose for any departure from precisely uniform treatment.

The clash came to a head in a decision this month by Brooklyn Commercial Division Justice Lawrence Knipel involving 4C Foods, a well-known, fourth generation, family-owned business that manufactures and markets under the 4C® brand grated Italian cheeses, bread crumbs, iced tea, and drink mixes. The suit pits Nathan Celauro, a non-managing, minority owner holding directly or beneficially about 22% of 4C’s voting and non-voting shares, against his cousin John Celauro, the managing majority shareholder who controls or has aligned with him the remaining 78%. (Disclosure: Farrell Fritz represents the minority shareholder in the case.)

The case and Justice Knipel’s decision in Celauro v 4C Foods Corp., 2016 NY Slip Op 31917(U) [Sup Ct Kings County Oct. 12, 2016], is the latest in a series of litigations and court rulings between two factions of the Celauro family beginning around 2005, following the death of Nathan’s father the year before. About 20% of the father’s voting and non-voting shares passed to his wife either directly or to trusts under her control, with the remaining 2% going directly to Nathan. Continue Reading Too Clever By Half? Court Permits Suit Challenging Share Increase Tied to Transfer Restrictions