During her many years as Presiding Justice of the Brooklyn Commercial Division, New York Supreme Court Justice Carolyn E. Demarest (Ret.) decided numerous important and challenging business divorce cases. I should know, having featured on this blog in the last 10 years no less than 19 of her decisions.

Among them, and likely the one with the most lasting impact, is the Mizrahi case in which Justice Demarest issued two major post-trial decisions granting dissolution of an LLC based on financial infeasibility and ordering a closed auction between the two 50/50 members, before the Appellate Division on appeal by the petitioner made new law by ordering an “equitable buy-out” of the respondent member.

Another of my favorites is the Cortes case, also a post-trial decision, in which Justice Demarest granted common-law dissolution of a restaurant business conditioned on a buy-out of the minority shareholder reflecting his share of millions in cash “skimmed” by the controlling shareholders from a restaurant business as established by sophisticated forensic analysis.

I was among many lawyers saddened by Justice Demarest’s decision last year to hang up her robes. She truly was one of the best trial court judges around, not to mention losing one of my most prolific sources of blog fodder.

The good news is, soon after leaving the bench Justice Demarest joined the Manhattan office of JAMS where she serves as an arbitrator and mediator in complex commercial cases. With 34 years on the bench, a deep understanding of the substantive law governing relations among co-owners of closely held business entities, and equally extensive experience with business valuation, it’s hard to imagine a more qualified neutral in business divorce matters.

I recently had the pleasure of interviewing Justice Demarest for my Business Divorce Roundtable podcast. You can hear the interview by clicking on the link at the bottom of this post.

The interview features Justice Demarest’s thoughts on the many challenges presented by business divorce cases. Naturally I had to ask her about the Mizrahi case and a few others she decided. We also talk about the mediation of business divorce cases.

So give it a listen and if you like it, I’d be grateful if you post a good review on iTunes which will help spread the word.

ValuationIf you’ve studied New York dissolution law, you know that, unlike proceedings involving close corporations, there’s no statutory authority for a court-ordered buy-out when a member of a limited liability company petitions for judicial dissolution under LLC Law § 702.

You also know, especially if you follow this blog, that notwithstanding the absence of such authority, on a few occasions New York courts have invoked their common-law powers of equity to compel buy-outs in LLC dissolution cases, or have reached the same result by characterizing the buy-out as a form of liquidation.

The selected valuation date can make a critical difference in determining the value of an equity interest in the business. In dissolution proceedings involving close corporations, the statute authorizing a buy-out election, Business Corporation Law § 1118, stipulates valuation as of the day before the filing of the petition. We don’t have similarly definitive guidance on the LLC side because there’s no enabling statute, but the few LLC cases decided so far suggest some answers. Continue Reading Court-Ordered LLC Buy-Outs: What’s the Valuation Date?

 

I’m pleased to present my sixth annual list of picks for the past year’s ten most significant business divorce cases. This year’s selections, featuring seven appellate decisions, include significant rulings on a variety of issues in dissolution and appraisal cases involving closely held corporations, partnerships and limited liability companies. All ten were featured in this blog previously; click on the case name to read the full treatment. And the winners are:

 

  1. Holdrum Investments, N.V. v. Edelman, 2013 NY Slip Op 30369(U) (Sup Ct NY County Jan. 31, 2013), in which Manhattan Supreme Court Justice Anil C. Singh followed a 1994 First Department precedent in rejecting the argument that a New York court lacks subject matter jurisdiction to dissolve a foreign entity, in that case a Delaware limited partnership.
  2. Doyle v. Icon, LLC, 103 AD3d 440, 2013 NY Slip Op 00797 (1st Dept Feb. 7, 2013), where the First Department dismissed a complaint seeking judicial dissolution of an LLC, holding that allegations by a minority member of systematic exclusion by the controlling members, without more, fail to state adequate grounds for relief under LLC Law § 702.
  3. Sullivan v. Troser Management, Inc., 104 AD3d 1127, 2013 NY Slip Op 01634 (4th Dept Mar. 15, 2013), a 10-year litigation over a stock buy-out where the parties never updated the called-for Certificate of Value, in which the Fourth Department rejected the purchasing shareholder’s contention that the buy-out price should be based on book value.
  4. Gelman v. Buehler, 20 NY3d 534, 2013 NY Slip Op 01991 (Ct App Mar. 26, 2013), in which the Court of Appeals construed the phrases “definite term” and “particular undertaking is specified” as used in Section 62 of the Partnership Law in dismissing a complaint for wrongful termination of an oral partnership agreement.
  5. Mizrahi v. Cohen, 104 AD3d 917, 2013 NY Slip Op 02056 (2d Dept Mar. 27, 2013), where the Second Department ordered a buy-out of the defendant 50% member by the plaintiff 50% member as an equitable remedy in an LLC dissolution case.
  6. Born to Build LLC v. 1141 Realty LLC, 105 AD3d 425, 2013 NY Slip Op 02193 (1st Dept Apr. 2, 2013), in which the First Department ordered dismissal of a complaint for judicial dissolution of an LLC, brought by a party who purportedly acquired an undocumented membership interest at a judgment execution sale, where the LLC agreement negated the existence of the membership interest at issue.
  7. Matter of Sunburst Associates, Inc., 106 AD3d 1224, 2013 NY Slip Op 03368 (3d Dept May 9, 2013), an unusual case in which the Third Department dismissed a deadlock dissolution petition brought by a putative 50% shareholder on the ground that he had transferred his stock to the other 50% shareholder, notwithstanding evidence that, even after the transfer, the respondent shareholder had signed corporate tax returns reflecting the two of them as 50/50 shareholders. 
  8. Breidbart v. Wiesenthal, 108 AD3d 492, 2013 NY Slip Op 05040 (2d Dept July 3, 2013), where the Second Department held that a retired partner, or the estate of a deceased partner, who elects to receive post-withdrawal profits in lieu of interest under Section 73 of the Partnership Law is not entitled to recover appreciation on the value of the partnership assets.
  9. Ruggiero v. Ruggiero, 2013 NY Slip Op 31955(U) (Sup Ct Suffolk County July 29, 2013), in which Suffolk County Justice Emily Pines opted for one appraiser’s income approach over the other appraiser’s market approach in a stock valuation contest involving a family-owned kosher deli.
  10. Feinberg v. Silverberg, Decision and Order, Index No. 3120-11 (Sup Ct Nassau County Sept. 6, 2013), a decision by Nassau County Justice Vito DeStefano in which the court ruled that the petitioner’s alleged bad faith and creation of feigned deadlock is a cognizable defense in a proceeding for judicial dissolution under Business Corporation Law § 1104.

This is the second installment of a two-part interview of Claudia Landeo (photo right; read bio here), Associate Professor of Economics at the University of Alberta, and Kathryn Spier (photo left; read bio here), the Domenico de Sole Professor of Law at the Harvard Law School, on their forthcoming article in the Yale Journal on Regulation called “Shotguns and Deadlocks” [available on SSRN here].

Click here to read Part One of the interview, here to view Professor Landeo’s SSRN home page linking to her numerous published articles and discussion papers, and here to view Professor Spier’s lengthy list of academic publications.

Part One covered some of the basics of the shotgun buy-sell mechanism, its utility in resolving deadlock disputes, and the challenges posed by asymmetries of information and financial capabilities as between the owners. The discussion continues in Part Two, focusing on judicial implementation of the shotgun and the experimental data supporting selection of the better-informed owner as the offeror.

Mahler: You told us that, unlike in the context of ex ante private agreements, judges might have the ability to address problems with asymmetries that can better ensure equitable outcomes for shotgun mechanisms. What are some of the things judges can do?

Spier: The judge might use her discretion when one party is under financial duress. Specifically, the judge might mitigate the negative effects of financial asymmetries by giving parties adequate time to arrange for financing of the buy-sell operations. If the financial asymmetries cannot be mitigated by judicial order, then the judge can certainly consider alternative mechanisms or approaches. Continue Reading Interview With Professors Claudia Landeo and Kathryn Spier on Shotguns and Deadlocks: Part Two

The Mizrahi v. Cohen case, about which I’ve posted twice before, took a surprising turn last week when an appellate court granted the plaintiff’s request to compel a buy-out of the defendant’s interest as an equitable remedy in an LLC dissolution fight between 50/50 members.

Last week’s ruling by the Brooklyn-based Appellate Division, Second Department, in Mizrahi v. Cohen, 2013 NY Slip Op 02056 (2d Dept Mar. 27, 2013), resolved an appeal and cross-appeal from a January 2012 post-trial order by Brooklyn Commercial Division Justice Carolyn E. Demarest. The trial court’s order granted the plaintiff’s request to dissolve the subject LLC which owns a mixed-use, four-story building that houses Mizrahi’s dental office and Cohen’s optometry office along with other tenants. (Read here my post about the January 2012 decision.)

The Appellate Division affirmed Justice Demarest’s determination that dissolution under LLC Law § 702 was warranted based on the LLC’s financial infeasibility caused largely by the defendant 50% member’s refusal to make additional capital contributions. It also affirmed Justice Demarest’s rulings allowing parol evidence of the parties’ course of dealings to assist the interpretation of the LLC agreement, and dismissing plaintiff’s contract and fiduciary breach claims.

The Appellate Division disagreed with Justice Demarest on one issue only, albeit one with potentially great precedential importance in LLC dissolution cases: Did the plaintiff establish a right to compel a buy-out of the defendant’s membership interest as an equitable remedy in lieu of winding up the LLC and liquidating its realty asset?

Continue Reading Appellate Court Orders Equitable Buy-Out in LLC Dissolution Case

The contractarian recoils at the notion of equitable remedies in LLC dissolution cases. Allowing judges to grant relief ex post facto based on principles of equity untethered to the parties’s operating agreement, the contractarian argument goes, erodes the contract-based nature of the LLC — that which makes LLCs fundamentally different from corporations — and breeds moral hazard by rescuing LLC members from their shortsighted failure to bargain for desired rights and remedies in the LLC agreement.

One would be hard pressed to find a more powerful rejoinder to the contractarian argument than the case of Mizrahi v. Cohen, 2013 NY Slip Op 50092(U) (Sup Ct Kings County Jan. 15, 2013), decided last month by Brooklyn Commercial Division Justice Carolyn E. Demarest (pictured). What’s more, Justice Demarest’s opinion, in which she ordered a Lyons-style auction sale of LLC membership interests (I’ll explain below), is refreshingly candid about the court’s necessary employment of its equitable powers to avoid the glaring injustice that would have resulted in Mizrahi had the court stayed within the strict confines of the LLC agreement.

Mizrahi may sound familiar to regular readers of this blog. About a year ago I wrote about Justice Demarest’s prior decision in the case (read here) ordering dissolution of an LLC co-owned 50/50 by brothers-in-law. The LLC was formed to own, renovate and operate a small commercial building in Brooklyn used by the two members for their separate dental and optometry practices and to rent additional space to third-party tenants. Justice Demarest dissolved the LLC on the ground that continuing it was financially unfeasible due to the defendant member’s failure to provide needed financial support and his undermining of the LLC’s financial integrity by withholding rent and taking unauthorized cash withdrawals. Continue Reading Court Decision Boosts Equitable Buy-Out Remedy in LLC Dissolution Case

Back in 2008, I wrote a couple of posts about the Youngwall case in which the court ordered involuntary dissolution of a commercial real estate limited liability company (LLC) owned 50/50 by two brothers who also were involved in a bitter dispute over their father’s will, based on the personal animosity between the brothers and because the vacant building was losing money (read here and here).

Youngwall foreshadowed the landmark decision in 2010 by the Appellate Division, Second Department, in the 1545 Ocean Avenue case, which redefined the standard for judicial dissolution of LLCs under §702 of the LLC Law as requiring the petitioner to show “in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.”

I emphasize the disjunctive “or” in the quoted passage because the cases involving judicial dissolution petitions based solely on financially failing LLCs are few and far between, as opposed to the more common scenarios involving management and/or money disputes between members of otherwise profitable ventures. The explanation may well be that most business people don’t like to pay lawyer’s fees fighting over a corpse.

LLCs being the entity of choice for real estate holding companies, and the real estate market having remained in a slump the last four years, it was only a matter of time before another Youngwall case appeared. And so it has, in the form of Mizrahi v. Cohen, 2012 NY Slip Op 50030(U) (Sup Ct Kings County Jan. 12, 2012), decided last week by Brooklyn Commercial Division Justice Carolyn E. Demarest.

Continue Reading Court Orders Dissolution of Unprofitable Real Estate LLC