Winter Case Notes: Oppression of the “Gifted” Minority Shareholder and Other Recent Decisions of Interest
February 11, 2019
Notwithstanding we’ve had no more than a dusting of snow thus far in my downstate New York neck of the woods, welcome to another edition of Winter Case Notes in which I visit 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.
This year’s synopses feature cases involving minority shareholder oppression claims in a father-daughter dispute previously reported on this blog; an appellate decision affirming the dismissal of a books and records action involving Delaware LLCs; one case granting and another denying claims for advancement and indemnification of legal expenses; the dismissal of claims alleging wrongful transfer of the plaintiff’s LLC membership interest; and a decision compelling arbitration of a claim for wrongful removal of the plaintiff as a manager and member of an LLC.
Oppression of the “Gifted” Minority Shareholder
By “gifted” I’m referring not to the natural talents or intellect of a minority shareholder, but to her ownership of shares by way of a gift from a family member. Under the governing reasonable-expectations standard, can such a shareholder, who made no investment and has no involvement in the company’s business affairs, successfully petition for dissolution based on a claim of oppression by a majority shareholder based on the latter’s denial of her shareholder status?
That’s the interesting question addressed not for the first time by Manhattan Commercial Division Justice Marcy Friedman in Quazzo v 9 Charlton Street Corp., 2019 NY Slip Op 30097(U) [Sup Ct NY County Jan. 10, 2019]. I gave this case the full treatment in a post almost five years ago, on the occasion of Justice Friedman’s decision denying the father’s summary judgment motion seeking dismissal of the daughter’s petition to dissolve three corporations allegedly co-owned with her father and brother. At the time, and notwithstanding considerable documentary evidence of an actual conveyance of shares to his daughter including Schedule K-1s, the father argued that his intent was to convey shares only upon his death.
This time around, it was the daughter’s turn to seek a summary judgment of dissolution and, like her father’s prior effort, not only did she come up short, but Justice Friedman held that the daughter failed to proffer sufficient proof to confer standing on her to seek dissolution of two of the three corporations. As to the third corporation, Justice Friedman cited a multitude of tax and other documents confirming the daughter’s stock ownership, sufficient to confer standing but not enough to establish entitlement to dissolution as a matter of law based on factual issues raised by the father concerning allegations of financial mismanagement, denial of access to company records, etc.
For me, the most significant aspect of Justice Friedman’s recent decision was her finding that, because the daughter “did not commit capital to [the corporation], and did not have an active role in [the corporation],” and because she did not “submit legal authority,” her father’s “denial of her status as a shareholder of [the corporation] [does not] rise to the level of oppression warranting dissolution of the corporation.” Is this finding consistent with the Pappas and Pickwick Realty cases mentioned in my prior post on Quazzo? You be the judge.
LLC Manager’s Negative Determination of Valid Business Purpose Defeats Books and Records Action
Austin v Gould, 2019 NY Slip Op 00677 [1st Dep’t Jan. 31, 2019], is an appellate decision issued last month affirming a pair of decisions by Manhattan Commercial Division Justice O. Peter Sherwood in the third in a series of lawsuits starting in 2010 brought by the non-managing member of a group of real estate holding companies against the managing member over the latter’s alleged failure to pay certain Management and Acquisition Fees to the plaintiff.
The appellate panel agreed with Justice Sherwood that the plaintiff’s blunderbuss demand for access to the LLCs’ books and records was properly denied by the managing member, among other reasons, under a provision in the operating agreements granting members access to books and records “for valid business purposes as determined in the sole discretion of the Managing Member.” The plaintiff’s demand had no valid purpose, the courts held, based on the outcome of the prior lawsuits rejecting the plaintiff’s claimed entitlement to share in the disputed fees.
One Win, One Loss, in Cases Seeking Advancement and Indemnification
Here we look at two cases with different outcomes, both involving claims for advancement and indemnification, one contractually based on LLC agreements, the other statutorily based on § 724 of the Business Corporation Law.
In Thomas v G2 FMV, LLC, 2018 NY Slip Op 30650(U) [Sup Ct NY County Apr. 11, 2018], a case involving Delaware LLCs, former Manhattan Commercial Division Justice Shirley Werner Kornreich granted the plaintiff’s application for advancement and indemnification in connection with his defense of claims in a separate action. The LLCs argued, and Justice Kornreich disagreed, that the LLC agreements’ advancement and indemnification provisions did not cover the type of claims made against the plaintiff in a separate action and did not apply to plaintiff as a former managing member.
The defendant in 47-53 Chrystie Holdings LLC v Thuan Tam Realty Corp., 2018 NY Slip Op 32210(U) [Sup Ct NY County Sept 7, 2018], was less fortunate in his request for advancement and indemnification under BCL § 724. In that case, Manhattan Commercial Division Justice Saliann Scarpulla denied the defendant’s request on the ground that the action was brought against him as a shareholder rather than as a director or officer as required by the statute.
Statute of Limitations Defeats Claim for Wrongful Reduction of LLC Membership Interest
Konstantinidis v Pappas, 2018 NY Slip Op 32281(U) [Sup Ct Kings County May 25, 2018], decided by Brooklyn Commercial Division Justice Lawrence S. Knipel, centered on the plaintiff’s claim that, after the plaintiff turned down a request by the LLC’s de facto controller to reduce from 30% to 20% his membership interest in a realty holding LLC, the controller did so anyway without telling him. There was one not-so-small problem for the plaintiff: the reduction took place in 2003, some 12 years before he filed suit.
The defendants naturally sought dismissal under the statute of limitations applicable to the plaintiff’s claims for breach of the contract, tortious interference with contract, fraud, and conversion. Based on the plaintiff’s deposition testimony admitting that he learned of the reduction in 2003, and thereafter received Schedule K-1s reflecting the reduced interest, Justice Knipel granted the defendants’ dismissal motion.
Court Compels Arbitration of Plaintiff’s Claims for Wrongful Removal as LLC Manager and Member
In Milman v Thrane, 2018 NY Slip Op 32287(U) [Sup Ct NY County Sept 17, 2018], Manhattan Commercial Division Justice Jennifer G. Schecter denied the plaintiff’s motion to reargue her prior bench ruling staying the action because his claims challenging his involuntary removal as a manager and member of a New York LLC were subject to mandatory arbitration under the LLC’s operating agreement, which narrowly confined arbitration to “any dispute . . . relating to” a member’s “withdrawing from the Company or terminating his services for any reason.”
The plaintiff argued that the provision covered only a voluntary withdrawal but Justice Schechter disagreed, pointing to the operating agreement’s provision defining a member’s removal as an “Involuntary Withdrawal” which, the judge added, dovetailed with the arbitration provision’s reference to a withdrawal “for any reason.” Justice Schechter also concluded that the plaintiff’s claims seeking recovery of his capital account and certain distributions were arbitrable since they “related to” a member’s contractual entitlements upon withdrawal.