Over the years I’ve blogged about hundreds of court decisions in business divorce cases. Believe it or not, one of the things I like to do is track the cases I’ve written about — or at least those that survive the court’s decision — to see if the decisions lead to settlement as they often do but, more importantly, to see how the decisions shape the subsequent case proceedings and, of course, searching for later court rulings helpful to my business divorce practice and/or of potential interest to readers of this blog.

When I find a later decision that doesn’t deserve its own post usually I’ll just add an update blurb to the original post about the case. But occasionally there are follow-up decisions in distinctive cases whose denouement merits a bit more. Here are three of them:

The Kensington Publishing Case 

Four years ago, in a post entitled Voting Agreement Triggers Fight for Control of Family-Owned Publishing House, I wrote about Zacharius v Kensington Publishing Corp., a high-stakes fight for control of the largest independent publisher of mass-market books in the U.S. The company was founded by Walter Zacharius who died in 2011, leaving his second wife, Suzanne, with 59% of the voting shares and his two children by his first marriage with most of the remaining shares. He also left behind a 2005 Voting Agreement among himself and his two children giving them the power, following Walter’s death, to vote his shares in any election of Kensington’s directors. Continue Reading Business Divorce Epilogues

abstentionCivil litigation in federal court can be a luxury experience. The quality of the judiciary is superb. Federal judges often give their cases substantial individualized attention. Lawsuits progress relatively quickly. The procedural rules in federal court have been litigated nationwide, so lawyers can easily find case law on almost every procedural nuance. Yet, business divorce cases are almost never litigated in federal court. Why?

The Friedman Decision

In 1994, the United States Court of Appeals for the Second Circuit all but sealed the courthouse door to business dissolution cases in federal court, at least in the territorial jurisdiction of the Second Circuit, which includes New York. Continue Reading Federal Court No Mecca for Business Divorce Litigants

Top 10BI’m pleased to present my 9th annual list of this past year’s ten most significant business divorce cases. The list includes important appellate rulings by the First and Second Departments on dissolution of foreign business entities, shareholder rights to inspect book and records, and valuation of partnership interests, along with an interesting mix of trial court rulings on issues affecting LLC members and fair value appraisals. I’ve also included a likely bellwether New Jersey Supreme Court ruling concerning grounds for LLC member expulsion. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Matter of Raharney Capital, LLC v Capital Stack LLC, 138 AD3d 83, 2016 NY Slip Op 01425 [1st Dept Feb. 25, 2016], which brought to an end a longstanding departmental split over the question whether New York courts have jurisdiction over dissolution suits involving foreign business entities, with the First Department in Raharney agreeing there is no jurisdiction.
  2. Matter of Pokoik v 575 Realties, Inc., 143 AD3d 487, 2016 NY Slip Op 06648 [1st Dept Oct. 11, 2016], an appellate ruling of apparent first impression in New York in which the court upheld shareholder inspection rights concerning the books and records of the corporation’s wholly-owned subsidiary.
  3. Huang v Northern Star Management LLC, 2016 NY Slip Op 32194(U) [Sup Ct NY County Oct. 24, 2016], one of only a handful of New York cases involving challenges to cash-out LLC mergers in which Justice Charles E. Ramos of the Manhattan Commercial Division denied a preliminary injunction sought by a minority shareholder who alleged that the merger violated the LLC’s operating agreement.
  4. IE Test, LLC v Carroll, 2016 WL 4086260 [NJ Sup Ct Aug. 2, 2016], an important ruling by the New Jersey Supreme Court in which it reversed the lower court’s judicial expulsion of an LLC member under a narrowed construction of that state’s enabling statute mirroring the Revised Uniform LLC Act’s expulsion provision.
  5. La Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016], a highly detailed and thorough fair-value appraisal opinion by Westchester County Commercial Division Justice Alan D. Scheinkman involving a chain of fitness clubs in which the court confronted dueling expert appraisals whose methodology and conclusions of value were light years apart and ultimately fashioned its own appraisal that, among other important findings, rejected a discount for lack of marketability.
  6. Congel v Malfitano, 141 AD3d 64, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], a controversial ruling currently before the New York Court of Appeals on a pending application for leave to appeal, in which the Second Department upheld a wrongful dissolution judgment against a minority partner and further imposed a 66% discount for lack of control on the value of the partner’s interest.
  7. Gilbert v Weintraub, Short Form Order, Index No. 602290/15 [Sup Ct Nassau County Jan. 29, 2016], presenting the novel issue whether a co-manager of an LLC with no operating agreement can resign as manager while retaining his member status and engage in competitive business activity, where Nassau County Commercial Division Justice Timothy S. Driscoll held that further factual development was needed to determine whether it was reasonable for the resigned manager’s fiduciary duty to extend beyond his resignation and, if so, for how long.
  8. Matter of Hudson (Pure Lime USA, Inc.), Short Form Order, Index No. 600127/16 [Sup Ct Nassau County June 16, 2016], in which Nassau County Commercial Division Justice Stephen A. Bucaria dismissed a 50% shareholders’ dissolution petition alleging director deadlock where the governing shareholders’ agreement authorized one of the respondent’s designees on the four-member board to cast the deciding vote in case of a tie vote.
  9. MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which Manhattan Commercial Division Justice Saliann Scarpulla dismissed derivative claims by a purported LLC member for lack of standing based on the plaintiff’s failure to obtain the required super-majority consent to its admission as a full-fledged member of the LLC notwithstanding it having obtained such consent to the initial assignment of the interest.
  10. Fakiris v Gusmar Enterprises LLC, 53 Misc 3d 1215(A), 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016], where Queens County Commercial Division Justice Martin E. Ritholtz denied a motion to dismiss claims for breach of fiduciary duty brought against a non-member designated as tie-breaker under the LLC’s operating agreement, finding factual issues whether the tie-breaker engaged in any misconduct.

Rosalyn H. Richter - Assocaite Justice, Appellate Division, First Department 042809

For more than 20 years, there’s been a split among New York’s several intermediate appellate courts on the question whether the state’s courts have subject matter jurisdiction in proceedings seeking judicial dissolution of foreign business entities.

No more. Last week, in a signed opinion by Associate Justice Rosalyn H. Richter (photo right), writing for a unanimous panel of the Manhattan-based Appellate Division, First Department, in Matter of Raharney Capital, LLC v Capital Stack LLC, 2016 NY Slip Op 01425 [1st Dept Feb. 25, 2016], the court abandoned its contrary 1994 ruling in Matter of Hospital Diagnostic Equipment Corp. and, realigning itself with decisions by the Brooklyn-based Second Department and Albany-based Third Department, held that New York courts lack subject matter jurisdiction over foreign company dissolution proceedings.

The Raharney case involves a petition filed in October 2014 in Manhattan Supreme Court by a 50% member of a two-member Delaware LLC with no written operating agreement, seeking judicial dissolution under § 18-802 of the Delaware LLC Act based on intractable deadlock (read petition here). The petition alleges that both members are New York residents, that the Delaware LLC’s place of business is New York, and that the LLC’s only connection to Delaware is its state of formation. The petitioner’s supporting memorandum of law predicated the court’s subject matter jurisdiction on Hospital Diagnostic in which the First Department found “without merit” the State Attorney General’s argument that the courts of New York lack subject matter jurisdiction to dissolve a foreign corporation. Continue Reading A Split No More: First Department Agrees, No Subject Matter Jurisdiction to Dissolve Foreign Business Entities