Earlier this year, to honor the retirement of former Manhattan Commercial Division Justice Shirley Werner Kornreich, we published a special retrospective of some of her most notable business divorce decisions. This month, two of her former colleagues, Manhattan Commercial Division Justices Eileen Bransten and Charles E. Ramos, are themselves retiring. Justice Bransten concludes 25 years a jurist; Justice Ramos, 35 years on the bench.

With the departure of these two judicial titans, we here at New York Business Divorce thought it fitting to take another stroll down memory lane with a retrospective of some of their most significant contributions to New York’s business divorce jurisprudence. As Justice Ramos is senior career-wise, he will go first.

Three Memorable Decisions from Justice Ramos

For Justice Ramos, we focus on three LLC cases.

In the first, Roni LLC v Arfa, Mem. Decision, Index No. 601224/2007 [Sup Ct, NY County Apr. 14, 2009], Justice Ramos considered the important, first-impression question of whether LLC “promoters” or “organizers” (those who form the entity) owe fiduciary duties to investors / future LLC members. Continue Reading A Fond Adieu to Two Giants of the Manhattan Commercial Division Bench

Freeze-out2Unless otherwise provided in the operating agreement, majority members of LLCs formed under New York law — and under the LLC laws in most other states — effectively can expel a minority member by implementing a merger with another company owned by the majority members. The so-called freeze-out merger (a/k/a cash-out merger) compels the minority member to accept cash for his or her membership interest in lieu of equity in the surviving entity. The statutes generally protect the frozen-out member to the extent of providing the right to dissent from the merger and to demand a fair-value judicial appraisal.

As best as I can tell, until last month there were exactly four reported court decisions in New York involving challenges to LLC freeze-out mergers, each of which I’ve covered on this blog. In three of them — the Stulman case, the Alf Naman case, and the Slayton case — trial judges rejected various procedural and substantive objections to the mergers by the minority members. In the fourth case (SBE Wall), the trial judge denied a motion to dismiss an action seeking to invalidate a freeze-out merger, but the merger was never enjoined or rescinded and the case eventually settled.

Along comes a fifth case decided last month by Manhattan Commercial Division Justice Charles E. Ramos — who also decided the Stulman case — in which he denied the frozen-out minority members’ preliminary injunction motion seeking to enjoin the merger’s implementation after finding no basis for the minority members’ claim that the merger breached the operating agreement. Huang v Northern Star Management LLC, 2016 NY Slip Op 32194(U) [Sup Ct NY County Oct. 24, 2016]. Continue Reading Court Finds No Breach of Operating Agreement, No Basis to Enjoin LLC Freeze-Out Merger

Two years ago, I blogged about a decision in a case called Stulman v. John Dory LLC which, as far as I knew at the time, was the sole decision by a New York court in which a dissenting member of a limited liability company (LLC) sought to block an allegedly unlawful freeze-out merger. The court gave the merger a green light after finding that the ousted minority member in a restaurant business failed to establish that the merger was procedurally improper or “tainted with fraud, illegality, or self dealing.”

Since Stulman, there was one other reported New York case that I blogged about last year involving an LLC freeze-out merger, Alf Naman Real Estate Advisors, LLC v. Capsag Harbor Management, LLC, but that case focused almost entirely on the minority member’s challenge to the offered price for his membership interest and only peripherally on the merger’s technical compliance with the operating agreement, i.e., there was no claim of underlying fraud or misconduct.

Recently I came across a third, new decision in an LLC merger case more akin to Stulman, in which Manhattan Commercial Division Justice Melvin L. Schweitzer examined a disputed LLC freeze-out merger involving a realty management company. Unlike in Stulman, Justice Schweitzer’s decision in SBE Wall, LLC v. New 44 Wall Street, LLC, 2013 NY Slip Op 32104(U) (Sup Ct NY County Aug. 29, 2013), found that the dissenting plaintiffs’ allegations of misconduct by the controlling member, including misrepresentation, concealment, and use of a pretextual capital call in furtherance of a “sham” merger to deprive plaintiffs of their equity stake, fell within an exception to the LLC Law’s provision mandating appraisal as the dissenting members’ exclusive remedy, and enabled them to proceed with their claims seeking to invalidate and set aside the merger.

The combination of Stulman and SBE Wall raise an interesting question about the interplay of the LLC Law’s two, separate provisions that address the dissenting member’s exclusive appraisal remedy. But first let’s look at what happened in SBE Wall.

Continue Reading Action to Enjoin LLC Freeze-Out Merger Goes Forward

There are many reported decisions addressing the rights of dissenting minority shareholders in merged corporations to receive cash payment for the fair value of their shares pursuant to an appraisal proceeding (e.g., see last week’s post on the Barasch case). Dissenters’ rghts, embodied in statutes enacted over 100 years ago, protect minority shareholders from majority actions that fundamentally change the nature of their investment without their consent, while abrogating the ancient common-law rule that permitted a single shareholder to block a merger.

There’s also ample statutory and case law addressing the rights of the controlling shareholders to compel the cashing out of a minority shareholder for fair value subject to appraisal, in what’s known as a “freeze-out merger.”

But what about that relatively recent invention, the limited liability company? Do minority members of LLCs have a statutory right to demand payment for their interest if the LLC is merged into another entity? Can the majority members force a minority member to cash out his or her interest in a freeze-out merger? Is there any case law on the subject?

Yes, the LLC laws in New York and some other states make provision for dissenters’ rights.

Yes, the majority can effectuate a freeze-out merger.

Yes, there is decisional law but the cases are few and hard to find.

Continue Reading Freeze-Out Merger and the Limited Liability Company