A Trip Down Business Divorce Lane with Recently Retired Justice Shirley Werner Kornreich

June 11, 2018

With a genuine sense of loss, we bid adieu to Manhattan Commercial Division Justice Shirley Werner Kornreich, who retired at the end of May after more than three decades of service on the bench, including nearly ten years as a Justice of the Commercial Division. Her accomplishments are many and varied. She is a detailed and scholarly writer. She ran an orderly and efficient part. Invariably well prepared, she asked probing questions at oral argument, arriving quickly at the “nub” of the issue. It was a pleasure and a luxury to be a litigant in her part.

Justice Kornreich also knew and understood as well as any judge the complexities and dynamics of business divorce cases.

As a testament to Justice Kornreich’s quality as a jurist, this blog has written about her opinions on many an occasion, with some of her decisions receiving repeat treatment. Rather than quantify her massive body of work, this week’s post will summarize a half dozen or so of Justice Kornreich’s more memorable decisions in the area of business divorce. You can click on the case name to read the earlier post.

In Schindler v Niche Media Holdings, LLC, 1 Misc 3d 713 [Sup Ct, NY County 2003], Justice Kornreich became the first court in New York to truly analyze the meaning of the LLC dissolution statute, Section 702 of the LLC Law. The court held, “While this standard has never been construed in the case law, the Court interprets it to mean that judicial dissolution will be ordered only where the complaining member can show that the business sought to be dissolved is unable to function as intended, or else that it is failing financially.” Though Justice Kornreich’s “failing financially” prong received some criticism at the time as unsupported by the plain language of the statute itself, years later the Appellate Division – Second Department, relying upon Schindler, adopted her standard in Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121 [2d Dept 2010].

In JG Club Holdings, LLC v Jacaranda Holdings, LLC, 35 Misc 3d 1217 [A] [Sup Ct, NY County 2012], Justice Kornreich became the first court in New York to hold that a member of a member of an LLC lacks standing to sue to dissolve the entity. In other words, the court held, there is no derivative standing to sue to dissolve a New York LLC. Under LLC Law 702, one must be an actual member of the LLC to have standing to sue for dissolution.

In Zelouf v Zelouf, 2013 NY Slip Op 32073(U) [Sup Ct, NY County Aug. 30, 2013], Justice Kornreich declined to invalidate the freeze-out merger of a corporation cashing out a minority shareholder’s interest in the business on the eve of a jury trial, rendering the member’s exclusive remedy an appraisal proceeding under Section 623 of the Business Corporation Law. The court noted that whether “the tactic employed by defendants – a ‘freeze-out’ merger on the eve of a trial . . . appears to be an unsettled question” in New York. Despite the obvious “purpose and effect of the merger” being “to buy out plaintiff’s shares so that she would lack standing to maintain her derivative claims,” the court ruled that “since the ultimate right of plaintiff to recover on her derivative claims will be preserved in the appraisal proceeding and there has been no showing that the proposed merger is ‘unlawful or fraudulent,’ the court will not enjoin the merger.”

In Zelouf Intl. Corp. v Zelouf, 45 Misc 3d 1205 [A] [Sup Ct, NY County 2014], a follow-up to her earlier freeze-out merger decision, Justice Kornreich ruled in a post-trial appraisal proceeding decision brimming with helpful insight for practitioners on the standards for fair value appraisals, that it would be unfair under the facts of the case to impose a discount for lack of marketability (DLOM) to a 25% corporate interest, ruling that “no New York case stands for the proposition that a DLOM must be applied to a closely-held company.” The court ruled that the company was unlikely to ever be sold – it “will always remain under the control of the Zelouf family. This makes the company’s illiquidity irrelevant, mooting the concern for which a DLOM accounts.” Two months later, on reargument in Zelouf Intl. Corp v Zelouf, 47 Misc 3d 346 [Sup Ct, NY County 2014], Justice Kornreich adhered to her prior decision declining to apply DLOM, which the Court ruled “would be the economic equivalent of imposing a minority discount” which is “not permitted under New York law.”

In Slayton v Highline Stages, LLC, 46 Misc 3d 450 [Sup Ct, NY County 2014], Justice Kornreich become one of a handful of Commercial Division Justices to consider – and to all agree – that Section 407 of the LLC Law permits the majority members of an LLC, unless otherwise prohibited by an operating agreement, to consummate a merger of the LLC under Section 1002 of the LLC Law by written consents without prior notice or a meeting of the members.

Last but not least, in Shawe v Elting, 2017 NY Slip Op 31406(U) [Sup Ct, NY County June 29, 2017], Justice Kornreich made her contribution to the sprawling TransPerfect Global litigation emanating from Delaware Court of Chancery based heavily upon a 104-page post-trial decision by Chancellor Bouchard ordering a forced buyout of a 50% stake in a highly-successful translation services business. Noting that the Chancery Court’s decision “was a massive win for Elting” and “amounts to a worst-case-scenario loss of Shawe,” the court blasted Shawe’s new complaints as “collateral challenges to the loss he suffered in Delaware,” which pretended “as if the Delaware proceedings, and its notable holdings, never occurred,” and were “replete with revisionist history that borders on downright frivolity.” “It is time for this saga to end,” the court declared, dismissing all three complaints. Just two weeks ago, in Shawe v Elting, 2018 NY Slip Op 03644 [1st Dept May 22, 2018], the Appellate Division – First Department affirmed Justice Kornreich’s dismissal decision in all respects.

This list is just a tiny sample of the many valuable opinions Justice Kornreich issued over the years in the area of business divorce. She was a source of constant inspiration for this blog and she will be missed.