I’m delighted to present our 15th annual list of the past year’s ten most significant business divorce cases.
This year’s list includes decisions by New York’s trial and appellate courts concerning a smorgasbord of interesting issues involving limited liability companies, closely held and not-for-profit corporations, and partnerships. All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:
McCormack v Kuras In this case, Manhattan Commercial Division Justice Joel Cohen rejected attempts by majority members of a realty-holding LLC to remove the minority member as the LLC’s designated, sole managing member where the operating agreement (a) was silent on manager removal and (b) required unanimous member consent to amend the operating agreement. The dispute erupted when the managing member, to whom the operating agreement gave sole authority to sell the LLC’s realty, began exploring a sale. The key legal issue in the decision was whether the majority members could remove the managing member under LLC Law 414’s default rule allowing a majority in interest to remove or replace a manager with or without cause. Justice Cohen held that the default rule did not apply in the absence of any reference to removal in the operating agreement naming a specific person as manager. Recognizing the paucity of case authority, he also commented “it would be helpful” to have appellate guidance surrounding the applicability of the LLC Law’s default rules. And how!
O’Donnell v Fleetwood Park Corp. When one of the apartment owners in a 478-unit Yonkers co-op decided to run for a board position and requested a list of the co-op’s shareholders for his campaign, the property manager allowed him to view (but not copy) an out-of-date list from which a number of names and addresses were redacted supposedly at the request of owners who requested privacy. The disappointed shareholder brought a books and records proceeding to obtain a copy of the updated, unredacted list. The lower court ruled that the shareholder was not entitled to the records under BCL 624 due to his defective affidavit required by the statute, but nonetheless granted his petition based on his common-law right of inspection. In a decision arguably expanding the courts’ discretionary authority to compel inspection of shareholder records, the Appellate Division, Second Department subsequently affirmed the decision, finding that the shareholder “pleaded and proved that he had a proper purpose for seeking the information” and that “no substantial question of fact existed as to the petitioner’s good faith and proper purpose.”
People v National Rifle Association, Inc. In this headline grabbing litigation, the New York Attorney General sued for judicial dissolution of the not-for-profit NRA based on an alleged pattern of “self-dealing and lax financial oversight” at the NRA’s “highest levels,” especially its top executive Wayne LaPierre. The AG sought dissolution under provisions of the Not-for-Profit Corporation Law addressing fraudulent business practices and other misuse of corporate assets. The NRA moved to dismiss the petition, calling it a “political vendetta” and arguing that the petition failed to state a viable claim. The decision by the above-mentioned Justice Joel Cohen agreed with the NRA that the extreme sanction of dissolution was not warranted, finding that the NRA was still capable of “continuing its legitimate activities on behalf of its millions of members,” that the AG’s petition “does not allege the type of public harm that is the legal linchpin for imposing the ‘corporate death penalty,’” and that the AG can only seek judicial dissolution in cases involving “a grave, substantial and continuing abuse, involving a public rather than a private right, by the corporation.”
Stile v C-Air Customhouse Brokers-Forwards, Inc. Under New York law, is there a viable cause of action seeking money damages for “oppressive” conduct by a controlling shareholder, or is oppression solely ground for judicial dissolution under BCL 1104-a as has been recognized by case precedent? In Stile, the lower court denied dismissal of claims for dissolution and for money damages brought on behalf of the estate of a deceased minority shareholder. On appeal, the Appellate Division, First Department, upheld dismissal of the dissolution claim but reinstated the minority shareholder oppression claim seeking money damages “to the extent this claim is based on defendants’ refusal to recognize plaintiff as a shareholder.” A narrow fact-specific ruling, or opening the door to a whole new breed of oppression claims? Only time and new cases will tell.
Max v ALP, Inc. Section 402(b) of the Business Corporation Law authorizes inclusion in the certificate of incorporation of a provision eliminating or limiting the personal liability of directors to the corporation or its shareholders for any breach of duty absent bad faith, intentional misconduct, knowing violation of law, or personal gain to which the director is not legally entitled. In this case, involving a dispute between siblings over a company founded by their father, the artist Peter Max, to market his artwork, the subject corporation’s certificate included exculpatory language tracking section 402(b). That language, plus the business judgment rule, put the kibosh on a lawsuit by one of the siblings against the other complaining about being cut out of the business and making business decisions he disagreed with. In its decision affirming the lower court’s dismissal of the suit, the Appellate Division, First Department, held that the complaint failed to plead facts permitting an inference of bad faith or intentional misconduct, and that while the plaintiff “might disagree with decisions of ALP’s Board of Directors,” the challenged decisions were beyond judicial inquiry under the business judgment rule.
Ashkenazy v Gindi The court’s opinion in this case by Manhattan Commercial Division Justice Andrea Masley, weighing in at 132 pages, offers a master class on drafting capital call provisions in joint venture agreements. The plaintiffs sued the defendants for failing to fund their share of around $9 million in capital calls for seven realty-holding joint ventures variously organized as LLCs, TICs, and a limited partnership. Each governing agreement utilized one of four different capital call provisions. The court’s detailed analysis resulted in a pair of claims for breach of contract and breach of the implied duty of good faith and fair dealing being sustained, and another pair of claims for breach of contract and breach of the implied duty of good faith and fair dealing being dismissed. As one would expect, the devil was in the details of the drafting.
Shalov v Brisbane Associates, L.P. Until Shalov, there was next to no case law applying or interpreting section 1006 of the LLC Law authorizing conversion of limited partnerships to LLCs. The plaintiff-holder of a 1% limited partnership interest brought suit challenging the legality of such a conversion approved by the other 99% or, alternatively, demanding a fair-value appraisal of her former interest. The court’s scholarly opinion by Manhattan Justice Nancy Bannon rejected the plaintiff’s procedural and substantive objections to the transaction, holding that the two-step design of the conversion did not fall within the scope of section 1006 and that “while the Plan ultimately resulted in former partners holding various membership interests in the Company, the Company was never considered to be the same entity as the Partnership and did not assume the Partnership’s obligations.”
Hoffman v S.T.H.M. Realty Corp. This case presents a classic fact pattern involving a dispute among the grandchildren of the companies’ founders, pitting an “outside” shareholder seeking to monetize her shares against the “inside” shareholders who managed the companies and drew compensation. The companies were formed in 1950 to manufacture and sell seltzer and to own the real estate used for the business. Decades later, the seltzer business fizzled but the real estate mushroomed in value to over $40 million. The outside shareholder sued to dissolve the companies, claiming to be the victim of oppressive conduct by the majority. In a post-trial ruling, Brooklyn Commercial Division Justice Lawrence Knipel dismissed the dissolution petitions, finding that the petitioner’s “frustration” of her desire to liquidate the companies’ realty and distribute the proceeds “is decidedly not the frustration [of reasonable expectations] needed for liquidation under BCL 1104-a” and that “New York law permits the three shareholders controlling 75% of the shares to block the remaining shareholder, with whom, they profoundly disagree, from corporate management.”
Sage Systems, Inc. v Liss Rare is the agreement among co-owners of business entities lacking a provision for indemnification of officers, directors, managers, etc. In Sage, the New York Court of Appeals put its large imprint on the issue of when such provisions cover claims brought not only by third parties but also direct claims between business partners. Breaking with prior case precedent, and launching from the platform of the “American Rule” under which prevailing parties in litigation generally may not recover attorneys’ fees from the losing party absent an express agreement to the contrary, the court held that a claim for indemnification of legal expenses arising from claims between business partners must not rest on “broadly worded indemnification provisions” but “must contain ‘unmistakably clear’ language of the parties’ intent to encompass such actions.”
Chernomordik v Ocean Sand Development, LLC The primary test for judicial dissolution of New York LLCs is whether the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved. In Chernomordik, the LLC was formed in 2007 to acquire waterfront acreage in the Dominican Republic for the purpose of developing an ambitious condominium project. The project, however, never obtained the necessary government permits and the land remained barren for the next 14 years, at which point a 5% member sued for judicial dissolution. The operating agreement’s stated purpose was to “own, lease, develop, manage, and operate the premises . . . and to engage in such other lawful activities for which [LLCs] may be organized under the laws of the State of New York.” The LLC moved to dismiss the complaint, arguing that the operating agreement contained no deadline for completing the project and that the value of the property “will skyrocket if and when the regulatory environment changes” in the Dominican Republic. That argument did not find favor with Brooklyn Commercial Division Justice Leon Ruchelsman who denied the motion, finding that the defendants’ argument was “so speculative” and “abstract,” and that the plaintiff “may be able to establish the stated goal of the entity will never be achieved.”
Together with my partners and fellow bloggers Frank McRoberts and Peter Sluka, we wish all our readers a happy, healthy and prosperous New Year!