We call it deadlock dissolution when a 50% shareholder of a close corporation, who claims to be at an impasse with the other 50% shareholder, asks the court to dissolve and liquidate the corporation. New York’s deadlock dissolution statute, unlike its statutory cousin for minority shareholder oppression petitions, does not give the non-petitioning 50% shareholder the right to avoid dissolution by acquiring the petitioner’s shares for “fair value” as determined by the court, nor do the courts have statutory or common-law authority to compel a buyout. Absent a settlement, the litigation outcomes are binary: either dissolution is granted, in which case the court usually will appoint a receiver to sell the corporation’s assets, or it’s denied, in which case the co-owners continue indefinitely their fractious co-existence.

There’s one particular subspecies of deadlock dissolution that may not be motivated primarily by the usual disputes over finance, personnel, owner compensation, budget, distributions, or other such operational issues. Rather, sometimes a deadlock dissolution petition is brought when the two owners disagree whether to dissolve or continue to operate a functioning business. The petitioner may need the liquidity for unrelated financial reasons, or in contemplation of retirement, or because he or she believes the optimal time to sell the business or its assets is at hand. Perhaps the two owners also discussed a buyout but couldn’t agree on terms. Over time, as resentments fester and pressures grow, one or both owners typically undertake unilateral actions affecting the business, or block management actions advanced by the other, that push the standoff to crisis mode and into the hands of lawyers and judges.

A recent decision by Manhattan Commercial Division Justice Saliann Scarpulla shows how a deadlock dissolution petition of this existential sort can play out. Continue Reading One 50% Shareholder Wants to Sell or Liquidate the Business. The Other Wants to Keep It Going. Is That Deadlock?

Board members’ decisions to award compensation packages for themselves can present some thorny issues. In a close corporation, shareholders typically serve as officers and directors, and have a reasonable expectation of compensation in lieu of dividends or distributions. But dissenting shareholders or directors, armed with the benefit of hindsight, can, and often do, criticize a board’s compensation decisions as excessive, claiming self-dealing, looting, and waste. What statutory protections do board members have when making compensation decisions? To what extent can board members truly rely on those protections?

In Cement Masons Local 780 Pension Fund v Schleifer, 56 Misc 3d 1204 [A], 2017 NY Slip Op 50875 [U] [Sup Ct NY County June 29, 2017], Manhattan Commercial Division Justice Saliann Scarpulla considered these issues in a thoughtful opinion, in which she relied on some relatively infrequently litigated provisions of the Business Corporation Law (“BCL”). The decision is also noteworthy for its reliance on decisional law from Delaware on not one, but two important issues of law, one of which was an apparent question of first impression in New York. Although Cement Masons Local involved a public company, it addressed the same statutes that govern close corporations, and provides helpful guidance to board members, and counsel, when weighing compensation decisions. Continue Reading Navigating Rocky Shoals and Safe Harbors When Board Members Fix Their Own Compensation

In 1981, three partners formed a general partnership to own and operate a rental property. Their partnership agreement fixed a 30-year term, to 2011. In 2003, the partners formed a new LLC maintaining the same ownership percentages as the partnership, to which the partnership transferred the property for purposes of refinancing the existing mortgage loan.

In 2016, after failing to secure a buy-out agreement, the holder of a 45% interest sued to dissolve the LLC under New York LLC Law § 701 (a) based on the 2011 expiration date in the partnership agreement.

But wait, you say, didn’t the LLC supersede the partnership and, if so, how can the LLC’s duration be governed by the termination date in the partnership agreement? Unless there’s an LLC agreement that provides otherwise, isn’t the LLC’s existence perpetual by default? And how can the owners hold themselves out to the world as an LLC while acting as partners among themselves? After all, it was the mortgage lender that likely required the transition from partnership to LLC as a condition of the loan, among other reasons, precisely to avoid the risk associated with a general partner’s unfettered right to dissolve the partnership at any time for any reason.

An interesting set-up, indeed, for a decision last week by Manhattan Commercial Division Justice Saliann Scarpulla in Golder v 29 West 27th Street Associates, LLC, 2017 NY Slip Op 31527(U) [Sup Ct NY County July 17, 2017], in which she denied a motion to dismiss the dissolution petition upon finding “a material issue of fact exists as to whether a written operating agreement exists as to the LLC’s term of duration.” Continue Reading It’s a Partnership! No, It’s an LLC! No, It’s Both!

consentThe pick-your-partner principle is universally embedded in the default rules of limited liability company enabling acts, including Sections 601 through 604 of the New York LLC Law which permit free assignment of distributional and other economic rights appurtenant to a membership interest but require the other members’ consent before an assignee is granted full member status with voting and other rights associated with membership in an LLC.

The distinction between a “mere” assignee versus a transferee with member status can become a battle ground when a putative LLC member who received his, her or its interest by assignment brings legal action against the LLC’s managers for dissolution, access to books and records, or asserting derivative claims on behalf of the LLC. That’s because by statute and/or common law, the suing party’s requisite legal standing to assert such claims depends on having member status.

A recent decision by Manhattan Commercial Division Justice Saliann Scarpulla in MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which she dismissed derivative claims by a mere assignee of LLC interests, starkly illustrates the distinction and the importance of compliance with the LLC agreement’s provisions for bestowing member status on assignees. Continue Reading Operating Agreement’s Two-Step Consent Provision Foils Assignment of LLC Member Interest

When you come across a legal dispute among the partners of a New York limited partnership, the first thing you need to know is whether it’s an “old” or a “new” limited partnership, that is, whether it’s governed by the Limited Partnership Act adopted in 1922 (NYLPA) or the Revised Limited Partnership Act (NYRLPA) adopted in 1991 for partnerships formed after that date. Depending which law applies, the case will either be a mess or a bigger mess, which is one of the many reasons the limited partnership form has fallen into disfavor since New York’s adoption of the superior limited liability company form in 1994.

Manhattan Supreme Court Justice Saliann Scarpulla recently handed down a decision involving what I consider the messier category of limited partnership dispute governed by the old NYLPA. The court’s opinion in Poole v. West 111th Street Rehab Associates, 2013 NY Slip Op 30827(U) (Sup Ct NY County Apr. 19, 2013), addressed a particularly thorny issue whether and how the partnership could be continued and reconstituted with a new general partner following the death of the last remaining, original general partner. Upon examining the overlapping and arguably inconsistent, crazy-quilt provisions of the NYLPA, the partnership’s Certificate of Limited Partnership and its Limited Partnership Agreement, as well as the partners’ course of conduct, Justice Scarpulla held that the limited partner seeking a declaration of the partnership’s dissolution failed to establish his entitlement to relief as a matter of law, and that a trial was required to resolve disputed issues of fact. Continue Reading Death of a General Partner, or How Not to Plan for Succession in a Limited Partnership