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Rare as a Dodo: Bifurcation in Business Divorce Trials

March 11, 2024

Jury trials in business divorce litigation are uncommon. Bifurcated business divorce jury trials are all but nonexistent.

But in Aronov v Khavinson (81 Misc3d 1242(A) [Sup Ct, Kings County Feb. 9, 2024]), we encounter the elusive specimen in the wild: a successful jury verdict on liability on a slew of business tort, quasi-contract, and equitable claims in the first phase of a bifurcated jury trial by an LLC owner against the entity’s three managers, including a lawyer.

Basic Principles of Bifurcation

For those not familiar, “bifurcation” refers to the practice of trying a case in two parts: a liability phase, followed, if the jury renders a plaintiff’s verdict on liability, by a separate damages phase.

Our readers who happen to be lawyers may associate trial bifurcation generally with the Appellate Division – Second Department, and with bodily injury or death claims specifically, not business divorce cases (see e.g. Castro v Malia Realty, LLC, 177 AD3d 58 [2d Dept 2019] [“For decades, trial courts in the Second Judicial Department have, as a general rule, conducted trials in personal injury actions in a bifurcated manner”]). In cases for “personal injury,” judges are “encouraged” to “direct a bifurcated trial of the issues of liability and damages” (Marisova v Collins-Brewster, 223 AD3d 891 [2d Dept 2024]).

One of the theories of bifurcation is that the jury should not reach the question of damages without first finding a viable case for liability. If a plaintiff’s damages case is strong, but liability weak, a unified trial of both liability and damages may unfairly incline a jury to sympathize with the plaintiff, disfavor the defendant, or otherwise permit its view of damages to influence its perception of liability. Or so the thinking goes. Hence, the bifurcated trial, where a plaintiff must prove liability in one trial before the jury may reach the question of damages in another.

But sometimes damages overlap with liability to such a degree that bifurcation may be impractical or unfair to the plaintiff. Where damages have “an important bearing upon the question of the liability,” a unified trial is warranted (Matthew H. v County of Nassau, 131 AD3d 135 [2d Dept 2015]).

In the end, bifurcation is “not an absolute given,” but a matter of discretion: it is the “responsibility of the trial judge to exercise discretion in determining whether bifurcation is appropriate in light of all relevant facts and circumstances presented by the individual case” (Rueda v Elmhurst Woodside, LLC, 187 AD3d 955 [2d Dept 2020]).

How did the trial judge – Kings County Supreme Court Justice Patria Frias-Colon – arrive at that exercise of discretion in Aronov? Let’s take a look.

The Facts of Aronov

According to his Amended Complaint, Aronov was an “unsophisticated investor” who contributed $150,000 in exchange for a 3 1/3% membership interest in an LLC formed for a real estate venture to develop and sell four condominiums at a home in Park Slope, Brooklyn (you can read the operating agreement here).

Aronov, suing derivatively on behalf of the entity, alleged that his co-owner, Khavinson, a practicing lawyer, conceived of the real estate project, owned the property prior to its conversion to condominiums, solicited Aronov’s investment, managed the construction as one of three “Operating Managers,” and handled all the entity’s legal work.

Allegedly Khavinson and certain other members used several hundred thousand dollars of entity funds for illegitimate purposes, including to pay the criminal legal defense fees of one of the defendants (according to the pleading, later incarcerated in Federal prison) and several alleged loans, including one to a “personal friend and doctor” of Khavinson allegedly jailed for insurance fraud.

The Note of Issue and Jury Demand

After four years of litigation, including three unsuccessful motions by defendants for dismissal (read the very terse decisions here and here), Aronov filed a Note of Issue demanding a jury trial. Had they wished, defendants likely would have been entitled to strike the jury demand as a matter of right, opting for a bench trial because the Amended Complaint included several equitable claims, including for accounting (see e.g. Ayromlooi v Staten Is. Univ. Hosp., 7 AD3d 475 [2d Dept 2004] [“By joining an equitable claim for an accounting of [the] corporation with legal claims to recover damages . . ., the plaintiff waived his right to a jury trial”]). But the defendants, for whatever reason, chose not to move to strike plaintiff’s jury trial demand. Defendants also chose, for whatever reason, not to move for summary judgment post-Note of Issue.

The Trial on Liability

In December 2023, a jury trial on liability commenced. Unfortunately for NYSCEF voyeurs, there was literally not one submission on the docket about the trial until after it concluded. But the trial testimony (Aronov and Khavinson’s are available here and here) and resulting verdict sheet paints a fairly clear picture.

Aronov proceeded to trial on 18 counts against the LLC’s three Operating Managers, each of whom defended against six causes of action: (i) breach of fiduciary duty, (ii) breach of duty of loyalty and good faith, (iii) fraud and deceit, (iv) accounting, (v), unjust enrichment, and (vi) conversion. The resulting verdict was a total victory for Aronov, the jury finding defendants liable on all 18 counts.

The Motion to Set Aside the Verdict

In a post-trial memorandum in support of a motion to set aside the verdict, defendants argued that Aronov’s case was predominantly just investor’s remorse after Aronov suffered a 16 2/3% net operating loss from his $150,000 investment with a return of just $125,000. All the members of the LLC, they argued, suffered similar but greater losses because of their higher ownership percentages. You can read the other two post-trial submissions here and here.

Justice Frias-Calon was not persuaded. In her Post-Trial Decision and Order, the Court wrote that the jury had “plenty of evidence” to find for Aronov, including that defendants:

  • Transferred the LLC’s funds to third parties, including to friends, for purposes unrelated to the business of the LLC;
  • Failed to keep loan documentation, loan agreements, or promissory notes documenting the alleged loans to, and repayments from, the LLC’s funds;
  • Failed to attempt to enforce its loan rights to collect a $750,000 loan the LLC made to a construction company owned by one of the LLC’s members to fund the settlement of a claim by a worker who was injured onsite;
  • Made a $250,000 loan to another defendant for the purposes that were unrelated to the LLC’s business;
  • Manipulated the LLC’s ownership interests without complying with the requirements of the operating agreement; and
  • Improperly provided at least one individual a membership interest in the LLC.

What About Damages?

What about the damages trial?

A little less than a month after the jury verdict, Aronov filed a motion by order to show cause to stay the damages trial because defendants allegedly had not yet produced an accounting of the LLC, as the jury directed in its liability verdict, and which Justice Frias-Colon apparently ordered produced two weeks prior to the scheduled damages trial. In his moving papers, Aronov argued that he would suffer prejudice if forced to proceed to a damages trial without the accounting.

In a short order, Justice Frias-Colon denied the motion, but apparently changed her mind, because on the Court’s case detail, the latest case status is “stay.” So apparently damages remain to be tried another day.

Why Bifurcation?

The fundamental question of Aronov: Why a bifurcated trial? I see at least three possibilities.

First, the usual practice of non-commercial Kings County Supreme Court trial-level courts is to conduct bifurcated tort trials. In other words, inertia may be what led to the bifurcated trial in Aronov.

Second, the defendants may have advocated for a bifurcated trial, hoping or expecting Aronov to be unlikely to succeed on liability.

Third, perhaps Aronov’s counsel advocated for a bifurcated trial, hoping that a verdict on liability on the accounting claim would either result in a settlement before the damages phase, open the door to some additional financial disclosure with which to prove damages in the damages phase, or both.

From my perspective, it seemed the liability and damages components of Aronov closely overlapped, weighing in favor of a unified trial. If I were Aronov’s counsel, I certainly would have advocated for a unified trial.

But, on the other hand, it seems that Aronov and his counsel are now leveraging the trial’s bifurcation to some strategic advantage, securing additional financial disclosure because of the jury’s verdict on liability for accounting. From this perspective, Aronov is a good example of clever use of trial bifurcation to the plaintiff’s strategic advantage.