Years ago, we wrote about the perils of “impromptu” settlements in business divorce cases – settlements eked out at the courthouse, on the fly, under pressure, during conferences, hearings, or trials. The resulting agreements tend to be memorialized in on-the-record, transcribed settlements made verbally between lawyers, clients, and the judge.

In-court settlements are both common and vital to litigation, the ultimate goal of which, of course, is to resolve disputes. But sometimes the parties’ eagerness to resolve a lengthy, difficult litigation can cause them to overlook or ignore subtle (or not-so-subtle) aspects of the deal vital to the overall transaction.

In a recent decision, fissures in the façade of an impromptu settlement began to appear almost from the moment the parties put their agreement on the record. What followed was a series of painful, two-and-a-half year, post-settlement proceedings – a veritable parade of horribles that reached its climax in a decision last month by a Manhattan appeals court in Kadosh v Kadosh, 169 AD3d 439 [1st Dept Feb. 7, 2019]. Continue Reading A Pig in a Poke: The Rollercoaster Kadosh Settlement Litigation

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

Recently, in two separate cases, two New York judges construing two LLC agreements of two LLCs formed under the laws of two different states — Delaware and Nevada — came to the same conclusion when faced with the same argument by the LLCs’ controllers who contended that minority members waived the right to institute litigation asserting derivative claims based on provisions in the agreements requiring managerial or member consent to bring an action on behalf of the company.

In both cases, the judges rejected the waiver argument after finding that the language of the provisions upon which the controllers relied did not expressly prohibit derivative claims. The more interesting question not reached, at least in the case of the Delaware LLC for reasons I’ll explain below, is whether the statute authorizing derivative claims is mandatory or permissive.

Talking Capital

The first case, Talking Capital LLC v Omanoff, 2018 NY Slip Op 30332(U) [Sup Ct NY County Feb. 23, 2018], involves a New York-based, three-member Delaware LLC in the factoring business, providing financing to telecommunications firms that route international calls. The suit was filed by one of the members against the other two and their principals, at heart alleging derivative claims for usurpation of business opportunity, breach of the LLC agreement, and breach of fiduciary duty by forming a competing entity in league with the LLC’s third-party lender. Continue Reading Can LLC Agreement Waive Right to Sue Derivatively? Not in These Two Cases

I’ve seen LLC operating agreements ranging from one page to over 100. Usually there’s a direct relationship between the length of the agreement and the complexity of the LLC’s capital and management structure.

But if there’s one thing I’ve learned about LLC agreements, it’s that no matter how comprehensive and tome-like their design, there’s no guarantee that a future, unanticipated dispute won’t expose the inevitable cracks in the design prompting the need for court intervention. Indeed, depending on the drafter’s skill, one can argue the more complex the LLC agreement, the greater the risk of a court contest over its interpretation.

Take the recent case of Tungsten Partners LLC v Ace Group International LLC, 2017 NY Slip Op 32025(U) [Sup Ct NY County Sept. 20, 2017], in which Manhattan Commercial Division Justice Shirley Werner Kornreich was called upon to decide whether the plaintiff holder of a 4% non-voting profits interest, identified as a “Management Member” in a 65-page operating agreement (plus another 170 pages of schedules and exhibits), was a member of the subject Delaware LLC for purposes of demanding access to books and records under § 18-305 of the Delaware LLC Act. Continue Reading A Member By Any Other Name . . . May Have Access to LLC Books and Records

LLCIf there’s a common theme to the trio of LLC cases highlighted in this post, it’s that having a well-crafted written operating agreement is no guarantee there won’t be a litigation dust-up, while not having a written operating agreement greatly enhances the odds of a legal dispute among members at some point down the road.

Let’s start with the well-crafted operating agreement in Estate of Calderwood v Ace Group International LLC, 2016 NY Slip Op 30591(U) [Sup Ct NY County Feb. 29, 2016], in which Manhattan Commercial Division Justice Shirley Werner Kornreich ruled that upon the death of the subject Delaware LLC’s majority member, under the express terms of Sections 9.7 and 7.1 of the LLC Agreement (read here), his estate was deemed a “Withdrawing Member” with no management rights and retaining solely the right to receive distributions. Continue Reading LLC Case Notes: Member Expulsion, Withdrawal, and LLC Purpose

deadlock1“Finally, while this court is the only court with jurisdiction to dissolve the Company, the parties are advised that further attempts to collaterally evade the lawful orders of the New Jersey court may result in sanctions.”

Strong words, indeed, at the conclusion of a Decision and Order earlier this month by Manhattan Commercial Division Justice Shirley Werner Kornreich in a multi-jurisdictional fight for control of a data marketing company organized as a New York LLC owned by two deeply divided, 50-50 members.

Justice Kornreich’s ruling in Matter of Belardi-Ostroy, Ltd. v American List Counsel, Inc., 2016 NY Slip Op 30727(U) [Sup Ct NY County Apr. 14, 2016], denied injunctive relief and dismissed a dissolution petition which asked her effectively to override an order issued last December by a New Jersey judge appointing a fifth Board member to fill a vacancy on the LLC’s otherwise deadlocked five-member Board of Directors. Continue Reading Court Dismisses Dissolution Petition Amidst Multi-Jurisdictional Battle for Control of LLC

KornreichManhattan Commercial Division Justice Shirley Werner Kornreich (pictured) is not known to mince words, so one has to sit up and take notice when she describes a partnership dissolution case as “yet another unfortunate example of a family business dispute that has developed into needless litigation” whose “outcome here is obvious.”

The judge’s admonition in Redel v Redel, 2015 NY Slip Op 31941(U) [Sup Ct NY County Oct. 16, 2015], springs from a suit against the plaintiff’s father and two sisters concerning a general partnership formed by the four of them over 30 years ago to acquire and hold a 10% interest in a limited partnership known as 225 Broadway Co. which owns an office building in lower Manhattan. The amended complaint (read here) identifies Leder Enterprises as an at-will family partnership with no written partnership agreement in which the father holds a 40% interest as managing partner and the sisters hold 20% apiece.

The complaint alleges that, in violation of various provisions of the Partnership Law, the father sold a 4% partnership interest to the plaintiff’s ex-boyfriend without her knowledge or consent; failed to provide plaintiff with reasonable access to partnership books and records; failed to provide a reasonable explanation for a $50,000 “shortfall” in plaintiff’s capital account; and failed to comply with the plaintiff’s demand for the immediate dissolution and winding up of Leder Enterprises. The complaint seeks declaratory judgments of dissolution and that the ex-boyfriend is not a partner, a formal accounting, and damages against the father for breach of fiduciary duty. Continue Reading Court Chides Parties in Family Partnership Dispute for “Needless” Litigation with “Obvious Outcome”

shortsTraditions are good. This blog has two annual traditions. First, at the end of each year I write a post listing the year’s top ten business divorce decisions. Second, each August I offer readers who are (or ought to be) on summer vacation some light reading in the form of three, relatively short case summaries.

So here we are in what’s been a particularly felicitous August weather-wise (at least here in the Northeast U.S.), with another edition of Summer Shorts. This edition’s summaries feature two out-of-state cases — one from Florida involving expulsion of an LLC member and one from Delaware involving the valuation upon redemption of an LLC member’s interest — and a New York appellate court decision involving the removal of a limited partnership’s general partner.

The Anti-Chiu: Florida Court Upholds LLC Member’s Expulsion

Froonjian v Ultimate Combatant, LLC, No. 4D14-662 [Fla. Dist. Ct. App. May 27, 2015].  The Florida intermediate appellate court’s ruling in Froonjian makes for a fascinating contrast with New York case law represented most prominently by the Second Department’s 2010 decision in Chiu v Chiu holding that, absent express authorization in the LLC’s operating agreement, a member’s involuntary expulsion is not permitted. Going 180° in the other direction, the Froonjian court upheld the majority members’ expulsion of a minority member from a Florida LLC that had no operating agreement, reasoning that the Florida default statute vesting all decision-making authority in the members acting by majority vote encompasses the authority to expel a member. Continue Reading Summer Shorts: Member Expulsion and Other Recent Decisions of Interest

Out of businessNot surprisingly, the vast majority of business divorce cases involve firms with valuable assets and/or profitable operations. After all, outside of creditor claims in bankruptcy court, who wants to invest time and money fighting over the corpse of a business with little or no equity value?

Still, it happens once in a while. Take, for example, a case recently decided by Manhattan Commercial Division Justice Shirley Werner Kornreich involving a limited liability company that was up and running for a couple of years before it went insolvent and shut down. Almost five years after a minority member brought suit against the controlling majority member, and after the court’s denial of summary judgment on the plaintiff’s primary claim for recovery, the majority member settled the case for $30,000 which, I imagine, is a small fraction of the legal fees spent by both sides.

Justice Kornreich’s decision in Mazel Capital, LLC v Laifer, 2015 NY Slip Op 30295(U) [Sup Ct NY County Mar. 3, 2015], tells the story of a short-lived business called Heartwatch that unsuccessfully marketed a heart monitoring device in tandem with a live 24-hour call center staffed by cardiologists and other medical professionals. In 2006, the business was organized as an LLC by its founder and sole managing member, Dr. Franklyn Laifer, a retired cardiologist and the defendant in the case. The plaintiff, Mazel Capital, LLC, initially invested $250,000 cash and contributed other assets in consideration of a 9% membership interest in Heartwatch. A year later Mazel invested another $300,000 cash, raising its stake to 12%. Dr. Laifer’s son and others invested another $100,000 in exchange for an 8% membership interest, leaving Dr. Laifer with the remaining 80% for his “sweat equity.”

The LLC’s operating agreement gave Dr. Laifer exclusive management authority but also provided that he was “not entitled to any compensation for serving as Manager.” A contemporaneous side  agreement placed limits on monthly expenditures during the first six months absent Mazel’s consent. Continue Reading Business Partners Fighting Over the Company’s Corpse

The question is, will the Zelouf case prove to be an outlier or the beginning of a sea change in the way New York courts view the marketability discount in fair value proceedings?

Last October I wrote about Zelouf Int’l Corp. v Zelouf, an important post-trial decision in which, among other significant rulings, Manhattan Commercial Division Justice Shirley Werner Kornreich refused to apply a discount for lack of marketability (DLOM) in a statutory fair value proceeding triggered by a cash-out merger of a family-owned business.

Justice Kornreich found the risk of illiquidity associated with the company “more theoretical than real,” explaining there was little or no likelihood the controlling shareholders would sell the company, i.e, themselves would incur illiquidity risk upon sale. Imposing DLOM in valuing the dissenting shareholder’s stake, therefore, would be tantamount to levying a prohibited discount for lack of control a/k/a minority discount.

Within weeks of the decision, both sides filed motions for reargument seeking to vacate or modify various aspects of the court’s rulings including its rejection of any DLOM. In her decision dated December 22, 2014, Justice Kornreich adhered to her prior DLOM ruling but also saw fit to revisit and expand upon her reasons for doing so, given what she described as “New York’s contentious DLOM jurisprudence and the persuasive opinions of the academic community and non-New York courts.” Continue Reading Court’s Rejection of Marketability Discount in Zelouf Case Guided by Fairness, Not “Formalistic and Buzzwordy Principles”