Top 10 Business Divorce Cases of 2021
December 27, 2021
It’s been another year of important case law developments in business divorce controversies. I’m pleased to present my 14th annual list of the past year’s ten most significant cases.
Consistent with the LLC’s growing dominance in the realm of closely held business entities, six of the cases on this year’s list involve disputes among LLC members over various issues including cash-out merger, arbitration, distributions, dissolution, and capital calls. The remaining cases involving corporations feature decisions addressing Burford abstention in dissolution cases, board elections, shareholder oppression, and buy-sell agreements.
All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:
Farro v Schochet The Appellate Division, Second Department’s January 2021 decision in Farro, in which my firm represented the winning majority LLC members, is bound to have long-lasting consequences for LLC owners and, in particular, for LLCs whose majority members retain statutory default rights to implement cash-out mergers as a means of involuntarily dissociating minority members. In the first of two novel rulings, the appellate panel held that, in contradistinction to the rights of cashed-out minority corporation shareholders under BCL § 623(k) to assert fraud or other unlawfulness as grounds to enjoin or rescind the merger, a cashed-out LLC member’s sole recourse under LLCL § 1002(g) is to dissent and demand a fair-value judicial appraisal. In a second, key ruling the panel held that LLCL § 407(a)’s default rule, authorizing member action by written consent in lieu of meeting, supersedes LLCL § 1002(c)’s requirement of a member meeting on at least 20-days notice to vote on a proposed merger. Also noteworthy is the panel’s decision issued the same date in a companion appeal, dismissing the cashed-out minority member’s derivative claims for lack of standing as of the merger’s effective date (read here).
Yakuel v Gluck This case makes the Top 10 list for the second year in a row. The trial court’s 2020 decision, denying dueling applications to confirm and to vacate an arbitration award following the majority LLC member’s exercise of a repurchase option amidst allegations by the minority member that appraisal process by the company-selected appraiser was rigged, set the stage for last May’s ruling resolving a second round of dueling applications to confirm and to vacate the arbitrator’s post-hearing award adopting the minority member’s appraiser’s substantially higher valuation notwithstanding the repurchase agreement’s provision delegating the appraisal process to a single, company-selected appraiser. The court again left the parties without a victor, holding that the governing agreement did not authorize arbitration of the repurchase price and directing the parties to select a new, single appraiser to value the minority member’s interest consistent with the terms of the agreement.
Deal v Tugalo Gas Co. Over 25 years ago, the Second Circuit U.S. Court of Appeals in Friedman v Revenue Management, Inc. employed the Burford abstention doctrine to close the courthouse door to judicial dissolution proceedings even where diversity jurisdiction is present. Over the years a small number of District Court decisions in other Circuits have gone the other way, but the Eleventh Circuit’s March 2021 decision in Tugalo appears to be the first federal appellate court to disagree explicitly with Friedman, reasoning that Burford abstention as intended by the U.S. Supreme Court is a narrow exception to the federal courts’ “unflagging” duty to exercise subject matter jurisdiction, to be invoked only when federal court jurisdiction would interfere with an “ongoing state administrative proceeding (or, at the very least, enforcement action).” Will Tugalo inspire a challenge to Friedman in New York’s federal District Courts? One can only hope so.
Simon v Moskowitz The Appellate Division, First Department’s decision last year in Simon starkly illustrates the impotence of minority LLC members compared to minority corporation shareholders when it comes to majority overreach, due to the LLC Law’s omission of a dissolution remedy for majority oppression. The minority, non-managing member in Simon sued the managing member to compel distributions, based on allegations that the manager was hoarding millions in cash without justification with the aim of squeezing out the minority member. The manager countered that the large cash reserve was needed for contingent liabilities associated with the operation of the LLC’s residential apartment building. Both the lower court and the Appellate Division agreed with the manager that the broad powers granted him by the operating agreement and as well as the business judgment rule shielded from judicial scrutiny his decision to withhold distributions.
ALP v Moskowitz BCL § 619 provides that upon the application of a shareholder “aggrieved by an election” of directors, the court “shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require.” ALP involves a multi-faceted business dispute between the son and daughter as co-shareholders over the art company formed by their father, the famous artist Peter Max. In a suit by the daughter to permanently remove her brother from the board under BCL § 716(c) for various breaches of fiduciary duty, last June the court rendered an apparent first-impression decision applying § 619 to preliminarily enjoin the holding of a shareholders meeting called by the brother to elect a new board of directors.
Pachter v Winiarsky The limited grounds available for judicial dissolution of LLCs under New York law likely inspired the 50% member in Pachter to borrow from corporate law and include in his complaint a novel claim for common-law a/k/a equitable dissolution of the subject realty-holding LLCs. After winning a ruling in 2020 allowing the common-law claim to proceed, in two subsequent rulings on motions to reargue, the trial court reversed its initial ruling and held that the LLC Law’s provision in § 702 for judicial dissolution of LLCs, as interpreted by the Appellate Division in its seminal 1545 Ocean Avenue opinion, forecloses all other forms of judicial dissolution.
Durst Buildings Corp. v Edelman Family Co. It’s settled New York law that the state’s courts lack subject matter jurisdiction to entertain suits for judicial dissolution of foreign business entities. In Durst, the petitioning 50% member of a Delaware LLC nonetheless predicated the court’s authority to hear its dissolution petition on the operating agreement’s forum selection clause consenting to the exclusive jurisdiction and venue of New York courts in any litigation among the signatories, to which the respondent 50% member was happy to oblige, both parties being based in New York. After the court on its own questioned its jurisdiction to hear the case, the petitioner but not the respondent agreed the dissolution claim could not proceed, leading to the court’s predictable order last July dismissing the petition without prejudice to recommencing the case in Delaware.
Brady v Brady The Appellate Division, Fourth Department’s decision last April in Brady, affirming the lower court’ order summarily granting judicial dissolution of a corporation that owns over 400 acres of valuable farmland, laid bare what I described in my post as a “ticking time bomb of a family-owned, closely held business.” The case’s combustible ingredients included a domineering family patriarch in his late 80s in the middle of divorce with his second wife, conflict between half-brothers involved in the family farm business, no shareholders agreement, no adherence to corporate formalities, commingling of business and personal finances, and poor recordkeeping. The case also highlights the unhappy consequences to a respondent in a summary proceeding for judicial dissolution who replies to the petition and its documentary exhibits with denials and conclusory allegations lacking evidentiary support.
McGuire v McGuire Also making this year’s list is a second Fourth Department decision last August in another intra-family squabble, this time focusing on the legitimacy of dilutive capital calls by the managing member who, along with his five siblings, co-owned an LLC that managed the family’s real estate and health care businesses. The LLC’s operating agreement authorized additional capital calls and diluted the shares of those who didn’t contribute. Amidst already tense relations with his siblings, the manager issued a series of capital calls and diluted the interests of the siblings who did not contribute. In subsequent litigation, the siblings asserted claims that they were improperly diluted because the capital call notices were sent to them by email rather than by personal delivery or first class mail as specified in the operating agreement. The trial court ruled that the siblings had by course of conduct waived any objection to the manner in which the notices were delivered and granted summary judgment for the manager, but on appeal the Fourth Department reversed and reinstated the siblings’ claims based on the manager’s failure to abide by the operating agreement’s notice provision.
Estate of Collins v Tabs Motors Corp. The Top 10 list is capped by a November 2021 decision in another case handled by my firm, in which we successfully obtained for our client an order granting counterclaims for specific performance of the buy-sell provisions in a 2012 shareholders agreement, triggered by the adverse parties’ filing of a dissolution petition and requiring them to sell their shares at a fixed price. The court rejected the petitioners’ contention that the shareholders agreement was unconscionable, holding that the agreement and its pricing of the shares, which had not been updated since 2012, was “fundamentally fair,” and noting that in probate the petitioning estate had recently valued the estate shares using the same, fixed price.
Together with my co-bloggers Frank McRoberts and Peter Sluka, we wish all our readers a happy, healthy and prosperous New Year!