Winter Case Notes: De Facto Partnership and Other Recent Decisions of Interest
February 06, 2017
Welcome to another edition of Winter Case Notes in which I clear out 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.
And speaking of digging deeper, if you don’t already know, New York’s e-filing system has revolutionized public access to court filings in most parts of the state. The online e-filing portal (click here) allows searches by case index number or party name. Once you find the case you’re looking for, you’ll see a chronological listing with links allowing you to read and download each pleading, affidavit, exhibit, brief, decision, or other filing. No more trips to the courthouse basement to requisition paper files!
This year’s synopses feature matters that run the gamut, from a claimed de facto partnership, to several disputes pitting minority against majority shareholders, to an LLC case in which the court resolved competing interpretations of a somewhat murky operating agreement.
Court Rejects De Facto Partnership Claim Involving Hamptons Realty Brokerage
DeCristofaro v Nest Seekers East End, LLC, 2017 NY Slip Op 50074(U) [Sup Ct Suffolk County Jan. 11, 2017]. In 2011 the plaintiff, a successful real estate agent in the Hamptons, moved to the Southampton branch of a competing brokerage pursuant to a commission agreement designating him an independent contractor. The agreement included an addendum that provided the plaintiff with a “‘bonus” of 25% of the Southampton office’s “net earnings”; gave him a “Managing Partner” title; and provided that the parties “shall make best efforts to convert this agreement into an operating partnership agreement formed as a single purpose entity for the management and ownership” of Southampton offices. A draft agreement thereafter was circulated but never executed, and the relationship unraveled for various reasons culminating with plaintiff’s departure in late 2011, following which he sued and eventually went to trial on his claim for breach of agreement giving him a 25% de facto partnership interest in the defendants’ Southampton operations. The court’s post-trial decision, by Suffolk County Commercial Division Justice Elizabeth H. Emerson, analyzed the various factors bearing on the existence of a partnership-in-fact in the absence of a written agreement (sharing of profits and losses, ownership of partnership assets, joint management and control, etc.) and concluded that the plaintiff failed to establish the formation of a de facto partnership. The court also relied on Real Property Law § 441-b and 19 NYCRR 175.22 which prohibit a licensed real estate salesman such as the plaintiff from owning an interest in a realty brokerage organized as a corporation, LLC, or partnership.
Court Resolves LLC Members’ Dispute Over “Return on Capital” vs. “Return of Capital”
Calabrese v AJG Parkview Corp., Short Form Order, Index No. 602920/15 [Sup Ct Nassau County Dec. 7, 2016]. This is a complex dispute involving multiple lawsuits between 50-50 members of an LLC formed to develop and construct a three-phase condominium project. One member provided the capital; the other served as managing member and oversaw construction through his separate development company. The central dispute between the parties was over the interpretation and application of the defined terms “First Preferred Return” and “Second Preferred Return” in the operating agreement’s article governing distributions, made more complicated by seemingly inconsistent provisions, on the one hand, precluding payment of interest on a member’s capital contribution and, on the other hand, entitling the capital member to “a return . . . equal to 12% per annum, compounded quarterly, on such capital contribution.” In the decision by Nassau County Commercial Division Justice Stephen A. Bucaria, the court held that the preferred returns “were intended to provide for a return of capital to the capital member, rather than interest, or a return on capital,” and accordingly declared that the two members were required to split profits 50-50 once the capital member recovered its $2.6 million capital contribution.
Minority Shareholder Wins Preliminary Injunction Applying Shareholders’ Agreement to Later-Acquired Affiliates
Ciment v Spantran, Inc., 2017 NY Slip Op 30039(U) [Sup Ct NY County Jan. 6, 2017]. The headline from this decision, in a suit brought by a minority shareholder of a translation services company against the controlling shareholder, is the court’s grant of interim injunctive relief based on application of Corporation A’s shareholders’ agreement to later-acquired or later-formed Corporations B and C. The shareholders’ agreement provided that it applied to Corporation A “and all business entities owned by” Corporation A. Some years later, the minority and majority shareholder acquired in their own names a related business (Corporation B), which in turn spun off a third business (Corporation C). The two shareholders also entered an interim agreement that was never finalized, defining the three corporations as “Common Entities.” The minority shareholder subsequently sued to enjoin the majority shareholder from taking certain actions concerning Corporations B and C based on governance provisions in the Corporation A shareholders’ agreement requiring unanimous consent. The majority shareholder argued that the shareholders’ agreement did not apply to Corporations B and C, but Manhattan Commercial Division Justice Charles E. Ramos disagreed, finding that the language “and all business entities owned by” in the shareholders’ agreement, buttressed by the “Common Entities” language in the later interim agreement, demonstrated the parties’ intent that the shareholders’ agreement be applied to Corporations B and C.
Receiver Appointed in Family Feud Over Realty Business
Laffey v Laffey, Short Form Order, Index No. 609953/16 [Sup Ct Nassau County Jan. 12, 2017]. This case involving a multitude of family-owned realty brokerages bears a slight resemblance to the preceding one, in that the minority shareholder here sought interim relief — the appointment of a temporary receiver — extending to companies in which he had no equity stake. The dissension that pitted two brothers against a third stemmed from an unusual arrangement initiated by the founding father in which the sons ended up owning some of the realty offices individually and some jointly, which led to accusations of unlawful competition and diversion of commission and other assets in breach of fiduciary duty. Finding that the parties “have demonstrated that they are incapable of conducting the Laffey real estate brokerage business as equal one-third owners” and that there was “a danger of irreparable loss or waste of the business,” Justice Bucaria appointed a receiver for the jointly-owned business as well as certain new companies formed by the two defendant brothers “because of defendants’ commingling of assets of the jointly-held companies with their companies and in order to protect the viability and good will of the jointly-held companies.”
Parties’ Conflicting Submissions Warrant Evidentiary Hearing of Minority Shareholder’s Dissolution Petition
Kocak v Dargin, 2017 NY Slip Op 30051(U) [Sup Ct NY County Jan. 4, 2017]. This proceeding for judicial dissolution of a Turkish restaurant business under BCL § 1104-a, brought by a minority shareholder claiming oppressive conduct by the majority shareholder, mostly fits the standard freeze-out scenario in which the petitioner accuses the majority of terminating his employment, compensation, distributions, and access to company bank accounts and information. Occasionally such petitions are summarily resolved in the petitioner’s favor, but here the court, by Manhattan Supreme Court Justice Geoffrey D. Wright, denied the respondent’s dismissal motion and ordered an evidentiary hearing based on the respondent’s conflicting allegations that the petitioner failed to perform his duties and that the respondent was the 100% shareholder based on an alleged buy-out arrangement. The court’s decision also rejected the respondent’s argument that the petition was defective because it “failed to provide alternative remedies to liquidation,” citing the Court of Appeals’ seminal 1984 decision in Matter of Kemp & Beatley [Gardstein] for the proposition that “the appropriateness of dissolution is vested with the court, as is the alternative relief that can be fashioned by the court.”