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Business Divorce Epilogues

January 07, 2019

Over the years I’ve blogged about hundreds of court decisions in business divorce cases. Believe it or not, one of the things I like to do is track the cases I’ve written about — or at least those that survive the court’s decision — to see if the decisions lead to settlement as they often do but, more importantly, to see how the decisions shape the subsequent case proceedings and, of course, searching for later court rulings helpful to my business divorce practice and/or of potential interest to readers of this blog.

When I find a later decision that doesn’t deserve its own post usually I’ll just add an update blurb to the original post about the case. But occasionally there are follow-up decisions in distinctive cases whose denouement merits a bit more. Here are three of them:

The Kensington Publishing Case 

Four years ago, in a post entitled Voting Agreement Triggers Fight for Control of Family-Owned Publishing House, I wrote about Zacharius v Kensington Publishing Corp., a high-stakes fight for control of the largest independent publisher of mass-market books in the U.S. The company was founded by Walter Zacharius who died in 2011, leaving his second wife, Suzanne, with 59% of the voting shares and his two children by his first marriage with most of the remaining shares. He also left behind a 2005 Voting Agreement among himself and his two children giving them the power, following Walter’s death, to vote his shares in any election of Kensington’s directors.

Suzanne, apparently desiring to sell her majority stake to a major publishing house — a goal opposed by her two stepchildren, one of whom was the company’s President and CEO — brought suit in 2012 to have the Voting Agreement declared invalid on a number of grounds including the allegation that Walter never physically signed it.

In June 2014, Justice Eileen Bransten dismissed all of Suzanne’s claims save the one challenging the genuineness of Walter’s signature on the Voting Agreement as well as the authenticity of the entire Voting Agreement, finding that the complaint alleged sufficient discrepancies surrounding Walter’s signature to survive dismissal.

Four and a half years later, following (a) extensive discovery including 14 witness depositions and review of 44,000 documents, (b) Justice Bransten’s denial of Suzanne’s motion to amend her complaint, (c) Justice Bransten’s award of over $100,000 in sanctions against Suzanne for discovery abuses, and (d) appellate affirmances of both of the preceding rulings (read here and here), on December 27, 2018, Justice Bransten issued a final decision and order granting summary judgment dismissing Suzanne’s sole remaining claim (read here).

Based on Suzanne’s admissions and her failure to refute the defendants’ evidentiary submissions including forensic expert reports, Justice Bransten found no triable issue as to the authenticity of Walter’s signature on the Voting Agreement, instead finding that Suzanne’s contentions were “riddled with ‘whataboutism’ which fails to raise a dispute of fact” and that the Voting Agreement “was, in fact, executed by Walter Zacharius in 2005 and, as such, there was a meeting of the minds between the named parties to the Voting Agreement.”

Not exactly a bodice ripper of the sort published by Kensington, but nonetheless the end of a fascinating and instructive tale of dysfunction and dissension in a family-owned business.

The Candlewood Holdings Case

I can’t think of another business divorce case I’ve come across that has lasted as long as this one: 13 years.

You’d think with 13 years of litigation, there must be some fabulously successful, asset-rich company at stake. Not so. The two antagonists in Matter of ANO, Inc. v Goldberg have spent more than a decade as 50/50 shareholders fighting over a holding company that indirectly owns about 60% of a Massachusetts company that owns and operates (judging from what I saw on Google Earth) a none-too-impressive looking gas station, convenience store, and car wash outside of Boston. Go figure.

The litigation spanned at least three separate lawsuits and generated a slew of motions and decisions by trial and appellate courts. Along the way, I wrote about two court rulings in 2009 enforcing a disputed Nominee Agreement cementing the parties’ 50/50 stock ownership (read here and here). In 2013, Justice Stephen Bucaria granted a BCL § 1102 directors’ petition for dissolution (read here), only to be reversed in 2015 by the Appellate Division (read here). A second dissolution petition — this time based on deadlock — was granted by Justice Bucaria in 2016 (read here) primarily owing to the financial infeasibility of the operating company. That order was affirmed on appeal last month (read here).

In its decision last month, the appellate panel found that “[t]he evidence before the court demonstrated that the dissension between the two shareholders ‘posed an irreconcilable barrier to the continued functioning and prosperity of the corporation.'” Little wonder after 13 years of duking it out in court.

The Raharney Capital Case

Raharney Capital was huge news in business divorce circles when the Appellate Division, First Department, issued its decision in early 2016, affirming the lower court’s ruling declaring that New York courts lack subject matter jurisdiction over proceedings to dissolve foreign business entities, thus ending what had been a 20-year split with the Second and Third Departments. I wrote about it here.

If you thought that ended the matter in New York or anywhere else, think again. The case, which began in 2014, involves a dispute between the two, 50% members of a Delaware LLC known as Daily Funder, LLC which, before the falling out, operated a New York-based trade magazine and website devoted to the merchant cash advance and alternative lending industry. Not long after the lower court’s dismissal order, the two members — Raharney Capital, LLC and Capital Stack, LLC — locked horns in a new lawsuit filed in New York Supreme Court in which each accused the other of a series of contract, fiduciary and assorted other claims. In 2016, not long after the Appellate Division’s affirmance, Raharney Capital filed a second dissolution petition in Delaware which, in early 2017, was stayed by Chancery Court pending resolution of the second New York action.

The second New York lawsuit, now in its fourth year, experienced its usual share of discovery-related motions and, eventually, dueling summary judgment motions. In an interesting decision issued late last month (read here), Justice Eileen Bransten mostly applied Delaware law to pare down each side’s claims and allowed Capital Stack to replead some of its dismissed direct claims as derivative claims. Presuming Capital Stack follows through with an amended complaint, it will be seeking damages to Daily Funder allegedly caused by and when Raharney Capital effectively shut down Daily Funder’s business immediately after the lower court dismissed the first dissolution petition and transferred its contracts and other assets to a separate entity controlled by Raharney Capital known as deBanked.

The case has been reassigned to Commercial Division Justice Joel M. Cohen upon Justice Bransten’s recent retirement. Discovery is over, so at this point it’s either settle or go to trial. Either way, I suspect the case will resolve in New York without having to pick up again in the Delaware dissolution proceeding.