Who knew Quick Draw would turn into Slo-Mo?

Regular readers of this blog may remember the Quick Draw (as I dubbed it) buy-sell agreement in the Mintz v Pazer case decided by Brooklyn Commercial Division Justice David Schmidt. The provision at issue — found in a shareholders’ agreement between two, 50/50 factions of a family owned business whose sole asset is a shopping center allegedly worth over $50 million — authorized either faction to give the other an irrevocable purchase notice within 10 days after the failure to resolve deadlock, with the purchase price to be determined by a subsequent multiple-appraiser process. Litigation erupted after each of the Mintz and Pazer factions sent the other a purchase notice within the 10-day period. Justice Schmidt eventually declared the Mintz faction the purchaser because its notice preceded the Pazer faction’s notice by several days.

The dueling purchase notices were given in September 2012. Justice Schmidt declared the Mintz faction the purchaser in December 2013. It’s now sixteen months later and still no sale has occurred while the two factions continue to battle it out in court. What went wrong? Continue Reading Case Highlights Importance of Valuation Date in Buy-Sell Agreement

You’ve heard of a Shotgun buy-sell agreement? Let me introduce you to the Quick Draw.

I’ve named it after Quick Draw McGraw, one of my favorite, classic Saturday morning TV cartoons, and because it so nicely describes the unusual buy-sell mechanism enforced by Brooklyn Commercial Division Justice David Schmidt in his fascinating decision earlier this month in Mintz v Pazer, Decision and Order, Index No. 502127/13 [Sup Ct, Kings County Mar. 12, 2014].

What’s the difference between a Quick Draw and a Shotgun? With a Shotgun, the offeror names a price at which the offeree has the option either to buy the offeror’s shares or sell the offeree’s shares to the offeror. In most instances, the precise timing of the trigger-pull by the offeror is not critical because the offeree has the choice to buy or sell, which if anything creates a disincentive to be the trigger-pulling offeror.

With a Quick Draw, upon the occurrence of a contractually defined trigger event, either side can give a notice to purchase the other’s shares at a price to be determined subsequently by an appraisal process. Unlike the Shotgun, however, the timing of the trigger-pull is everything. The designation of buyer and seller is determined instantly by whichever side first serves its written notice to purchase. When each side wants to buy out the other, as occurred in Mintz, a difference of minutes in the delivery of the purchase notice will determine which side gets to buy and which side must sell.

If you think that sounds a little meshuggeh, you’re not alone. But that’s the agreement the parties made in Mintz, and that’s what the judge enforced.  Continue Reading Court Enforces “Quick Draw” Buy-Sell Agreement in Suit Between 50/50 Shareholders

It’s hard enough to explain to clients in business divorce cases the complicated statutory and judge-made law governing the substantive rights of the parties, for example, what constitutes shareholder oppression, or what kind of deadlock between 50/50 owners warrants dissolution, or how a stock interest gets valued in a buy-out proceeding.

But try explaining to clients the confoundingly intricate rules of civil procedure that dictate how a lawsuit must be prosecuted and defended, and, well, let’s just say you tend to get a lot of blank stares in return.

Whatever clients do or don’t comprehend, lawyers know that the rules of civil procedure present pitfalls and opportunities that can make or break a case, regardless of the more meaningful questions about who did what to whom, and which side should win or lose on the merits.

So primarily for all you lawyers reading this, I present below a series of short summaries of recent court decisions addressing a potpourri of procedural issues in dissolution cases, including service of the petition, time to answer, consolidation and intervention, and seeking unpleaded relief. Continue Reading A Potpourri of Procedural Issues in Dissolution Cases

Here we are again, in the doldrums of the last week of August. Offices are semi-deserted. The phones are quiet. Even the email traffic is down. Last chance to recharge the batteries before the post-Labor Day onslaught begins. A perfect time to offer vacationing readers summaries of a few recent decisions of interest involving disputes between business co-owners.

First, we’ll look at what appears to be a decision of first impression, holding that a liquidating receiver may consider the tax advantages of a shareholder bid for the dissolved corporation’s assets structured as a stock redemption. Then we’ll look at a pair of decisions addressing derivative versus direct claims, in one finding that the plaintiff’s claims were properly brought as direct claims, and in the other finding that the plaintiff failed to plead justification for failing to make a pre-suit demand.

Liquidating Receiver Authorized to Accept Shareholder Bid for Corporation’s Real Property Structured as Stock Redemption

Matter of Gohil (Bayside Mini Grocery, Inc.), 2012 NY Slip Op 30320(U) (Sup Ct Nassau County Jan. 23, 2012). The case was brought by the controlling shareholders of two corporations, one operating a bodega and the other owning the building housing the bodega, under §1103 of the Business Corporation Law for judicial dissolution of the corporations pursuant to majority shareholders’ resolution. In April 2011, the court appointed a receiver to liquidate the business and the real property. In July 2011, the court authorized the receiver to hire a real estate broker to market and sell the property at an initial listing price of $2.6 million. The court’s order also permitted the shareholders to put in topping bids to any outside offer. In August 2011, the broker obtained a $2.4 million all-cash outside offer. In September 2011, the petitioners put in a $2.5 million topping bid structured as a stock redemption agreement pursuant to which the respondents would sell to the realty corporation their 30% interest and petitioners would then own 100%. The proposed redemption also was designed to avoid approximately $75,000 in realty transfer taxes. The respondents did not at that time put in a topping bid, and the receiver determined that the petitioners’ bid was the highest offer.

Continue Reading Summer Shorts: Liquidating Receiver’s Authority to Compel Share Redemption and Other Recent Decisions of Interest

When one of a handful of shareholders in a close corporation decides to sell his shares to another shareholder, is the buying shareholder obligated to offer the other remaining shareholders the opportunity to participate in the purchase on an equal basis? In the absence of a shareholders’ agreement regulating such transfers, is there a common law fiduciary duty to share the shares with the remaining shareholders?

If you answered these questions “no,” you’ll take comfort in a decision issued last week by Kings County Commercial Division Justice David Schmidt in a case called Varveris v. Zacharakos, 2012 NY Slip Op 50947(U) (Sup Ct Kings County May 24, 2012), turning down a bid by a disappointed shareholder to require equal participation in the purchase of a departing shareholder’s shares.

Varveris involves a real estate business known as Jarc Realty Co. formed in 1986 to own and operate a residential apartment building in Brooklyn. Upon incorporation, Jarc’s 200 shares were issued and distributed equally among four shareholders: Zacharakos, Sichenze, Kristiansen and Varveris. After Zacharakos transferred his shares to his wife in 1999, he continued to serve as president. A company initially owned by Zacharakos, and later transferred to his daughter, manages the property.

Continue Reading There’s No Fiduciary Duty to Share and Share Alike for Shares of Stock

You’ve met with your client who’s embroiled in a nasty dispute with his or her business partners.  You’ve learned the facts and reviewed the documents.  You’ve explained to your client the ins and outs, the pros and cons, the timing, expense and possible outcomes of bringing a judicial dissolution proceeding.  The client has given you the green light to start the lawsuit.  You’re at your desk, fingers on the keyboard, ready to draft papers.  What documents do you prepare, and where do you start?

If the case involves a closely held New York business corporation and you’re seeking judicial dissolution based on 50/50 deadlock or minority shareholder oppression, the rules laid out in Article 11 of the Business Corporation Law require you to file a "special proceeding" consisting minimally of two documents: (1) a petition and (2) an order to show cause (OSC).

The petition differs slightly in format but closely resembles an ordinary complaint in which you’ll set forth in numbered paragraphs all of the relevant factual allegations along with the legal claims and relief sought.  (Read here my recent post on the need to include detailed factual allegations in the petition rather than bare allegations of dysfunction or misconduct.)

The focus of this post is the OSC, which is a form of court order, prepared by the petitioner’s lawyer and affixed on top of the petition, submitted to the assigned judge for signature.  At its most basic the OSC requires the respondents to appear in court on a specified date to "show cause" why the relief demanded in the petition should not be granted.  It is used in special proceedings in lieu of the more familiar summons that accompanies a complaint in ordinary lawsuits.   

Continue Reading Dissecting the Order to Show Cause in Corporate Dissolution Proceedings

If you’re the majority member of a New York limited liability company (LLC), and either you have no written operating agreement, or you have one but it’s silent on the issue, repeat after me:  I cannot make a compulsory capital call; I cannot make a compulsory capital call; I cannot make a compulsory capital call.

Alternatively, you can read a recent decision by Kings County Commercial Division Justice David I. Schmidt in Georgi v. Polanski, Decision and Order, Index No. 10406/10 (Sup Ct Kings County Sept. 22, 2010), where the court denied a preliminary injunction application by a purported majority member of an LLC who sought to expel the minority member after he failed to comply with the majority member’s unauthorized capital call.

The facts in Georgi are relatively straightforward.  In 2004, Tina Georgi and Andrew Polanski as 50-50 members formed A&T Partners, LLC to own and operate commercial realty at 60 Pulaski Street in Brooklyn.  According to Georgi, she and Polanski made initial capital contributions of $40,000 and $90,000, respectively, plus they obtained a $200,000 mortgage loan secured by an adjoining property also co-owned by the two of them.  In 2008, Georgi obtained on A&T’s behalf a $640,000 construction loan which she alone personally guaranteed.  That same year Georgi caused A&T to return $40,000 to Polanski who by that time was unemployed.

Continue Reading Not a Capital Idea: Making Unauthorized LLC Capital Calls