Last month gave us three noteworthy post-trial decisions in three different cases from three different states, all centering on disputes among business co-owners over the ownership and exploitation of the businesses’s core intellectual property. While each case stems from a unique set of facts, they all have in common failures to allocate IP ownership by means of clear contractual undertakings ex ante and/or failures to exercise due diligence at inception or during the life of the business.

The first highlighted case hails from New York, involving an extremely high stakes financial dispute between family members comprising the minority and controlling shareholders of the famous Palm restaurants located throughout the United States and elsewhere. The second case comes from Delaware, in which the court ordered dissolution of a limited liability company where the 50% member who licensed to the LLC the patented technology on which rested its entire business plan, as it turned out, did not own the rights. In the third case, from Arkansas, the judge dismissed a one-third LLC member’s claims for copyright infringement and dissolution after finding that he was equitably estopped from enforcing his copyrights in the company’s principal software products.

Derivative Suit Over Palm Restaurant IP Yields $120 Million Award

The original Palm Restaurant was founded in Manhattan in 1926 by Pio Bozzi and John Ganzi, who ran it with their wives. Today, despite the ubiquity of Palm-branded restaurants throughout the U.S. and worldwide, the original corporation formed by Pio and John, now owned by third-generation family members, does not operate a single restaurant. Rather, its sole asset consists of the enormously valuable Palm IP consisting of a series of trademarks and service marks, and design elements including its menu and distinctive restaurant décor, all of which is licensed to independent Palm restaurant operators as well as Palm restaurants owned in whole or with other investors by two family members, Bruce Bozzi and Walter Ganzi, who also happen to own 80% of the original Palm corporation that owns the IP, which I’ll called Palm IP Corp. Continue Reading IP Disputes Among Private Business Co-Owners Dominate Three Recent Cases

When three gentlemen in their mid-eighties, one of whom is in a nursing home with failing health and onset dementia, are the key players in a disputed shareholder buy-out transaction, what are the odds they’ll all be around to give evidence in a lawsuit brought four years later?

If you answered slim or none, you’d be right in the case of Gourary v Laster, 2016 NY Slip Op 04287 [1st Dept June 12, 2018], where the absence of testimony by the two deceased principals and the deceased lawyer for one of them doomed a lawsuit on behalf of the estate of an enfeebled 50% shareholder who, about six months before he died, sold for $5.75 million his 50% stake in a realty holding company to the other 50% shareholder’s son-in-law who, less than a year later, sold the company’s realty to a third party for $32 million.

The case involves a corporation named 121-131 West 25th St. Corp. that was co-owned equally by Paul Gourary and Oliver Laster since the 1940’s when the corporation acquired a 12-story commercial building in Manhattan’s Chelsea district. In 2005, after the ailing Gourary was admitted to a nursing home, Laster’s son-in-law, Scott Macomber, expressed an interest in acquiring either a 50% interest in the realty or buying Gourary’s 50% stock interest. Continue Reading Dead Men Tell No Tales of Shareholder Buy-Outs Gone Sour

NY

DelawareThe common perception among practitioners familiar with the business entity laws of New York and Delaware is that Delaware law generally is friendlier to, and more protective of, majority ownership and management interests.

Two recent cases — one from each state — highlight at least one important area where the common perception does not apply: majority rights under the statutory default rules to adopt or amend an LLC operating agreement without the consent of all the members.

The difference between the two states can have critical consequences for both majority and minority members of the many LLCs that, for better or worse, are formed without a written operating agreement.

The New York case is one I previously wrote about on this blog. Last January, in Shapiro v Ettenson, the Appellate Division, First Department, in a case involving a three-member LLC that was formed without a written operating agreement, affirmed a lower court’s decision construing Section 402 (c) (3) of the New York LLC Law (“except as provided in the operating agreement . . . the vote of a majority in interest of the members entitled to vote thereon shall be required to . . . adopt, amend, restate or revoke the articles of organization or operating agreement”) to permit the two-member majority to adopt a written operating agreement almost two years after the LLC was formed and began operating, without the third member’s consent and notwithstanding certain provisions in the agreement that modified the statutory default rules adversely to the third member. Continue Reading Delaware Ruling Highlights Difference With New York Over Amending LLC Agreements

articlesThis week I’m departing from my usual, case-focused, long-form post due to time constraints of an impending trial. Instead, I’m putting a well-deserved spotlight on two recently published articles of special interest to business divorce practitioners.

The first concerns one of my favorite topics, on which I’ve written several posts (here, herehere, and here), about whether the courts of one state have subject matter jurisdiction over involuntary dissolution petitions for a business entity formed in another state. The article, entitled Judicial Dissolution: Are the Courts of the State that Brought You In the Only Courts that Can Take You Out?, is co-authored by Peter B. Ladig and Kyle Evans Gay and is published in the Fall 2015 issue of The Business Lawyer (available here).

Ladig and his firm, Morris James LLP, represented one of the members of a Philadelphia-based newspaper publishing company organized as a Delaware LLC in a recent, high-profile dissolution case that initially played out as a game of jurisdictional ping-pong between the Pennsylvania and Delaware courts. Ultimately the Pennsylvania court sided with Ladig’s client and ruled against its own jurisdiction, allowing the case to proceed unobstructed in the Delaware Court of Chancery. It therefore comes as no surprise that Ladig’s thoroughly researched, scholarly article strongly supports the argument against subject matter jurisdiction to dissolve foreign business entities. Continue Reading Recent Articles Highlight Dissolution of Foreign Entities and Delaware LLC Litigation

Sign hereIt just got more dangerous to become a minority member of a New York limited liability company without a written operating agreement.

In a case of first impression decided last month, a Manhattan judge ruled that the majority members of an LLC that had no operating agreement at the time of its formation were authorized by statute to later adopt and enforce against a non-signatory minority member an operating agreement that, among other things, authorizes additional capital calls and potentially dilutes the membership interest of a member who fails to contribute.

The facts in Shapiro v Ettenson, 2015 NY Slip Op 31670(U) [Sup Ct NY County Aug. 16, 2015], are fairly simple. In January 2012, three individuals — plaintiff Shapiro and defendants Ettenson and Newman — filed articles of organization for ENS Health, LLC as a member-managed LLC with each member holding a one-third membership interest. From its formation until December 2013, ENS had no written operating agreement. Between September and December 2013, the members negotiated and exchanged draft agreements but none was executed. Continue Reading Can LLC Agreement Be Enforced Against Member Who Doesn’t Sign It?

Del Ct Chancery 2Viewing the arc of Delaware Chancery Court jurisprudence over the last two decades implementing that state’s Limited Liability Company Act, and witnessing the Delaware legislature’s frequent amendments to the statute in reaction to judicial developments, you can’t help but detect a pattern of maintaining the unique attributes of the Delaware LLC, as compared to other forms of business entity, by:

  • rigorously promoting freedom of contract (in the form of the LLC agreement) and its corollary, “you made your bed now lie in it”;
  • deciding internal governance disputes within the bounds of the interplay of the Delaware LLC Act’s default rules and the LLC agreement; and
  • strongly disfavoring judicial intervention based on open-ended notions of fairness (the main exception being when managers take on fiduciary duties by agreement or by default under the statute).

Stated simply, in Delaware certainty trumps indeterminacy.

Well, not always, as seen in a first-impression ruling last week by Vice Chancellor J. Travis Laster in In re Carlisle Etcetera LLC, C.A. No. 10280-VCL (read here), in which the court held that the assignee of an LLC membership interest, who as a non-member and non-manager lacked standing to seek involuntary dissolution under Section 18-802 of the Delaware LLC Act, nonetheless had standing to seek equitable dissolution under the Chancery Court’s common-law authority as a court of equity.  Continue Reading Delaware Chancery Court Endorses Equitable Dissolution of LLC

The implied covenant of good faith and fair dealing, at least in the realm of shareholder and partnership disputes, may be one of the least understood and most misused legal doctrines.

I suspect the reason is, it’s not quite what it sounds like, and what it sounds like is an all-purpose, “lite” version of some quasi-fiduciary duty. I wish I had a dollar for every complaint I’ve seen in litigation between business co-owners in which, bringing up the rear in a parade of causes of action, the pleader alleges something like, “By reason of the foregoing, defendants breached their duty of good faith and fair dealing.” I wish I had another dollar for every court decision I’ve read dismissing such a claim on the ground it duplicates another cause of action for breach of contract.

Alright, you ask, so what is the implied covenant of good faith and fair dealing? Fundamentally it is a contract-centric doctrine whereby a court fills the “gaps” in the parties’ express agreement by discerning, under a reasonable expectations standard, what the parties would have agreed themselves had they considered the issue.  The doctrine is anchored in Judge Benjamin Cardozo’s 1917 opinion for the New York Court of Appeals in the Lady Duff-Gordon case (222 NY 88), where he famously wrote: Continue Reading Can’t Get Rid of Those Nooks and Crannies: Delaware Supreme Court Clarifies Implied Covenant of Good Faith and Fair Dealing

The Latin maxim, scientia potentia est, translated as “knowledge is power,” is commonly attributed to the English philosopher Sir Francis Bacon (1561-1626) who, it so happens, also was a prominent lawyer and jurist before his career ended in disgrace for accepting gifts from litigants.  Likely he never had occasion to rule in a legal proceeding by the minority owner of a closely held business to gain access to company books and records, but if he had, his maxim would have come in quite handy as an encapsulation of the interests at stake when company managers resist disclosure of information to outsider owners.

In New York, Delaware and most if not all other states, rights of access to company information by shareholders of business corporations and members of limited liability companies (LLC) are governed by statute and common law, subject to any different or broader rights that may be spelled out in a shareholders or operating agreement.  The statutes also may provide, as they do in New York and Delaware, for summary proceedings designed to allow expedited resolution of a books and records dispute.

The statutes not surprisingly require the petitioner in a books and records proceeding to be a shareholder of the corporation or a member of the LLC whose information is sought.  This seemingly black-and-white requirement has not dissuaded company managers from contesting petitioners’ standing to bring a books and records proceeding, or to restrict the temporal scope of the information required to be produced, under a variety of special circumstances.  Decisions in three recent cases — one from New York and the other two from Delaware — are illustrative.

Continue Reading New York and Delaware Courts Clarify Petitioner Standing to Bring Books and Records Proceedings