Top Ten Business Divorce Cases of 2019
December 30, 2019
Imagine staging an Oscars-like award ceremony for business divorce cases:
Emcee: And the award for Best Oppressive Conduct Toward a Minority Shareholder in a Family-Owned Business Not Resulting in Dissolution goes to, envelope please, Egbert versus Egbert! [Audience applause] Accepting the award for the majority shareholders is Cruella Egbert.
Ms. Egbert: Thank you, thank you! Wow! What an honor! I just want to give a shoutout to Judge Cataract for not seeing through my argument that cousin Edsel’s reasonable expectations were not defeated when I threw his ass out of the company, cut off his family health insurance, and gave myself a large bonus. If Uncle Ralph and his lawyer are watching this, may you both rot in hell!
I can’t match the drama, but I’m nonetheless pleased to present my 12th annual list of this past year’s ten most significant business divorce cases.
This year’s list offers a good mix of business entities: six involve disputes among LLC members, two involve law firms organized as limited liability partnerships, one involves an accounting firm organized as a professional corporation, and one involves a regular close corporation. All are trial court decisions save one appellate ruling.
All ten decisions were featured on this blog previously; click on the case name to read the full treatment. And the winners are:
Matter of Straka v Arcara Zucarelli Lenda & Assoc. CPAs P.C., 62 Misc 3d 1064, 2019 NY Slip Op 29017 [Sup Ct Erie County Jan. 9, 2019]. I headlined this case involving an accounting firm as Minority Shareholder Oppression in the #MeToo Era. It’s the first and perhaps only reported judicial dissolution case in which a court upheld a female minority shareholder’s oppression claim based in part on her male co-owners’ toleration of offensive, demeaning, and condescending behavior in the workplace.
Advanced 23, LLC v Chambers House Partners, LLC, 2019 NY Slip Op 30173(U) [Sup Ct NY County Jan. 22, 2019]. In another first, the court in this case effectively upheld a bad-faith petitioner defense in denying a 50% member’s petition to dissolve a realty holding LLC based primarily on the petitioner’s refusal to refinance the building’s mortgage in an effort to force out the other elderly, husband-and-wife 50% members.
Barrison v D’Amato & Lynch, LLP, 2019 NY Slip Op 30905(U) [Sup Ct, NY County Apr. 2, 2019]. This case, involving a damages suit by an expelled “partner” of a law firm who previously sued unsuccessfully for judicial dissolution, hinged on the plaintiff’s primary reliance on tax Form K-1s he received identifying him as a “general partner” in arguing that defendants were estopped from denying his general partner status. The court rejected plaintiff’s position based on lack of any other indicia of being an equity partner including capital investment, agreement to share losses, or control over firm policies and hiring.
Hanley v Hanley, 64 Misc. 3d 1202(A), 2019 NY Slip Op 50970(U) [Sup Ct Albany County June 13, 2019]. This is an unusual judicial dissolution case in which siblings battled over an estimated $50 million to $80 million of proceeds from the sale of the family-owned business. The court denied the respondents’ dismissal motion in which they argued unsuccessfully that their proposed $11 million severance package offered to the petitioner defeated his reasonable expectations as a minority shareholder.
Rosania v Gluck, 2019 NY Slip Op 32087(U) [Sup Ct NY County July 8, 2019]. In this case of first impression, the petitioner initially filed for judicial dissolution of 17 single-asset realty holding companies organized as Delaware LLCs. After respondents moved to dismiss the petition for lack of subject matter jurisdiction — New York appellate rulings uniformly hold that New York courts lack jurisdiction in dissolution cases involving foreign entities — the petitioner amended his petition to seek what he styled as alternative remedies including a forced sale of assets or a forced buy/sell. The court characterized the amended petition as an “ill-disguised attempt” at an “end run” around the jurisdictional proscription and granted respondents’ dismissal motion.
Capizzi v Brown Chiari LLP, 65 Misc 3d 1202(A), 2019 NY Slip Op 51471(U) [Sup Ct, Erie County Sept. 13, 2019]. This is the second case to make the top ten involving a law firm dissolution petition triggered when one of three partners withdrew from the partnership. The two other partners contended that the petitioner was collaterally estopped from claiming to be an equity partner based on his testimony many years earlier in another partnership lawsuit involving the same partners also triggered by another former partner’s withdrawal. The court rejected the collateral estoppel argument and held that the respondents themselves were estopped from denying petitioner’s partner status based on the partnership’s tax returns.
Roy Food and Wine LLC v Meregalli, 2019 NY Slip Op 32875(U) [Sup Ct NY County Sept. 25, 2019]. If you need a reminder that indeterminate membership interests in LLCs can create a mess, this case is it. The bare-bones operating agreement tied each member’s voting percentage to his or her variable capital account, without defining what constitutes a capital contribution. The minority owners, contending that the founding majority member never made the $600,000 cash contribution he claimed, sued to enforce their newly claimed majority vote removing the founder as managing member. The founder claimed his capital account included non-cash contributions preserving his majority voting rights. The result? Summary judgment denied.
Sternlicht v Daniel Z. Rapoport Associates, L.P., 2019 NY Slip Op 08141 [1st Dept Nov. 12, 2019]. Talk about too little too late. The operating agreement for the realty holding LLC in this case defined the death of a member as an automatic dissolution trigger unless the remaining members vote within 180 days to continue the business. A member died. No vote was taken within 180 days. Two members sued to enforce dissolution. Did it work? Not a chance. The member died 11 years earlier at which time his full membership interest passed to his heirs as authorized under the LLC agreement.
Rubin v Baumann, 2019 NY Slip Op 08011 [1st Dept Nov. 7, 2019]. This case in its first trip to the appellate court, centering on a failed attempt to enforce buy-sell provisions in an operating agreement of a realty holding LLC, stands as a reminder of the need for strict compliance with the agreement’s notice requirements. The plaintiff fared better in a second trip to the appellate court when it ruled that the operating agreement required his consent as 50% member to the retention of the other 50% member’s separate company as property manager.
Acela Investments v DiFalco, C.A. No. 2018-0558-AGB, 2019 WL 2158063 [Del Ch May 17, 2019]. Can a deadlock resolution provision in an LLC agreement itself be the cause of deadlock? It can and was in this case in which the Delaware Chancery Court ordered dissolution of a start-up pharmaceutical company. The problem was, the deadlock provision didn’t define what constituted a conflict of interest for purposes of bringing in an independent person to cast the deadlock breaking vote, nor did it specify who determines the existence of a conflict of interest.