Notwithstanding we’ve had no more than a dusting of snow thus far in my downstate New York neck of the woods, welcome to another edition of Winter Case Notes in which I visit my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

This year’s synopses feature cases involving minority shareholder oppression claims in a father-daughter dispute previously reported on this blog; an appellate decision affirming the dismissal of a books and records action involving Delaware LLCs; one case granting and another denying claims for advancement and indemnification of legal expenses; the dismissal of claims alleging wrongful transfer of the plaintiff’s LLC membership interest; and a decision compelling arbitration of a claim for wrongful removal of the plaintiff as a manager and member of an LLC.

Oppression of the “Gifted” Minority Shareholder

By “gifted” I’m referring not to the natural talents or intellect of a minority shareholder, but to her ownership of shares by way of a gift from a family member. Under the governing reasonable-expectations standard, can such a shareholder, who made no investment and has no involvement in the company’s business affairs, successfully petition for dissolution based on a claim of oppression by a majority shareholder based on the latter’s denial of her shareholder status? Continue Reading Winter Case Notes: Oppression of the “Gifted” Minority Shareholder and Other Recent Decisions of Interest

C’mon, New York lawyers, do you really want to spend your time, your client’s money, and bother the court litigating a dead-end claim that your client rightfully expelled his or her LLC co-member for alleged misconduct, however egregious, when you don’t have an operating agreement that says your client can do it?

Despite clear law on the subject, some have not gotten the word as made evident by Justice O. Peter Sherwood’s ruling last month in Matter of Goyal (Vintage India NYC, LLC), 2018 NY Slip Op 31926(U) [Sup Ct NY County Aug. 7, 2018].

First, some background: Over ten years ago, in one of my earliest posts on this blog, I observed that, in contrast to states whose LLC statutes authorize judicial expulsion a/k/a dissociation of a misbehaving member, New York’s LLC Law does not authorize a judicial expulsion remedy, and that non-judicial member expulsion can only occur if and under the circumstances specified in the operating agreement.

Two years later, a far more consequential observer, namely, the Appellate Division, Second Department, in Chiu v Chiu specifically held that courts lack authority to order expulsion of an LLC member for alleged misconduct, absent language in the operating agreement expressly providing for an expulsion remedy. Continue Reading Repeat After Me: You May Not Expel a Member of a New York LLC Unless the Operating Agreement Says So

The third time definitely wasn’t a charm for the plaintiff in Austin v Gould, 2017 NY Slip Op 31494(U) [Sup Ct NY County July 13, 2017], in which the court dismissed ill-pleaded claims for “unfettered and unlimited access to all books and records” of a series of Delaware limited liability companies and their wholly-owned real estate subsidiaries.

The decision by Manhattan Commercial Division Justice O. Peter Sherwood is the latest in a series of trial and appellate court rulings, spread over seven years and three separate lawsuits, rejecting claims by the LLCs’ non-managing one-third owner against the managing two-thirds owner allegedly for failing to distribute millions in management and acquisition fees.

The plaintiff’s two prior lawsuits — the first filed in 2010 and, after its dismissal, the second filed in 2013 — hit dead ends for various reasons including untimeliness and pleading deficiencies. The third lawsuit, filed in 2016, asserted claims for access to the LLCs’ books and records along with damages claims for breach of fiduciary duty and conversion. Continue Reading Books and Records Case Illustrates Crucial Importance of Pre-Suit Demand

SurchargeHidden in plain view in Section 1104-a (d) of the New York Business Corporation Law, which authorizes an oppressed minority shareholder to petition for judicial dissolution, is a provision empowering the court to adjust stock valuations and to “surcharge” those in control of the corporation for “willful or reckless dissipation or transfer” of corporate assets “without just or adequate compensation therefor.”

A second, fleeting reference to surcharge appears in Section 1118 (b) of the buy-out statute, empowering the court in its determination of the stock’s fair value to give effect to any surcharge “found to be appropriate” under Section 1104-a.

The ordinary definition of surcharge, at least in the context of settling accounts, is to show an omission for which credit ought to have been given. But what does it mean in its statutory setting, and how has it been applied by the courts? Continue Reading The Elusive Surcharge in Dissolution Proceedings

pizzaA self-described “world-renowned Neapolitan pizza chef” won a round in court earlier this month in a dispute with his business partner over control of a popular pizzeria located in Manhattan’s Greenwich Village. The court’s opinion by Manhattan Commercial Division Justice O. Peter Sherwood in Manzella v Caporuscio, 2015 NY Slip Op 31870(U)[Sup Ct NY County Oct. 6, 2015], granted summary judgment for the chef/majority member on his counterclaim against the minority member for breach of fiduciary duty and modified a prior Consent Order to authorize termination of the minority member’s employment for cause.

The case involves a Greenwich Village restaurant called Keste Pizza and Vino founded in 2009 by pizza chef Roberto Caporuscio. Since 2012 the business is co-owned by Caporuscio and Sandra Manzella as 55% and 45% members, respectively, of Keste Group LLC. Keste has a fairly standard operating agreement for member-managed LLCs, giving Caporuscio as majority member the controlling vote with a few exceptions requiring unanimous consent such as the admission of a new member.

Keste’s operating agreement (read here) doesn’t mention much less guarantee a member’s “employment” by the LLC. What it does say — which apparently stiffened spines on both sides in the lead-up to litigation — is that “[n]otwithstanding anything to the contrary contained in the provisions of this Agreement, the Members agree that Caporuscio and Manzella shall have primary responsibility for running the day-to-day operations of the Company” (¶ 4.1). Continue Reading Pizza Chef with Bigger Piece of LLC Pie Allowed to Terminate Minority Member’s Employment

RegretA Manhattan appellate panel’s unanimous decision last week in Brummer v Red Rabbit, LLC, 2015 NY Slip Op 02912 [1st Dept April 7, 2015], affirmed the dismissal of an LLC member’s claims for fraud and fiduciary breach based on the controller’s alleged concealment of impending equity investments by a pair of venture capital firms while the member was negotiating a partial buy-out of his membership interest.

The court held that the controller’s allegedly false representations regarding the company’s value and non-disclosure of investor interest “were neither relied upon nor material to plaintiff’s decision to sell.”

It’s an interesting contrast, to put it mildly, with the PF2 Securities case that I wrote about last week, in which a trial court refused to dismiss a minority shareholder’s fiduciary breach claim also based on an allegedly under-valued buy-out and the controller’s alleged withholding of financial information. In that case, the court held that the shareholder was “entitled to receive a fair market value for his stock after fair and complete disclosure and valuation.”

The complaint in Brummer (read here) alleged that around 2005 the plaintiff invested $25,000 in consideration of a 7% membership interest in a start-up venture called Red Rabbit that delivers “healthy” meals and snacks to New York metro area schools. After a period of modest growth, in 2010, the controlling member offered to buy back 6% for $28,500 using a percentage-of-revenue formula based on 2010 annual revenue of $475,000. He subsequently raised the offer to $40,000 which the plaintiff accepted, leaving plaintiff with a 1% membership interest. Continue Reading Another Case of Seller’s Remorse Bites the Dust