Recent Articles tagged dissolution procedure from LexMonitor

A Question of Procedure: Are Merits-Based Pre-Answer Dismissal Motions Allowed in Dissolution Proceedings?

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 27 Feb 2012 11:00:00 GMT

The New York Supreme Court's Commercial Division, which hears the bulk of corporate dissolution cases, operates in 11 counties across the state including Suffolk County on eastern Long Island. The pictured courthouse in Riverhead, New York, is home to the newest member of the Suffolk County Commercial Division, Justice Thomas F. Whelan, who last month handed down a thoughtful decision on an arcane but important procedural question: Can the respondent in a corporate dissolution proceeding move for dismissal in lieu of answering based on factual assertions contesting the merits of the petition?

In other words, can the respondent essentially move for a summary judgment of dismissal based on undisputed facts, prior to answering the petition? Or is the respondent limited at the pre-answer stage to a dismissal motion based on the facial inadequacy of the petition's allegations assuming them to be true, or on other non-merits grounds such as statute of limitations, lack of standing, lack of personal jurisdiction, etc.?

Justice Whelan's decision in Matter of Langella (Front Door Associates, Inc.), 34 Misc. 3d 1212(A), 2012 NY Slip Op 50058(U) (Sup Ct Suffolk County Jan. 13, 2012), involves a petition brought under §1104-a of the Business Corporation Law (BCL) for judicial dissolution of two closely-held corporations based on the controlling shareholder's allegedly oppressive conduct. The petitioner claimed to own 22% of Corporation #1 and 50% of Corporation #2. In lieu of answering the petition, the respondent corporations moved to dismiss the petition on the grounds that petitioner lacked standing to seek dissolution of Corporation #1 because he owned less than the requisite 20% voting interest, and based on the purported lack of merit of petitioner's claims of oppressive conduct with respect to Corporation #2.

Corporation #2: Dismissal Based on Lack of Merit

Justice Whelan's decision tackles the latter ground first. He notes that the procedural aspects of a special proceeding for judicial dissolution under BCL Article 11 are governed by the provisions of Article 4 of the Civil Practice Law and Rules (CPLR) "except to the extent that BCL Article 11 or some other applicable statute provides otherwise." CPLR §404, he goes on, requires that a legal defense to claims in a special proceeding must be raised in an answer as an "objection in point of law" -- a term the statute does not define -- or in a pre-answer motion to dismiss. Justice Whelan then cites a number of decisions in special proceedings of various sorts for the proposition that objections in point of law

should not involve a contest on the merits of the targeted claims, but instead, should be limited to the assertion of one or more of defenses in bar of the type contemplated by CPLR 3211(a). Accordingly, motions to dismiss special proceedings interposed pursuant to CPLR 404 . . . should be predicated upon defenses in bar, such as failure to state a claim, lack of standing or capacity to sue, statute of limitations, accord and satisfaction, res judicata and the others contemplated by CPLR 3211(a). [Citations omitted.]

Applying this rule, Justice Whelan concludes that the arguments made by the respondents in support of the dismissal motion regarding Corporation #2 must be denied because they

are not predicated upon objections in points of law within the contemplation of CPLR 404 and 3211(a). Instead, the respondents challenge the merits of the [petitioner's] claims for such relief by disputing the factual assertions set forth in the petition regarding the allegedly wrongful conduct which form the basis for the petitioner's demands for dissolution of [Corporation #2] under BCL 1104-a. Since such challenges are beyond the scope of this pre-answer application, the respondents' cross motion for dismissal of the petitioner's demands for dissolution of [Corporation #2] is denied. To the extent that the respondents' challenges may be read as being predicated upon legal insufficiency, they are rejected as unmeritorious.

Justice Whelan's discussion highlights the interplay between CPLR Article 4's rules generally applicable to all special proceedings, and the specific requirements in BCL Article 11 governing dissolution proceedings. BCL §1109 provides that, "[a]t the time and place specified in the order to show cause, or at any other time and place to which the hearing is adjourned, the court or the referee shall hear the allegations and proofs of the parties and determine the facts." The "hearing" specified in the order to show cause that initiates the dissolution proceeding (see BCL §1106) does not necessarily contemplate an evidentiary hearing.

A number of appellate court decisions, such as Matter of Williamson, 259 AD2d 362 (1st Dept 1999), Matter of HGK Asset Management, Inc., 228 AD2d 246 (1st Dept 1996), and Matter of Goodman, 200 AD2d 670 (2d Dept 1994), authorize the trial court to grant dissolution without an evidentiary hearing in cases where, whether by motion to dismiss or by answer, the respondent fails to raise material issues of fact in response to the petition's allegations of oppressive conduct or deadlock. These decisions effectively confer upon the trial court the same authority to make summary determinations upon the return date of the initial show cause order as exists under CPLR §3212 governing post-answer summary judgment motions generally. Such authority also is granted explicitly by CPLR §409(b) stating that the court "shall make a summary determination upon the pleadings, papers and admissions to the extent that no triable issues of fact are raised" and "may make any orders permitted on a motion for summary judgment."

Corporation #1: Dismissal Based on Lack of Standing

Justice Whelan finds no similar procedural bar to the respondents' motion to dismiss the petition as to Corporation #1, finding that the argument based on petitioner's alleged ownership of less than 20% of the corporation's shares, is a "quintessential defense in bar, namely, that the petitioner lacks 'standing' to prosecute his claims in this dissolution proceeding." In the discussion that follows, Justice Whelan helpfully cites numerous case authorities concerning the burden of proof to establish standing -- it rests on the petitioner; the necessity for a hearing to "aid the court's determination of the threshold ownership issue in those cases where the record is replete with factual issues"; and cases in "other special proceeding contexts, such as Article 78 proceedings," in which courts have denied pre-answer dismissal motions where issues of fact exist "without prejudice to the assertion of appropriate affirmative defenses in an answer, thereby leaving threshold issues presented on the pre-answer motion to the court's ultimate determination of the proceeding."

Based on the unresolved issues of fact surrounding the Langella petitioner's stock ownership, largely concerning his compliance or non-compliance with a shareholders' agreement that contemplated the issuance to him of additional shares upon satisfaction of certain conditions, Justice Whelan ultimately denies without prejudice the respondents' motion to dismiss the petition as to Corporation #1. "[I]n light of the procedural posture of this proceeding," he adds, "determination of the threshold issue of the petitioner's ownership should be made as part of the court's ultimate determination of the petition, as the same includes the petitioner's separate dissolution claims with respect to [Corporation #2]."

The Takeaway. As I've said before, if you're a petitioner in a dissolution proceeding you need to load up your petition (or supplemental affidavits) with as many facts as are available in support of your claims; bare "notice" pleading will not suffice. My advice to respondents wishing to oppose dissolution essentially is the same: whether you file an answer or a motion to dismiss, don't hold back, put in everything you've got by way of factual affidavits with as much documentary support as possible.

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Pizza Wars of the Shareholder Kind

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 12 Dec 2011 11:00:00 GMT

Who doubts that pizza runs in the veins of New York City inhabitants? According to one recent study by the NYC Economic Development Corporation, the city's five boroughs have almost 1,300 pizzerias. Which neighborhoods have the most? An EDC survey published last week gives top honors to the East Village in Manhattan, Ridgewood in Queens, and Williamsburgh in Brooklyn. Highest per capita concentration? Manhattan's East Harlem and Lower East Side.

There have been many stories about the intense competition and even litigation among the city's warring pizza purveyors, such as the lengthy court battle between the owners of the names "Famous Ray's" and "Original Famous Ray's." With so many pizza businesses, it's inevitable that some of them also fall victim to disputes among co-owners resulting in petitions for judicial dissolution.

Such is the case in Matter of DiMaria (JJM Pizza Corp.), 2011 NY Slip Op 33151(U) (Sup Ct Nassau County Nov. 28, 2011), involving a dispute between minority and majority shareholders of a small pizzeria chain located in northeast Queens known as Cascarino's Brick Oven Pizza. In a decision last month by Nassau Commercial Division Justice Ira B. Warshawsky, the court ruled that the parties' conflicting allegations concerning petitioner's claim of oppression and respondents' "unclean hands" defense prevent a summary determination of the petition. Justice Warshawsky also denied the petitioner's request for appointment of a temporary receiver.

Cascarino's operates its business through multiple entities. The petitioner, Joseph DiMaria, owns 20% of the shares in JJM Pizza Corp. and 30% of the shares in Bayside Pizza Corp. DiMaria also owns 25% of the shares in Cascarino Realty Corp. which owns the property on which the Bayside restaurant is situated. The remaining interests in the three entities are owned by brothers James and Vincent Coady. The Coadys and DiMaria are the directors and officers of the three entities.

DiMaria's petition alleges that, when the businesses were founded, the principals agreed that he would play an active management role as a salaried employee. The petition alleges that, beginning in early 2010, the Coadys began a course of oppressive, dictatorial and improper conduct towards DiMaria such as locking him out of the Bayside location, terminating his employment, salary and health benefits, excluding him from all management decisions, failing to distribute profits, and denying him access to company information and bank accounts.

DiMaria filed a petition for judicial dissolution in May 2011. The petition was brought under §1104-a of the Business Corporation Law, which authorizes a court to dissolve a closely held business corporation upon application by a shareholder holding at least 20% of the corporation's voting shares upon a showing of oppressive conduct or other improprieties by the controlling shareholders. DiMaria simultaneously applied for appointment of a temporary receiver and to compel the Coadys to turn over corporate books and records.

The Coadys' defense of the petition centers on the fact that, about one year before DiMaria petitioned for dissolution, they initiated a lawsuit in the names of JJM and Bayside accusing DiMaria of misappropriating corporate funds and other breach of fiduciary duty including opening a nearby Italian restaurant that competes against JJM and Bayside and luring away key employees of JJM and Bayside. The suit remains pending in Nassau County Supreme Court (which may or may not explain why DiMaria's subsequent dissolution petition was filed in Nassau County notwithstanding that each of the subject companies lists its "office" location in the records of the Secretary of State in Queens County which, under BCL §1112, normally would require filing of the petition in Queens County).

Justice Warshawsky's analysis neatly sets forth the applicable legal principles accompanied by a wealth of case citations:

"oppressive" conduct, not defined in the statute, means acts that substantially defeat the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise, to be determined on a case-by-case basis;
a shareholder whose own acts result in the complained of oppression cannot seek dissolution under §1104-a on the basis of those very acts; and
dissolution is a remedy of last resort, the appropriateness of which is vested in the sound discretion of the court.

Justice Warshawsky concludes that the application of these principles to the conflicting claims and proofs submitted in the parties' affidavits precludes a summary determination of the petition, writing as follows (citations omitted):

Here, and upon the relatively barren, pre-discovery factual record presented, the Court agrees that factual issues exist with respect to the petitioner's allegations and claims of improper and oppressive conduct. More specifically, and at this juncture, there are hotly disputed claims and credibility issues relating to the parties' respective actions -- including the petitioner's own pre-petition conduct. In sum, "[t]he conflicting affidavits submitted by the parties raise questions of fact regarding the merits of the petition and the appropriate remedy," if any, to be granted.

Justice Warshawsky also denies DiMaria's request for the "drastic remedy of the appointment of a receiver," which may only be granted to preserve corporate assets upon a "detailed evidentiary showing" of irreparable loss or waste to the corporation's property. "The petition's allegations that, inter alia, there is 'reason to be concerned about the financial well being' of the corporations," Justice Warshawsky writes, "are unsubstantiated and conclusory in nature."

The case in its current posture is fated for discovery proceedings and a later evidentiary hearing. From the fact that the decision comes well over 90 days after the filing of DiMaria's petition, we can infer that the majority shareholders have not elected under BCL §1118 to purchase DiMaria's shares for "fair value." What would it look like if the Coadys, either on consent or by court order, were given permission to make the election now? I can only speculate that the companies' claims against DiMaria in the prior-filed lawsuit would be factored by the Coadys' valuation expert into the business appraisals and then asserted as an offset to the valuation award. DiMaria's valuation expert likely would ignore such claims and, perhaps, make upward adjustments for the Coadys' alleged diversions. Not a pretty affair. But absent a global resolution based on a buyout, chances are at least one slice of each pizza pie sold by Cascarino's and DiMaria's restaurants for some time to come will be earmarked for legal fees.

Venue, Menu and Hebrew: Short Takes on Three Dissolution Cases

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 24 Oct 2011 10:00:00 GMT

For every blockbuster court decision there must be hundreds that don't merit a headline. Some of the "lesser" decisions nonetheless add ever-so-incrementally to our knowledge of the law.

Following are brief summaries of three recent decisions involving corporate dissolution and related disputes. Each decision, in its own small way, carries a lesson that helps lawyers better advise their clients and map their strategies.

Venue: Matter of Katz (Universal Fabrication Corp.), Mem. Decision, Index No. 2542/11 (Sup Ct Nassau County Sept. 12, 2011)

Venue means the place where a lawsuit is brought. Corporate dissolution proceedings have their own venue statute, Section 1112 of the Business Corporation Law (BCL), which dictates that they be brought in the judicial district in which the office of the corporation is located. "Office" for purposes of the statute means the county listed in the corporation's certificate of corporation regardless of the actual location of the corporate offices. (Read here a prior post on the subject.)

Improper venue is a non-jurisdictional, waivable defect. Section 511(b) of the Civil Procedure Law and Rules (CPLR), which applies generally to all civil lawsuits, requires that the defendant first serve a written demand on the plaintiff to change venue before making a motion. Depending on the plaintiff's response, under the statute the defendant can file a motion to change venue either in the court where the proceeding was brought or in the court where the action should have been brought. Also, when the defendant moves to change venue without making the pre-motion demand, the outcome changes from one as of right to a matter of the court's discretion.

In the Katz case, a proceeding was filed in Nassau County Supreme Court for dissolution of a corporation whose office is located in Brooklyn. Without making a pre-motion demand to change venue, the respondent filed a motion in the Nassau County proceeding for dismissal on the ground of improper venue. The question presented was whether BCL §1112 trumps CPLR §511(b) such that a respondent who seeks to change venue in a dissolution proceeding need not comply with the pre-motion demand requirement.

Katz offers a somewhat equivocal answer. The decision by Nassau County Supreme Court Justice Joel K. Asarch, ordering a transfer of the case from Nassau County to Brooklyn, states on the one hand, "to the extent that CPLR 511 is applicable here and the discretion of the Court is invoked," that the respondent's motion to change venue itself "suffices to give petitioner prompt and early notice of the improper designation of Nassau County as the venue for dissolution" of the Brooklyn corporation. On the other hand, Justice Asarch continues, "the Court believes that giving effect to Business Corporation Law §1112 should trump a technical failure to demand a change of venue prior to the making of the subject motion."

I suppose the cautious respondent's better approach after Katz is to serve a pre-motion demand to change venue. Otherwise, the respondent at least should be sure to make the motion to change venue promptly at the outset of the case.

Menu: Pierre v. Ellis, Short Form Order, Index No. 013958/07 (Sup Ct Nassau County June 8, 2011)

The menu in question belongs to Uncle Crab's Caribbean Restaurant, Inc., a Westbury, Long Island culinary establishment which, in addition to serving up jerk chicken, has now made an appetizer-size contribution to procedural law surrounding enforcement of shareholder buyout agreements reached in settlement of dissolution proceedings.

In 2007, Emile Pierre as 60% shareholder of the business sued for dissolution, as a result of which the other 40% shareholder, Jarvis Ellis, entered into a settlement agreement to purchase Pierre's shares for $30,000 payable over three years. Ellis consented to entry of a $40,000 judgment which was not to be entered unless he defaulted in payment. The court marked the matter discontinued with prejudice, except for enforcement of the terms of settlement.

In February 2011, Pierre filed a motion under the old proceeding's caption seeking an order deeming Ellis in default of the settlement agreement. Pierre's motion asked for entry of a money judgment in the amount of almost $20,000 (presumably equal to $40,000 less the payments received) plus his attorney's fees. Pierre also sought an order compelling Ellis to vacate the restaurant and return possession to Pierre. In opposition, Ellis argued that Pierre failed to provide him with access to the corporate books and records or a final statement of account.

The decision by Nassau County Commercial Division Justice Stephen A. Bucaria, who was not the judge who presided over the 2007 settlement, denies enforcement of the settlement, not on the merits, but on the ground that Pierre is required to bring a new, plenary enforcement action. Here's how Justice Bucaria explains it (some citations omitted):

A trial court has power to exercise supervisory control over all phases of pending actions and proceedings. Incident to this general authority, a court has discretionary power to relieve parties from the consequences of a stipulation effected during litigation. As a corollary to this power, a court may enforce a stipulation within a pending action or proceeding. "Because of its relative simplicity and lesser burden upon the litigants and the court," a motion within the action or proceeding tends to be the "favored procedural mode" (Teitelbaum Holdings v. Gold, 48 NY2d 51, 55). However, if the stipulation relates to an action which has previously terminated, it must be enforced in a plenary action. Thus, a plenary action is required if the parties have executed an express, unconditional stipulation of discontinuance or have entered judgment in accordance with the settlement.

Since the 2007 dissolution proceeding was marked discontinued with prejudice, Pierre cannot enforce the settlement by motion in that closed proceeding. Rather, he must start a new, plenary action by filing and serving a summons and complaint.

The Teitelbaum case quoted in the above passage, decided by New York's highest court in 1979, is quite clear on this point: once an express stipulation of discontinuance or judgment pursuant to settlement is entered, the action is terminated and the court's supervisory powers in the same case also terminate.

Hebrew: Tornheim v. Blue & White Food Products Corp., 2011 NY Slip Op 07411 (2d Dept Oct. 18, 2011)

In English, the word "option" as used in a contract generally means a future, enforceable right to compel the other contracting party to convey or perform upon agreed terms. Does the Hebrew word for "option" when used in a contract mean the same thing?

That was the question presented in the Tornheim case, in which the plaintiff sued for a declaration of his 20% stock ownership in a food products business under a contract written in Hebrew. The contract stated that the plaintiff would be hired as a salaried employee with the "option" of becoming a 20% partner after contributing certain equipment to the business and after working full-time for the business for six months. The phonetic transcription of the Hebrew word for option used in the contract is "haefsharut." The question for the court was whether haefsharut means plaintiff was automatically to become 20% shareholder upon satisfaction of the two conditions, as plaintiff contended, or whether the conveyance of shares was subject to the company's further consent and agreement, as the company contended.

The trial court conducted a nonjury trial on the issue of the contract's meaning and whether plaintiff satisfied the two conditions. A translator testified on the company's behalf that haefsharut translates as "option" in the sense of "possibility" or "chance." The company also put in evidence a Hebrew-English dictionary corroborating that testimony. The company's witnesses further testified that the equipment provided by plaintiff mostly was not functional and that he worked only part-time during the six-month period.

The trial court agreed with the company on both issues and dismissed the complaint. Plaintiff appealed to the Appellate Division, Second Department, which last week affirmed the lower court's decision. The appellate court held that, based on the translator's testimony and the dictionary evidence, the trial court had "properly determined that the memorandum was an unenforceable 'agreement to agree'" and that, in any event, other evidence sufficiently demonstrated that "the plaintiff failed to fulfill the conditions precedent underlying the alleged option."

I imagine upon getting the decision the plaintiff uttered "oy vey," the translation of which is less problematic.

There's No Need for Publication Notice of LLC Judicial Dissolution Proceedings

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 27 Jun 2011 10:00:00 GMT

One of my earliest posts on this blog, discussing the requirement in the Business Corporation Law (BCL) for publication notice of judicial dissolution proceedings for New York corporations, pointed out that no such requirement exists for dissolution proceedings for limited liability companies brought under Section 702 of the LLC Law.

Not that everyone reads this blog (I wish), but why after all these years are lawyers submitting and judges signing initial orders to show cause in LLC dissolution cases with provisions requiring newspaper publication in each of the three weeks preceding the hearing date, as specified in BCL Section 1106?

Here's a very recent example of one such order to show cause in a Kings County LLC dissolution case. Here's another example, also from Kings County.

As Justice Leonard Austin reminded us in last year's important ruling on LLC dissolution in the 1545 Ocean Avenue case, LLCs do not "fall within the ambit" of the BCL. "[T]he existence and character of these various entities," he added, "are statutorily dissimilar as are the laws relating to their dissolution."

The procedural dissimilarities are pronounced. Whereas the BCL mandates commencement of dissolution by way of petition and order to show cause, the LLC Law is silent on manner of commencement, which in theory means LLC dissolution can and ought to be commenced by ordinary summons and complaint (though courts routinely accept show cause orders for LLC dissolution).

The form of order to show cause used to commence dissolution proceedings is prepared by the petitioner's lawyer and submitted to the court for signature by a judge. The court clerk's office reviews it for compliance with certain formal criteria before it gets passed on to the judge. At that point the judge's review normally will focus on any provisions included by the petitioner's lawyer for temporary injunctive relief, and on ensuring adequate service of the papers on the appropriate parties within the time determined by the judge. (Read here my detailed post on what goes into the order to show cause.)

Publication of a copy of the order to show cause for three consecutive weeks in the legal notice section of the New York Law Journal or some other newspaper of general circulation can be a very expensive proposition, sometimes in the thousands of dollars. So why would a petitioner's lawyer needlessly include such a notice provision in the proposed order to show cause seeking judicial dissolution of an LLC?

I can only guess. Perhaps the lawyer hasn't read the dissolution sections of the LLC Law and simply assumes, based on prior experience with dissolution of corporations, that the BCL's publication requirement also exists in the LLC Law. Perhaps the lawyer recycles a form of order previously used in a corporate dissolution case without taking care to properly adapt it to an LLC dissolution proceeding. Perhaps the lawyer, even though aware it's not required, includes a publication provision in the order to show cause because the client wants whatever degree of public and industry awareness it will generate to put additional pressure on the opposing ownership faction.

Should the judge strike such a provision when included by the petitioner's lawyer in the order to show cause? It's not for me to say. After all, the LLC Law does not prohibit the court from ordering publication notice. It just doesn't require it.

Does it matter from the respondent's point of view? It could, especially if the respondent is concerned about potential harm to the business from whatever adverse publicity the legal notice might cause in the hands of competitors, or if brought to the attention of concerned creditors. Otherwise, a respondent might well be content to let his or her disputing business partner put a thousand or more dollars into the pocket of some newspaper publisher.

Certainly, before paying that kind of money for publication notice, the client has a right to know that it's not legally required.

© 2011 Farrell Fritz, PC. This feed is for personal, non-commercial & Newstex use only. The use of this feed on other websites is a copyright violation. If this feed is not in your RSS reader or Newstex, it infringes the copyright.

New Decisions of Interest by Nassau County's Commercial Division Judges

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 21 Mar 2011 11:00:00 GMT

The pictured courthouse in Mineola, New York, is home to the three judges of the Commercial Division of the Nassau County Supreme Court. They are, in order of seniority on the Supreme Court bench, Justice Stephen A. Bucaria, Justice Ira B. Warshawsky and Justice Timothy S. Driscoll. As someone who constantly monitors newly issued court decisions throughout New York State involving shareholder disputes and the like, I can say with a high degree of confidence that these three, prolific judges generate a greatly disproportionate share of the accessible decisions in business divorce cases.

Whether it's because there's something in Nassau County's water that breeds dissension among business partners, or because these three judges like to write about business divorce cases, or because Nassau County Supreme Court makes more of its trial court decisions available online than other counties, I can't say. But I can say it provides a great service for attorneys in need of judicial guidance to help navigate and advise their clients through the perilous waters of business breakups.

Without further ado, I give you three recent decisions of interest by the three Justices of the Nassau County Commercial Division.

Justice Warshawsky Orders Arbitration of LLC Dissolution Petition

In a post two months ago I wrote about a Montana Supreme Court decision that denied an application to compel arbitration of an LLC dissolution lawsuit because the arbitration clause in the operating agreement did not specifically mention dissolution, even though it broadly encompassed any dispute concerning "any activity conducted pursuant to" the operating agreement. I also suggested that under New York law the outcome likely would be different.

Justice Warshawsky's decision earlier this month in Matter of Cusimano (Berita Realty LLC), Short Form Order, Index No. 013147/10 (Sup Ct Nassau County Mar. 2, 2011), reinforces my suggestion. Cusimano is a horrific family dispute, pitting daughter against 90-year old parents and sister against sister, involving two separate proceedings to dissolve a family limited partnership (FLP) and a limited liability company (LLC). In the earlier FLP case, Justice Warshawsky ordered arbitration and, last October, granted daughter Rita Cusimano's application to depose her elderly parents in aid of the arbitration proceeding (read here).

In the later-filed LLC case, sister Bernadette Cusimano applied to compel arbitration of Rita's dissolution petition under the operating agreement's arbitration clause requiring initially mediation by specified outside accountants for the company, and secondarily arbitration by the American Arbitration Association, of "any dispute, controversy or claim arising out of or in connection with this Agreement or any breach or alleged breach hereof." As related in Justice Warshawsky's decision earlier this month, Rita opposed arbitration on the ground that the arbitration clause "is narrow in scope and does not encompass a request for an accounting or dissolution as a dispute which is capable of resolution by mediation."

Justice Warshawsky's decision rejects Rita's argument and orders compliance with the arbitration clause's provisions for mediation followed by arbitration if necessary. In so ruling, Justice Warshawsky lists the several subjects of controversy itemized in the dissolution petition and concludes that they "are directly related to the operation and management of [the LLC], and are appropriately governed by the Arbitration Clause in the Operating Agreement." His decision also finds noteworthy that the accountants designated as mediators "would appear to be well-positioned to explain the claimed justification for the transactions complained of in the petition."

Justice Bucaria Allows Claims to Enforce LLC Membership Purchase Agreement

Justice Bucaria's recent decision in Nigro v. Owen Logistics LLC, 2011 NY Slip Op 30447(U) (Sup Ct Nassau County Feb. 14, 2011), denies a motion to dismiss claims for breach of contract and specific performance arising from a disputed agreement by the defendants to convey to the plaintiff membership interests in two LLCs. It's particularly interesting as a counterpoint to last December's ruling in the Teutul case of American Chopper fame, in which the appellate court dismissed Paul Sr.'s attempt to enforce against Paul Jr. an imperfect buyout option provision (read here my post on Teutul).

The plaintiff in Nigro alleged that in July 2009 he made a verbal agreement with the three individual defendants to acquire their membership interests comprising 49% and 50% interests in two transport companies organized as LLCs. The plaintiff alleged that he advanced the $550,000 payment price for both companies but that defendants failed to transfer their interests to him. The plaintiff sued for breach of contract and specific performance, among other claims.

In support of dismissal the defendants relied on correspondence dated October 2009, in which defendants' attorney states that the "proposed" purchase price for one company is "inadequate in view of the accountant's $2.1 million valuation of the company" and a second letter from plaintiff's attorney stating that his client made an "initial loan" of $445,000 to one of the companies and then made several additional loans to the company. The second letter also inquires whether the sellers "intend on honoring their prior agreement or whether the new terms contained in your correspondence is the present offer."

Justice Bucaria's decision cites Teutul for the principle that "[i]f an agreement is not reasonably certain in its material terms, there can be no legally enforceable contract" and that a "mere agreement to agree, in which a material term is left for future negotiations, is unenforceable." He also cites an earlier appellate precedent, Marder's Nurseries, Inc. v. Hopping, 171 AD2d 63 (2d Dept 1991), for the proposition that "a price of 'fair market value' may be sufficiently precise, particularly if the parties have agreed that fair market value is to be determined by way of appraisal."

In Nigro, Justice Bucaria concludes, the material terms as alleged including price are sufficiently certain to support a claim for enforcement at the pleading stage of the case. Here's what he writes:

The documents before the court suggest that the parties agreed that plaintiff would purchase 49% of Owen Logistics and 50% of Meridian Transportation & Logistics for a price of $550,000, subject to adjustment based upon the accountant's valuation. Giving plaintiff the benefit of every possible favorable inference, the purchase price was defined with reasonable certainty. Defendants' motion to dismiss plaintiff's claims for specific performance and breach of contract on the grounds of a defense founded upon documentary evidence and failure to state a cause of action is denied.

In the balance of his decision, Justice Bucaria dismisses the plaintiff's claims for fraud, negligent representation and conversion.

Justice Driscoll Seals Complaint Seeking Dissolution of Law Firm

In days of yore, the practical difficulties and costs of accessing court documents from the files of court and county clerks meant that non-newsworthy, private disputes remained, relatively speaking, private. In modern times, the proliferation of online publishing of court decisions, and the advent of electronic filing systems that require all papers to be scanned and stored digitally, give the world instant, free access from anywhere to the pleadings, motions, stipulations, decisions, affidavits and associated evidentiary materials routinely filed in the course of civil litigation.

Such access is great cause for concern in all sorts of business cases, particularly those involving trade secrets or other information of potential value to competitors. Litigants attempt to mitigate the potential harm by entering into court-ordered confidentiality stipulations that, to the greatest extent possible, avoid the filing of sensitive documents and/or require that the sensitive information be filed "under seal", i.e., accessible only to authorized court personnel, the litigants and their counsel.

Dissolution proceedings involving closely held businesses raise many of these same concerns, as evidenced by Justice Driscoll's decision earlier this month in Cronin v. Harris, 2011 NY Slip Op 30165(U) (Sup Ct Nassau County Mar. 1, 2011). Cronin involves a father and two adult children, all attorneys, practicing together as Cronin, Cronin & Harris, P.C. specializing in tax certiorari proceedings and condemnation law. One of the children sued for dissolution based on his father's alleged physical incapacity and mental impairment.

The plaintiff moved for an order to file his complaint under seal asserting as grounds the need to protect and preserve his father's medical and personal, confidential information and to avoid undermining and adversely affecting the law firm's welfare, the legal and financial interests of its clients, and the confidence placed in the firm by its clients and adversary counsel.

The rule governing the sealing of court records requires the court to seal records only upon a finding of "good cause" which must take into account "the interests of the public as well as the parties." (22 NYCRR Section 216.1) In his decision, Justice Driscoll emphasizes that under the rule and case law applying it, "confidentiality is the exception"; that the public presumptively has a "right of access to the courts to ensure the actual and perceived fairness of the judicial system"; that the party seeking to seal documents "must demonstrate compelling circumstances"; and that a finding of good cause "presupposes that public access to the documents at issue will likely result in harm to a compelling interest of the movant, and that no alternative to sealing can adequately protect the threatened interest."

Justice Driscoll concludes on the facts presented in Cronin that:

good cause exists to permit Plaintiff to file the Complaint under seal, in light of the parties' shared concerns that public access to the Complaint would potentially undermine and adversely affect the legal and financial interests of CCH's clients, who are not parties to this litigation. The Court's review indicates that these concerns are not unwarranted.

In an important caveat, Justice Driscoll states that his decision to seal the complaint is not predicated on shielding the father's medical and personal information given that (1) such information already is adequately protected by HIPAA restrictions and (2) "the fact that the information regarding [the father] is potentially embarrassing does not, in and of itself, warrant the requested sealing." For this reason, Justice Driscoll expressly declines to grant a "blanket imprimatur" to file future records under seal, and he directs that each record sought to be filed under seal must first be submitted to the court for its independent review.

Dissecting the Order to Show Cause in Corporate Dissolution Proceedings

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 14 Mar 2011 11:00:00 GMT

You've met with your client who's embroiled in a nasty dispute with his or her business partners. You've learned the facts and reviewed the documents. You've explained to your client the ins and outs, the pros and cons, the timing, expense and possible outcomes of bringing a judicial dissolution proceeding. The client has given you the green light to start the lawsuit. You're at your desk, fingers on the keyboard, ready to draft papers. What documents do you prepare, and where do you start?

If the case involves a closely held New York business corporation and you're seeking judicial dissolution based on 50/50 deadlock or minority shareholder oppression, the rules laid out in Article 11 of the Business Corporation Law require you to file a "special proceeding" consisting minimally of two documents: (1) a petition and (2) an order to show cause (OSC).

The petition differs slightly in format but closely resembles an ordinary complaint in which you'll set forth in numbered paragraphs all of the relevant factual allegations along with the legal claims and relief sought. (Read here my recent post on the need to include detailed factual allegations in the petition rather than bare allegations of dysfunction or misconduct.)

The focus of this post is the OSC, which is a form of court order, prepared by the petitioner's lawyer and affixed on top of the petition, submitted to the assigned judge for signature. At its most basic the OSC requires the respondents to appear in court on a specified date to "show cause" why the relief demanded in the petition should not be granted. It is used in special proceedings in lieu of the more familiar summons that accompanies a complaint in ordinary lawsuits.

When I draft dissolution papers, I almost always start with the OSC. Why? Because it forces me to think about requests for critical interim relief that ought to be included in the OSC, such as a temporary restraining order (TRO) or other measures necessary to preserve the status quo or otherwise protect my client's interests while the litigation is pending. Once I determine the remedies I'm seeking in the OSC, I'm better able to draft a petition and any supplemental affidavits including facts and documents supporting the specific relief sought.

Let's take a closer look at what goes into the OSC, using some recently filed sample OSC's that I found on the state court system's website. For comparison purposes we'll also look at a sample OSC involving an LLC dissolution case. (I've chosen these particular samples for convenience and illustration purposes only, not as an endorsement.)

Sample OSC #1 is from a deadlock dissolution case filed earlier this month in Brooklyn Supreme Court, signed by Commercial Division Justice David Schmidt. As is typical, the first paragraph identifies the papers being filed with the court in support of the OSC, in this case including the verified petition as well as a separate affidavit of the petitioner. The inclusion of the affidavit usually indicates that the petitioner is seeking TRO relief which, indeed, is the case here.

The second paragraph contains the obligatory "show cause" command addressed to the respondents, also setting a return date for the court appearance and reciting the relief sought by the petitioner which usually tracks the relief specified in the petition. Under BCL Section 1106(a), the hearing date is supposed to be not less than four weeks after the date the OSC is signed, which is designed to allow sufficient time for publication notice (more on that below). In Sample OSC #1, Justice Schmidt sets a hearing date only three days after the OSC, undoubtedly because of the petitioner's request for interim injunctive relief. A hearing on the merits of the dissolution petition likely will be scheduled at that time for a future date, subsequent to publication.

The next three, decretal paragraphs include various temporary restraints granted by the court against the presumed co-shareholder, restricting her activities on behalf of the subject company and also directing preservation of business records. Bear in mind, under court rules a party seeking a TRO generally must give reasonable advance notice to adversaries of the TRO application, giving them the opportunity to appear in person to oppose the TRO when the OSC is submitted to the judge for signature. Often this is the first encounter between opposing counsel, so it may take on an importance beyond the grant or denial of the specific relief requested.

Sample OSC #1's final two paragraphs deal with publication and service of the OSC. The publication order tracks the requirements in BCL Section 1106(b) for publication of a copy of the OSC at least once in each of the three weeks preceding the hearing date in a newspaper of general circulation in the county in which the office of the corporation is located. The final provision for service by a specified date of the OSC on the corporation, the other 50% shareholder and the state tax commission conforms with BCL Section 1106(c).

Sample OSC #2 is another recent OSC signed by Justice Schmidt in a dissolution case by a one-third shareholder claiming oppression and deadlock. In certain respects the style and content are quite different than Sample OSC #1. The initial paragraph identifies the petitioner's supporting affidavit only (likely the petition is packaged as an exhibit to the affidavit) followed by a series of clauses summarizing the petitioner's factual allegations and the need for appointment of a receiver. In this case Justice Schmidt fixes a hearing date in the "show cause" paragraph over two months after the date of the OSC, which is consistent with the absence of any request for issuance of a TRO. The publication and service provisions in Sample OSC #2 are very similar to those in Sample OSC #1.

There is one other notable contrast between the two OSC's. Missing from Sample OSC #1, but included in Sample OSC #2 in its penultimate paragraph, is language tracking BCL Section 1106(a)'s provision authorizing the court to order the corporation's officers and directors:

to furnish the court with a schedule of all information, known or ascertainable with due diligence by them, deemed pertinent by the court, including a statement of the corporate assets and liabilities, and the name and address of each shareholder and of each creditor and claimant, including any with unliquidated or contingent claims and any with whom the corporation has unfulfilled contracts.

Under BCL Section 1106(d), the required schedules must be filed within 10 days after the OSC is entered by the clerk. Particularly for the non-controlling minority shareholder-petitioner, who may not have access to the company's books and records, inclusion in the OSC of such a provision can be quite helpful.

Do OSC's in LLC dissolution cases look any different? The most important distinction (and money saver) is the absence of a publication requirement in LLC dissolution cases, which also allows the court to set a hearing date sooner than the minimum four weeks in BCL dissolution cases. Otherwise they're pretty much the same, as illustrated by Sample OSC #3 signed by Brooklyn Commercial Division Justice Carolyn E. Demarest in an LLC dissolution case. The OSC includes typical TRO relief prohibiting any transactions outside the ordinary course of business, although you can see where the petitioner asked for more extensive TRO relief which the judge struck from the OSC. Sample OSC #3 also is interesting insofar as it borrows from the BCL by requiring the respondent to produce schedules of company assets, liabilities, etc., and by requiring service of the OSC on the Attorney General (presumably on behalf of the tax commission), neither of which is mentioned in the LLC Law.

Court Decision Weds Business Divorce with Matrimonial Divorce

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 07 Mar 2011 11:00:00 GMT

Last week, in a decision of apparent first impression, the Albany-based Appellate Division, Third Department, upheld the dismissal of a proceeding under LLC Law Section 702 for judicial dissolution of a limited liability company owned by husband and wife on the ground that the wife's prior-filed action against her husband for a divorce involved the same issues. Rossignol v. Rossignol, 2011 NY Slip Op 01560 (3d Dept Mar. 3, 2011).

After 24 years of marriage, in 2007 Dolores Rossignol filed a divorce action against her husband, Daniel. Two years earlier, Dolores and Daniel formed dr2 & Company, LLC to operate a McDonald's franchise. During the course of the divorce action, the judge entered an order restraining Daniel from accessing any funds in the marital or business banking accounts. The order also fixed the date of commencement of the action as the valuation date of the LLC and denied the husband's request to liquidate and sell the LLC.

Daniel responded by commencing a separate proceeding for involuntary dissolution of the LLC under LLC Law Section 702. On the consent of the parties, the judge in the matrimonial action ordered the two cases to be consolidated for trial. Dolores then moved under Section 3211(a)(4) of the Civil Practice Law and Rules to dismiss the LLC dissolution case on the ground that the matrimonial case constitutes, in the words of the statute, "another action pending between the same parties for the same cause of action." The judge granted the motion without prejudice to recommencement if any issues remained beyond the reach of the divorce action.

Daniel's appeal presented a two-fold argument. First, he contended that the prior order consolidating the two cases precluded the subsequent order of dismissal. The Third Department disagreed, stating that a "true, organic consolidation did not occur here." Instead, the lower court had merely "joined the actions for trial, keeping the individual actions intact and subject to separate resolution."

Daniel's second and more interesting argument was that the dissolution case "does not seek substantially the same relief as the divorce action." The appellate panel again disagreed, writing as follows:

Pursuant to Domestic Relations Law § 234, Supreme Court is empowered to determine all issues with respect to the property owned by the parties (see Ripp v Ripp, 38 AD2d 65, 67 [1971], affd for reasons stated below 32 NY2d 755 [1973]). Indeed, "[t]he courts and the parties should ordinarily be able to plan for the resolution of all issues relating to the marriage relationship in the single [matrimonial] action" (Boronow v Boronow, 71 NY2d 284, 290 [1988]). Inasmuch as the husband and wife are the only owners of the LLC, and both are parties to the divorce action, we see no reason why any issues should be left for resolution after equitable distribution of the parties' property. Given the availability of complete relief pursuant to Domestic Relations Law § 234 and our public policy of resolving equitable distribution within the context of a divorce action (see O'Connell v Corcoran, 1 NY3d 179, 185 [2003]; St. John v St. John, 201 AD2d 552, 552-553 [1994]; Karasik v Karasik, 172 AD2d 294, 294 [1991]), we conclude that dismissal of the second action was within Supreme Court's broad discretion pursuant to CPLR 3211 (a) (4).

There are intriguing issues here that unfortunately are not addressed by the court's decision either because they were not raised by Daniel in his appeal or because the court chose to ignore them. For starters, dismissal under the prior-action-pending rule of CPLR Section 3211(a)(4) requires an identity of the parties in the two actions. Yet the Rossignol decision effectively disregards the LLC entity which necessarily was named as a party in the dissolution case.

Why does it matter? Under LLC Law Section 601, members of the LLC have no direct ownership interest in the property of the LLC. Section 234 of the Domestic Relations Law, which seems to be the main pillar of the Rossignol decision, authorizes the court in a matrimonial case to determine "any question as to the title to property arising between the parties" and to "make such direction, between the parties, concerning possession of the property, as in the court's discretion justice requires." If the Rossignols have no direct ownership interest in the LLC's property, and if the LLC is not before the court as a party, how does Section 234 authorize the court to dissolve the LLC and liquidate its property?

A second issue lurking in Rossignol's shadows is the question of dissolution itself. With the Section 702 dissolution proceeding gone, under what authority and on what grounds does the lower court decide whether the company should be dissolved? As best as I can tell from the decision, the wife in Rossignol opposes dissolution of the LLC. Will the court decide the issue using the Section 702 standard, i.e., whether it's reasonably practicable to carry on the business in conformity with the provisions of the operating agreement? Or will the court use its broad, discretionary powers under the Domestic Relations Law to reach an "equitable" result?

My normal prescription for uncertainties like this is to advise LLC owners to deal with it expressly in the operating agreement. But let's be realistic: how many married couples out there, going into business together, will say to one another when putting together an operating agreement, "Honey, is it okay if I put in a Section 10.2 providing that I get to buy out your interest for book value if we get divorced"?

Attention All Would-Be Corporate Dissolution Petitioners: Notice Pleading Doesn't Cut It. You Need to Allege Facts. Lots of Them.

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 21 Feb 2011 11:00:00 GMT

In a garden variety lawsuit, say, for money damages based on breach of contract, the rules of procedure governing civil litigation allow what we lawyers call notice pleading. That is, the party bringing the suit can file a short form of complaint that alleges barely enough to put the defendant on notice of the claim, e.g., identifies the contract and the parties, alleges the nature of the breaching conduct, and makes some general statement of damages. The detailed facts in support of the claim can be fleshed out later by way of pretrial disclosure.

The rules are different for corporate dissolution lawsuits. A shareholder who applies for dissolution thinking he or she can gain traction with a skeletal pleading that alleges broad statements of wrongdoing or dysfunction bereft of underlying, detailed facts, is in for a rude surprise. Case in point: Matter of Comparato (Affiliated Agency, Inc.), Short Form Order, Index No. 021033-10 (Sup Ct Nassau County Jan. 26, 2011), in which Nassau County Commercial Division Justice Timothy S. Driscoll recently dismissed a minority shareholder's application for judicial dissolution for lack of specifics.

I've posted before about the distinctive procedures for bringing dissolution applications (read here, here and here). Briefly, an applicant for judicial dissolution based on minority shareholder oppression or deadlock must commence a form of fast-track lawsuit called a "special proceeding." Instead of the normal summons and bare complaint followed by lengthy discovery and eventually a trial, the party initiating a special proceeding must file a "petition" by "order to show cause" that will be scheduled for a hearing usually within four to six weeks. On the initial hearing or "return" date, the judge usually will hear oral argument by the opposing lawyers and -- here's the important part -- it can decide whether to grant or deny the petition based solely on the facts contained in the parties' papers. Generally speaking, only if the court finds that the material facts are disputed will it schedule a later trial.

In the Comparato case, a one-third shareholder of an insurance agency filed a petition by order to show cause in November 2010 seeking to dissolve the agency under Section 1104-a of the Business Corporation Law based on oppressive and fraudulent conduct by the other two co-equal shareholders. As quoted in Justice Driscoll's decision, the petition's allegations of wrongdoing consisted entirely of the following:

The [respondents] are guilty of illegal and fraudulent conduct with respect to trust funds over which [they] have control by nature of the corporation's business and have frustrated the petitioner's efforts to correct and cease this conduct.

That this petition is further being brought on the grounds that the [respondents] have engaged in oppressive actions towards the petitioner. Specifically, the [respondents] have made decisions material to the interest of the petitioner's rights and entitlements to profits in violation of the agreed upon practice of the Corporation.

The petitioner submits that liquidation is necessary to prevent further fraudulent conduct and is reasonably necessary for the protection of the rights and interests of the petitioner.

The petitioner apparently did not offer a supplemental affidavit of his own or submit documents to bolster his allegations. The petitioner's attorney submitted an affirmation restating but not really amplifying the petition's allegations that respondents were mismanaging premium collections. The respondent shareholders submitted opposing affidavits to which they attached a copy of the shareholders' agreement and various correspondence indicating that the petitioner filed for dissolution after unsuccessfully making a buyout demand in excess of the buyout price to which he was entitled following his permanent disability. The attached correspondence also reflected the respondents' pre-litigation attempts to draw out details concerning the petitioner's accusations of mismanagement, to which the petitioner merely responded that the specifics were "well known" by respondents.

After summarizing the applicable statutes and case law, Justice Driscoll's decision dismissing the petition focuses on its lack of factual allegations. Here's what he writes:

The Court concludes that the Petition fails to allege facts that would warrant dissolution of the Corporation pursuant to BCL 1104-a. The Petition makes general, conclusory allegations completely lacking in specifics regarding the allegedly improper conduct of the Respondents. Given the paucity of the allegations in the Petition, Petitioner has also failed to meet his burden to warrant the appointment of a receiver. In light of the foregoing, the Court dismisses the Petition.

I've no clue whether the petitioner in Comparato could have offered additional facts to salvage his petition, either in regard to the allegedly improper handling of premiums or the allegedly improper allocation of profits. What I can say is that Comparato underscores the absolute necessity to load the petition with all the facts at one's disposal, including documentary evidence to back up any claims of financial unfairness or impropriety. If you don't, be prepared for a first-round knockout like the one handed the Comparato petitioner.

Vying Over Venue in Corporate Dissolution Proceedings

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 17 Jan 2011 11:00:00 GMT

A rare appellate reversal earlier this month of a trial court's decision over the proper venue of a corporate dissolution contest prompts a closer look at the rules and considerations involved when trying to secure the home field advantage in litigation of this sort. Matter of Supplier Distribution Concepts, Inc., 2011 NY Slip Op 00084 (3d Dept January 6, 2011).

First, some basics. When lawyers talk about the proper "venue" of a case, they mean the location where it will be heard, i.e., which county if the case is in state court, or which federal district if the case is in federal court. The venue rules contained in the state and federal codes of civil procedure generally require the physical presence of a party or some other nexus between the case and the locality.

When litigation adversaries reside in different states or in different counties in the same state, and when jurisdiction and venue properly lie in both places, there's an incentive to grab the home field advantage by being the first to file a lawsuit in one's local courthouse. For the client, having to litigate in a distant place can mean significant additional expense, not to mention the perception if not the reality that the judge will lean in favor of local interests represented by local courthouse denizens. Likewise, lawyers almost always prefer to argue their case before a judge they know and who knows them. It's human nature.

You don't see many fights over venue in corporate dissolution proceedings even when the shareholders reside in different states or different counties in the same state, for two reasons. First, even if a court in State #1 technically has jurisdiction to decide a dissolution contest involving a corporation formed in State #2, under the so-called "internal affairs" doctrine, as a matter of comity and deference to the state under whose laws the corporation was formed, the State #1 court will not hear the dissolution petition. Imagine, for instance, how awkward (to say the least) it would be to present to the Delaware Secretary of State a New York judge's order directing the dissolution of a Delaware corporation, and vice versa. (Read here, here and here my prior posts on the subject.)

Second, in New York as in most if not all other states, the rules governing venue in applications for judicial dissolution of corporations (Business Corporation Law 1112) and limited liability companies (LLC Law 702) specifically require the proceeding to be brought in the "judicial district" -- for the moment, think county -- "in which the office of the corporation [or LLC] is located." Although you might think this could lead to disputes when the business has multiple offices in different counties within the state, as used in the statutes "office of the corporation" does not necessarily mean an actual place of business. Rather, it means the county of business stated in the certificate of incorporation or, in the case of an LLC, in the articles of organization whether or not the business has an actual place of business there.

Which brings us to the Third Department's decision this month in Matter of Supplier Distribution Concepts, Inc., in which Stephen Richards, as one-third owner of a close corporation ("SDC") and an affiliated limited liability company ("MDR"), sought to dissolve both by petition filed in the Supreme Court in Binghamton, New York, located within the Broome County judicial district where he resides and his lawyer practices. Richards' petition identically described each company as having "a place of business located in Broome County, New York." Note how the description varies slightly but importantly from the statutory language, "the judicial district in which the office of the [entity] is located."

It turns out, the difference in locution was no oversight. SDC's certificate of incorporation, as amended in 2003, designated Monroe County as the location of the corporation's office, as did MDR's articles of organization filed the following year. Monroe County, the seat of which is Rochester, is about 100 miles from Binghamton. It's also the residence of the managing owner, Charles Dekar, and the bricks-and-mortar location of the companies' main operations.

Richards' filing in Broome County did not sit well with Dekar and his Rochester-based lawyers who quickly filed a motion to change the venue to Monroe County Supreme Court under BCL 1112 and LLC Law 702 based on the office location designated in the organizational documents on file with the Secretary of State. Richards responded with a cross motion to retain venue in Broome County under Section 510(3) of the Civil Practice Law and Rules which gives judges broad discretion to change venue where "the convenience of material witnesses and the ends of justice will be promoted by the change."

The motions were heard by Broome County Supreme Court Justice Ferris D. Lebous who ruled in favor of Richards. As reflected in the transcript of the oral argument on the motions (read here), Justice Lebous was swayed to retain venue for several reasons. First, while agreeing that as a "general rule" venue in dissolution cases is determined by the office location stated in the filed organizational documents, there is an "exception" where the petitioner seeks relief beyond dissolution, such as enforcement of other shareholder or director rights. Second, with respect to the presence in Broome County of material witnesses -- Richards submitted a list of 42 supposed witnesses residing in Broome and nearby counties -- he focused on the fact that Dekar had contacted police authorities and the district attorney's office in Broome County to pursue allegations that Richards had misappropriated company property. Third, expressing his hope that he could preside over a more prompt settlement of the case, Justice Lebous states that

the ends of justice will be promoted and judicial economy will be promoted by getting a handle on these things now, putting the brakes on, and getting this thing resolved in as mutually agreeable a fashion as possible. [Transcript p. 30]

Justice Lebous signed a formal order retaining venue on June 21, 2010 (read here), from which Dekar appealed to the Albany-based Appellate Division, Third Department. The appellate court's decision reversing Justice Lebous's order does not address the latter's stated goal of judicial economy, but it does make short work of his two other rationales. After citing the BCL's and LLC Law's venue provisions, the appellate court addresses and rejects the other-relief issue as follows:

[E]ven assuming that a proceeding seeking judicial dissolution which also requests other types of relief may be brought in a venue other than where the offices of the corporation or limited liability company are located (see e.g. Matter of Tashenberg v Breslin, 89 AD2d 812, 812 [1982]), our review of the record reveals that petitioner did not request any other relief here, only minimal disclosure. While petitioner alleges in his petition that respondents, among other things, failed to authorize dividends or cash distributions and attempted to deprive him of compensation, he does not seek any relief based upon these alleged wrongdoings other than dissolution.

The court also faults the lower court's reliance on the presence of material witnesses in Broome County, finding that Richards did not adequately substantiate grounds to depart from the special venue statutes governing dissolution. Here's what the court said:

Regarding petitioner's cross motion, we are cognizant that a court may, in its discretion, change or retain venue upon consideration of "the convenience of material witnesses and the ends of justice" (CPLR 510 [3]; see Vasta v Village of Liberty, 235 AD2d 1006 [1997]). However, in order to retain venue in Broome County, it was petitioner's burden to provide "the names and addresses of the witnesses, the substance and materiality of their testimony relative to the issues in the case, [and assurances] that the witnesses have been contacted and are willing to testify on behalf of the movant, and the manner in which they will be inconvenienced" (Gissen v Boy Scouts of Am., 26 AD3d 289, 290-291 [2006]). "A discretionary change of venue under CPLR 510 (3) is addressed to the convenience of nonparty witnesses" (State of New York v Quintal, Inc., ___ AD3d ___, ___, 2010 NY Slip Op 09061 [2010] [emphasis added and citations omitted]; see State of New York v Slezak Petr. Prods., ___ AD3d ___, 910 NYS2d 268 [2010]). Inasmuch as petitioner failed to delineate the substance or materiality of the nonparty witnesses' testimony as it relates to respondents' dissolution and proffered only conclusory statements as to the manner or extent to which those witnesses would be inconvenienced by trial in the Seventh Judicial District [Monroe County] (see Frontier Ins. Co. in Rehabilitation v Big Apple Roofing Co., Inc., 50 AD3d 1239, 1239-1240 [2008]; Root v Brotmann, 41 AD3d 247, 247 [2007]; Gissen v Boy Scouts of Am., 26 AD3d at 290-291), his cross motion to retain venue in Broome County should have been denied.

The case will now be transferred to Rochester and a new judge, almost nine months after its commencement. The Broome County Supreme Court docket information available online only shows a recent motion to compel disclosure, so it's hard to tell how far the case has progressed in the interim or whether the majority owners elected to purchase Richards' interest. We'll just to wait and see whether the change in venue will expedite an out-of-court settlement or harden the parties' positions.

Do Not Take Pre-Trial Discovery for Granted in Corporate Dissolution Proceedings

Mon, 04 Oct 2010 11:00:00 GMT

The adjudication of corporate dissolution cases can and often does present any number of complex, fact-intensive issues that, if placed in the procedural context of an ordinary, plenary action, necessarily would occupy the parties in protracted pre-trial discovery proceedings including document exchange and depositions.

Dissolution cases in New York, however, are not ordinary lawsuits initiated by summons and complaint followed by discovery and trial. Rather, the governing statutes mandate that the dissolution request be brought in the form of a so-called "special proceeding" initiated by petition and order to show cause followed usually within 4 to 6 weeks by a hearing based on the papers, akin to the manner in which a summary judgment motion is determined. That is, the procedural rules for special proceedings laid out in Article 4 of the Civil Practice Law and Rules contemplate a potential summary disposition of the case at the initial hearing without the benefit (or detriment, depending on one's point of view) of discovery. CPLR Section 408 specifically requires leave of court before a party may serve a disclosure demand.

I have seen first hand and from afar many instances in which lawyers ignore the constraints on discovery in dissolution proceedings, or assume the court will rubber stamp applications for leave to serve discovery demands. This is a mistake, as illustrated by a recent, unpublished decision by Nassau County Commercial Division Justice Timothy S. Driscoll in Matter of Kaufman (L.I. Yellow Cab Corp.), Short Form Order, Index No. 001486-09 (Sup Ct Nassau County Sept. 15, 2010).

Kaufman involves a taxi business started in 1963 based in Hicksville on Long Island, initially owned and operated by brothers William and Stephen Kaufman. Years later Stephen's son, Keith, and a non-family member also became shareholders. In 2009, William as a 30% shareholder sued for judicial dissolution under Section 1104-a of the Business Corporation Law, claiming oppressive action involving Keith's alleged misappropriation of company assets, nonpayment of sales tax and falsification of lease agreements with drivers.

The respondent shareholders elected to purchase William's shares under BCL Section 1118, thereby converting the proceeding to a valuation contest. William's counsel subsequently served a notice to take Keith's deposition which the respondents moved to quash on procedural and substantive grounds. Procedurally, respondents argued that the deposition notice was invalid for failure to seek and obtain the court's leave prior to serving the notice as required by CPLR 408. Substantively, they argued lack of adequate justification in that the sole issue for trial was the fair value of Williams' shares; that there already had been an exchange of experts' valuation reports and production to William of all relevant financial information; and that William was actively involved in running the business.

William countered that Keith's deposition was necessary because the valuation report produced by respondents' expert was "without basis in reality" based on a recent third-party offer for a portion of the business; that Keith has "intimate knowledge regarding the income and expenses" of the company; that Keith had recently purchased a $1 million home; that Keith's testimony will provide information relevant to the impact of his alleged misconduct on fair value; and that, as to the procedural objection, William's counsel had advised the court at a recent conference of his intention to attempt to depose Keith.

Justice Driscoll's analysis notes that the "case law interpreting [CPLR 408] is somewhat sparse," but that guidance can be found in the Appellate Division, Second Department's ruling in Gargano v. V. C. & J. Construction Corp., 148 AD2d 492 (2d Dept 1989), where the court permitted document discovery in a special proceeding to fix an attorney's lien, but denied leave to take the deposition of the attorney-petitioner, observing that "the granting of discovery is generally looked upon with disfavor in summary proceedings."

Justice Driscoll's ruling skips over the respondents' procedural objection to reach the substantive issue. "Guided by Gargano," Justice Driscoll writes, "the Court concludes that Petitioner has not demonstrated the requisite need for the proposed deposition of Keith Kaufman." He then offers the following reasons:

The Court reaches its conclusion in light of the facts that 1) discovery is generally looked upon with disfavor in summary proceedings; 2) the parties have exchanged Valuation Reports; and 3) the parties will have the opportunity to present witnesses, and conduct cross examination of adverse witnesses, at the trial of this matter, regarding the fair value of Petitioner's interest in the Corporations. Accordingly, the Court grants Respondents' motion to vacate the Notice of Deposition of Keith Kaufman.

Neither Gargano, Kaufman nor any other case I've come across stands for the proposition that pre-trial discovery can never be had in corporate dissolution cases. Frequently, in hotly contested dissolution matters that cannot be resolved summarily upon the initial hearing of the petition, both sides desire document and testimonial discovery of the other, thereby making it relatively easy to get the court's permission. Rather, the main takeaway from Kaufman should be an understanding, particularly when only one side desires pre-trial discovery, that the proponent of discovery must be prepared to satisfy the court that the additional delay and expense attendant to depositions and the like are outweighed by a legitimate need to obtain relevant information without which the proponent's ability to prepare for trial will suffer meaningful prejudice.

One final note. In dissolution cases involving limited liability companies, the LLC Law does not contain a similar requirement mandating use of the special proceeding form, and the courts have permitted LLC members to utilize either a plenary action or special proceeding. (See my prior post on the subject here.) The need for discovery therefore is a factor to consider in deciding which form to use for LLC dissolution.

Dissolution Counterclaim Fails to Stall Action for Goods Sold and Delivered

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 19 Oct 2009 11:00:00 GMT

There are a couple of lessons to be learned from a recent decision by Nassau County Supreme Court Justice Daniel Palmieri in a quirky case called The Woods Knife Corp. v. Eastman Machine Co., 2009 NY Slip Op 32069(U) (Sup Ct Nassau County Sept. 2, 2009).

The first is, a minority shareholder who also does business with the corporation, and who fails to secure safeguards in the shareholders' agreement concerning the commencement of lawsuits by the corporation regarding their business dealings, cannot count on shareholder dissension issues to forestall enforcement of the corporation's commercial rights.

The second lesson is, if you're going to seek involuntary corporate dissolution, you must follow the procedural dictates of Section 1106 of the Business Corporation Law, which requires commencement of a special proceeding by petition and order to show cause with publication and service upon necessary parties including the state tax commission. A counterclaim for judicial dissolution in an existing litigation won't cut it.

The case involves two companies, Woods Knife Corporation and Eastman Machine Company, both formed many decades ago. Eastman, owned by the Stevenson family, manufactures cloth cutting machines. Woods Knife, owned 49% by the Stevenson family and 51% by the Woods family, manufactures blades used in Eastman's machines. The original agreement contained Eastman's pledge to "make every effort" to purchase its blade requirements from Woods Knife, but also permitted Woods Knife to sell to others. Nonetheless, over time Woods Knife became wholly dependent on Eastman for sales of its blades.

The commercial relationship between the two came under stress in recent years due to intense price competition from Chinese blade manufacturers. Eastman claimed that it could no longer sell or resell Woods Knife blades for use in Eastman's machines because of their high cost. Eastman alleged that in its role as minority shareholder and adviser, it attempted to help Woods Knife reduce costs and expand its customer base, but did not succeed due to lack of cooperation by James Woods, the principal and manager of Woods Knife. Eastman offered to purchase James Woods' 51% interest in Woods Knife, but the offer was rejected.

The first litigation salvo was fired by Woods Knife by way of a complaint alleging that Eastman owed it over $184,000 for blades sold and delivered to Eastman from October 2008 through January 2009. Eastman's answer to the complaint did not deny that it ordered and accepted the blades. Instead, its answer included a counterclaim for judicial dissolution under BCL Section 1104-a contending that Woods Knife had engaged in oppressive conduct and breach of fiduciary duty to Eastman as minority shareholder, and that James Woods' lack of cooperation threatened the viability of Woods Knife and consequently Eastman's 49% interest.

Woods Knife then moved for summary judgment on its claim for goods sold and delivered. In opposition, Eastman contended that Woods Knife was "moribund," "insolvent" and "in de facto dissolution" due to the cessation of Eastman's orders. Eastman also suggested that any monies recovered by Woods Knife in the action "will not go to support the business, but will instead go to the individual [James Woods], to the detriment of Eastman's interest." Eastman offered to pay $100,000 into court to retire "legitimate debts" of Woods Knife, "pending an accounting to determine all of the plaintiff's legal liabilities and who should receive payment."

Justice Palmieri granted summary judgment for Woods Knife based on the admissions in Eastman's answer and opposing affidavit that it had accepted shipment of the blades, that the amounts sought were accurate, and that Woods Knife had not been paid. Eastman's opposition, based on the alleged need to dissolve Woods Knife, was no defense, Justice Palmieri wrote, because

even if dissolution of the plaintiff is available to the defendant as 49% shareholder, this cannot serve as a reason to deny plaintiff judgment on its first and second causes of action. The Court agrees with the plaintiff that the defendant's concern about how payment will be used by the plaintiff is irrelevant in the context of the present action.

Woods Knife also sought summary judgment on the merits dismissing Eastman's dissolution counterclaims, which Justice Palmieri denied. He did, however, dismiss them without prejudice as procedurally defective, for failure to comply with BCL Section 1106's above-noted requirements for the commencement of a judicial dissolution proceeding.

Eastman appears to have heeded Justice Palmieri's advice. On October 8, 2009, Eastman filed a separate new proceeding in Nassau County Supreme Court which, from the limited information available online, appears to be one for judicial dissolution of Woods Knife. If there's any decision in the new case, I'll be sure to report on it.

Court Grants Dissolution, Rejects Claim that Failed Buy-Sell Agreement Was "Ploy" by Petitioner to Take Over Corporation's Retail Store Lease for His New Business

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 03 Aug 2009 11:00:00 GMT

Has anyone else noticed an uptick in the number of cases asserting claims for breach of fiduciary duty and fraud arising from stock buy-outs among owners of closely held companies? Perhaps it should be called the Littman Effect, after the First Department's 2008 decision in Littman v. Magee, where the court upheld this type of claim notwithstanding broad releases and disclaimers in the buy-out agreement. (Read my post on Littman here.)

The most recent example is a case called Matter of Lerman (Tive Clothing, Inc.), Short Form Order, Index No. 2947/09 (Sup Ct Nassau County July 8, 2009), involving a single-outlet clothing store known as Effie's owned 50-50 by two shareholders. Although Lerman offers a twist on the usual fact pattern -- the fight was over the consequences of a contemplated buy-out that did not occur -- it flows from the same idea, viz, that Shareholder A wrongfully induced Shareholder B to enter into a buy-out agreement by withholding material information that Shareholder A was duty-bound to disclose.

The facts in Lerman are not complicated. The two owners, Lerman and Knaffo, set up their corporation, called Tive Clothing Inc. ("Tive"), and operated the store in leased space for almost 20 years before their relationship began to unravel over profitability and other financial issues. In June 2007 they reached an interim solution in the form of a stockholders' agreement with a buy-sell provision that permitted either of them to offer their shares to the other at a fixed price. If the offeree declined to purchase, Tive was to be dissolved and the inventory liquidated.

The business continued to decline, requiring the owners to contribute another $30,000 each in the months following the stockholders' agreement. Knaffo subsequently offered to sell his shares to Lerman under the buy-sell provision. Lerman did not accept the offer -- at least not in writing -- although Knaffo later claimed that Lerman (verbally) agreed to purchase his shares. As the store lease was expiring, in August 2008, the landlord agreed to extend the lease for 3 months with a 3-month option. After the lease expired, the parties vacated the store and placed unsold inventory in storage.

After Effie's closed, Lerman on his own signed a new lease for the same premises and opened a clothing store called Ler Man's. The court's decision does not reveal what, if any, discussions occurred between Lerman and Knaffo concerning voluntary dissolution of Tive. What is known is that, in February 2009, Lerman filed a petition for judicial dissolution of Tive under Business Corporation Law Section 1104 based on shareholder deadlock. He also sought appointment of a receiver to wind up the affairs of Tive.

Knaffo opposed the petition, claiming that Lerman had perpetrated a fraud upon him, and breached his fiduciary duties owed to Knaffo, by concealing his plan all along to let the store lease lapse and open his own clothing business at the same location. Knaffo alleged that Lerman had participated in the negotiations to effectuate a buy-out merely as as a ploy to push Knaffo out of the business. Lerman countered that the stockholders' agreement expressly contemplated a dissolution upon the refusal of one shareholder to purchase the shares of the other.

The decision by Nassau County Commercial Division Justice Ira B. Warshawsky agreed with Lerman's position and granted the dissolution petition. Here's the key excerpt from the ruling:

It seems clear that it was the stated intention of the parties to arrange for an organized winding down, and ultimate dissolution of the business they were operating if the offer of one of the shareholders to purchase the shares of the other was declined. . . .

Once the offer to sell his shares to Lerman was rejected, the Agreement specifically provided for the dissolution of the corporation. Under these circumstances Lerman had no obligation to continue to operate in business with Knaffo, and either of them could have taken the opportunity to start a new business in the premises at the expiration of the lease.

The decision offers no further analysis of the claims for fraud and breach of fiduciary duty. It does not appear from the decision that Knaffo made any allegation that Lerman entered into his own lease negotiations with the landlord before Lerman and Knaffo entered into the stockholders' agreement or, for that matter, at any time before Tive's lease lapsed. Absent that type of allegation, even with the benefit of Littman, it's hard to see the makings of a fraud or fiduciary breach claim under the circumstances since, as the decision notes, Knaffo had the same opportunity as Lerman to take over the space.

All that remained of the case was Knaffo's claim that the racks and shelving left in the store belonged to Tive, and therefore he was entitled to be reimbursed 50% of their value. Lerman contended the items were fixtures, the ownership of which passed to the landlord. Justice Warshawsky's order refers the issue to the Court Attorney/Referee to hear and determine.

I haven't seen the stockholders' agreement in this case, however I'll venture a guess that it did not include a provision for the loser to pay the winner's attorney's fees in the event one of them refuses to cooperate with voluntary dissolution triggered by the rejection of an offer to sell. In general, such provisions can act as a strong deterrent to noncompliance with buy-sell agreements of this sort.

Can Corporate Dissolution Proceedings Be Brought in Federal Court?

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 01 Jun 2009 12:00:00 GMT

This month's Business Valuation Update includes a lengthy analysis of a recent stock valuation decision in a high-stakes corporate dissolution case, Kaplan v. First Hartford Corp., 2009 WL 737681 (D. Me. Mar. 20, 2009), brought by an oppressed minority shareholder of a Maine corporation that developed, owned and operated strip malls. The court, which had to contend with three different expert appraisals that came in $9 million at bottom and $48 million at top, valued the entire enterprise at $15 million based on "Pink Sheets" market trades adjusted -- as required by Maine's buyout statute -- to exclude any minority and marketability discounts. The decision is well worth the read for students of the art of stock valuation, but that's not what I want to address here. Rather, what I find most interesting about the case is who decided it: a federal judge.

Why is that interesting? The federal courts have two basic sources of subject matter jurisidiction: (1) the case involves a federal question, meaning the complaint asserts claims arising under federal statute or the U.S. Constitution, and (2) diversity of citizenship, meaning in most cases that the plaintiffs and defendants are citizens of different states. The typical case seeking judicial dissolution of a state-chartered corporation seeks state law remedies solely, which leaves diversity of citizenship as the only possible avenue to bring a corporate dissolution case in federal court.

In the U.S. Second Circuit, which encompasses New York, Connecticut and Vermont, the federal courts uniformly have abstained, i.e., refused to hear a case over which they otherwise have jurisdiction, from hearing corporate dissolution cases where jurisdiction is based on diversity of citizenship. Abstention doctrine is a highly complex area of federal (and sometimes state) law with several different strains. One of those strains, called Burford abstention after a U.S. Supreme Court case of that name, holds that a federal court sitting in diversity jurisdiction should abstain to avoid needless disruption of state efforts to establish coherent policy in an area of comprehensive state regulation. In Friedman v. Revenue Management, Inc., 38 F3d 668 (2d Cir. 1994), the U.S. Court of Appeals for the Second Circuit applied Burford abstention to dismiss a complaint seeking judicial dissolution of a New York corporation under Section 1104 of the Business Corporation Law based on shareholder deadlock. The plaintiff-50% shareholder resided in Indiana. The other shareholder was an Illinois corporation. The appellate court determined that abstention was appropriate because it

would avoid needless interference with New York's regulatory scheme governing its corporations. New York has a strong interest in the creation and dissolution of its corporations and in the uniform development and interpretation of the statutory scheme regarding its corporations. Moreover, to exercise jurisdiction over a dissolution of a state corporation would allow “the possibility of federal dissolution actions, based on [state statutes], being commenced in a number of different districts in which a particular ... corporation was subject to service, thereby placing an onerous burden on the corporation.” In addition, every federal court that has addressed the issue of dissolving state corporations has either abstained or noted that abstention would be appropriate, assuming jurisdiction existed. [Citations omitted.]

The federal District Court judges in the Second Circuit have rigorously followed Friedman, to the point of dismissing diversity-based corporate dissolution cases sua sponte, meaning, of their own accord, even when not asked by the defendant to do so, as in Boucher v. Sears, 1999 WL 736532 (NDNY Nov. 21, 1997).

I haven't done a comprehensive search of federal decisions outside the Second Circuit. A 2002 decision by the Sixth Circuit Court of Appeals, which covers Michigan, Ohio, Kentucky and Tennessee, agreed with Friedman. See Caudill v. Eubanks Farms, Inc., 301 F3d 658 (6th Cir. 2002). I haven't come across any decision on the subject by the First Circuit Court of Appeals which includes Maine where Kaplan was decided. There is, however, a 2008 decision by the U.S. District Court for the District of New Hampshire, which also is within the First Circuit, abstaining from deciding a corporate dissolution case brought under the court's diversity jurisdiction. See Neary v. Miltronics Manufacturing Services, Inc., 534 F Supp2d 227 (DNH 2008).

It does not appear that the defendants in Kaplan ever raised abstention as grounds to dismiss the case. In 2006, the federal judge held a trial of the plaintiff's state law claims for oppression, fraud and breach of fiduciary duty. The Court's April 2007 decision merely recites that the court has jurisdiction based on diversity of citizenship, and then goes on to uphold the oppression claim.

I can't close without noting that the Second Circuit's Friedman decision was in 1994, the year before the Commercial Division was established in the New York Supreme Court, initially in Manhattan and Rochester and later in many other counties throughout the state. The judges of the Commercial Division hear most of the corporate dissolution cases and, over the years, have developed great expertise and understanding of the special needs and dynamics of these cases. Therefore, and apart from the fact that diversity of citizenship among the co-shareholders and the corporation is infrequent, I don't think that the closing of the federal courthouse door to would-be dissolvers of New York corporations is a significant detriment anymore.

Winning the Dissolution Battle, Losing the War

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 04 May 2009 12:00:00 GMT

UPCOMING CLE PROGRAM ON LIMITED LIABILITY COMPANIES

On Thursday, May 21, 2009, I'll be speaking about LLC dissolution at a CLE program sponsored by the Queens County Bar Association. I'll be joined by attorney and author Michele Santucci who'll speak on LLC origins, choice of entity and organizational issues. It's a two-hour evening program (6 p.m. to 8 p.m.) with light dinner available starting at 5 p.m. For more details and registration, click here. Hope to see you there!

Most business divorce litigation involving closely held companies results either in a buyout of one party by the other, or the two sides dividing the remaining assets and going their separate ways.

The biggest problem getting to the buyout is the absence of a public market to establish the value of the interest being acquired, particularly when dealing with a non-controlling interest in a sales or services-based operating company. The buyer and seller, even when advised by qualified business appraisers, can be light years apart on price due to different assumptions about a host of valuation inputs some of which necessarily require subjective analysis.

Splitting up the business can be very easy or very difficult, depending on the specifics of the business. It tends to be more difficult when there is value associated with the defunct company's name or other such intangible good will value at the enterprise level (as opposed to personal good will that follows the individual business partner wherever he or she goes).

Litigation means time, expense and uncertainty, all of which can jeopardize the potential benefits of an eventual buyout or business split-up. It is difficult for the controlling owner to invest and make business plans while under the cloud of a prospective buyout of uncertain magnitude. The risks can be even greater in a split-up scenario for business partners who, perhaps as a matter of business survival, begin taking unilateral and sometimes surreptitious steps at odds with each other, designed to retain for themselves the loyalty and business of key customers and vendors.

These ruminations, and the title of this post, are inspired by recent decisions in two cases in which business partners remain locked in protracted and undoubtedly expensive litigation even after one side's initial attempt to achieve judicial dissolution became moot.

The first decision is Mouhlas Realty, LLC v. Koutelos, 2009 NY Slip Op 30893(U) (Sup Ct Queens County Apr. 7, 2009). If the party names sound familiar, that's because I highlighted a prior decision in this LLC dissolution case in a post last year (read here). In the prior decision, Queens County Supreme Court Justice Patricia Satterfield held that the petitioner, who owned a minority membership interest in the LLC, failed to establish grounds for judicial dissolution under LLC Law Section 702, and also held that the controlling members had no right to compel an "equitable" buyout of the petitioner's interest -- thereby leaving the litigants locked in a relationship neither wants. The decision also left unresolved a series of counterclaims brought by the controlling members against the petitioner, including one seeking imposition of a judicial lien on her membership interest on account of an unsatisfied demand for capital contribution.

Justice Satterfield's recent decision addresses the controlling members' motion for summary judgment on those unresolved claims. The controlling members argued, based on the "law of the case" doctrine, that the court's prior rejection of the minority member's grounds for dissolution, including her objection to a mandatory capital contribution, entitled them to judgment against her for specific performance enforcing the capital contribution requirement and imposing a lien. Justice Satterfield disagreed, stating that her prior decision did not determine the propriety of the capital call, only that there was no statutory prohibition against it, and that the petitioner failed to show that the LLC is unable to function in accordance with its operating agreement or that the business is failing financially.

So here it is, over a year after the minority member sued for dissolution, and even though the issue of dissolution has been taken out of the case, the parties seemingly are not one step closer to resolving their broken relationship. Have the parties been discussing a buyout? I don't know, I can only assume that they have and, if so, that the demand and offer are too far apart due to different views of the business value and/or the impact on price of the capital call.

The second case is Stack v. O'Higgins, 2009 NY Slip Op 30874(U) (Sup Ct NY County Apr. 2, 2009), decided by the newest member of the Commercial Division of the New York County Supreme Court, Justice Shirley Werner Kornreich. The plaintiff, Lawrence Stack, and the defendant, Michael O'Higgins, are 50-50 members of an LLC called Stack's Sales East Coast LLC ("SSEC") which buys and sells rare coins, medals, paper currency and other numismatic items. In September 2006, Stack brought an action for judicial dissolution of SSEC due to disagreement regarding the proposed transfer of Stack's membership interest. It appears from the court's docket that the case got bogged down in discovery for the next year and a half. Again, I don't know if any buyout negotiations took place in the interim.

What we do know from the court's decision is that in May 2008, Stack changed course by sending O'Higgins a written notice purporting to exercise his right under the operating agreement to cancel SSEC's license to use the word "Stack" in its company name or otherwise. The relevant section of the operating agreement expressly conditioned the license termination on Stack's withdrawal from SSEC or SSEC's dissolution, so O'Higgins responded with a letter demanding confirmation of Stack's withdrawal, which Stack gave by written notice in September 2008. Soon thereafter, O'Higgins filed a certificate of amendment changing SSEC's name to "Steib's Sales East Coast LLC."

Did Stack's withdrawal from SSEC, which effectively mooted his claim for dissolution, end the hostilities? Not by a long shot. Even after the formal withdrawal, O'Higgins apparently continued to use Stack's name to market and advertise his business, as evidenced by certain trade journal ads and online directories. This prompted Stack to file a motion to amend his complaint to add claims for breach of contract, a declaratory judgment and a permanent injunction. O'Higgins opposed the motion on the grounds that Stack's withdrawal from SSEC mooted the entire action and that, in any event, his company's official change of name met any obligation under the operating agreement to cease using Stack's name. Justice Kornreich rejected O'Higgins' contentions and, for the most part, granted Stack leave to amend his complaint.

Stack, as Stack's Rare Coins, and O'Higgins, as Steib's Sales East Coast, are now business competitors fighting each other for customers, sources and for the good will they spent years developing jointly. Dissolution is out of the picture. Yet they are still locked in a three-year old litigation that drains their financial resources, places in the public record matters that most business owners prefer to keep private, and distracts from time better spent building their business.

In both of these cases, Koutelos and Stack, the defendants avoided dissolution and were able to carry onward in control of the business. In that narrow sense they won the dissolution battle. But in both cases the war goes on to an uncertain end as they continue to litigate their unresolved business and financial differences.

Application for Judicial Dissolution of LLC Must Be Made by Complaint or Petition, Mere Motion Will Not Suffice

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 02 Mar 2009 12:00:00 GMT

For years I've been carping about the substantive and procedural inadequacies of New York's LLC judicial dissolution statute. LLC Law Section 702, which was modeled after the rarely utilized limited partnership dissolution statute, consists in its entirety of the following two sentences:

On application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. A certified copy of the order of dissolution shall be filed by the applicant with the department of state within thirty days of its issuance.

At the time of the LLC Law's adoption in 1994, the legislature's minimalist approach made some sense because of tax considerations requiring avoidance of certain corporate characteristics including continuity of life. The IRS's subsequent implementation of check-the-box regulations freely permitting partnership tax treatment of LLCs, and the 1999 LLC Law amendments restricting member withdrawal from LLCs, largely eliminated the legislative rationale for Section 702 as enacted, leaving the statute, in my view, not up to the complex task of adjudicating LLC breakups (hence the title of my June 2002 article published in the New York State Bar Journal, Vol. 74, No. 5, "When Limited Liability Companies Seek Judicial Dissolution, Will the Statute Be Up to the Task?").

These observations are prompted by a recent decision by New York County Commercial Division Justice Bernard J. Fried in a case I've previously written about called Ficus Investments, Inc. v. Private Capital Management, LLC. Ficus is a highly contentious dispute between LLC members involving accusations that the managing members misappropriated over $20 million. Last January, an appellate ruling enforced the lead defendant's right to advancement of his legal defense costs as provided by the operating agreement (see my earlier post here).

In a follow-up ruling dated February 23, 2009, Justice Fried granted a motion by another defendant also enforcing its advancement rights. The plaintiff, undoubtedly chafing at the prospect of subsidizing the defendants' legal defense, made a cross motion to dissolve the LLC, thereby requiring Justice Fried to consider whether, absent a pleading containing a claim for dissolution, the court can decree dissolution on application by motion. As far as I know, this is the first decision to address the issue.

Justice Fried notes that the operative language in Section 702 (court may decree dissolution "on application by or for a member . . .") does not expressly deny the right to seek dissolution by way of motion. He also contrasts Section 702 with the detailed procedural provisions in Article 11 of the Business Corporation Law requiring the commencement of a special proceeding for judicial dissolution of closely held business corporations by way of verified petition and order to show cause. Notwithstanding the legislative omission in the LLC Law, Justice Fried concludes that

the better practice is to apply for judicial dissolution by way of a plenary action. This would provide [the dissolution proponent] the opportunity to plead a cause of action for judicial dissolution, and it would enable [the dissolution opponent] to answer this claim, rather than merely oppose the [motion]. . . . Moreover, the vast majority of the cases applying Section 702 involve an application for dissolution that is made by way of cause of action contained in the complaint, counterclaim, or plenary petition [citations omitted]. . . . Here, Plaintiffs have not sought summary judgment on a claim or counterclaim for judicial dissolution, but rather, have merely cross-moved for the relief sought. Defendant PCM has neither interposed a counterclaim for dissolution nor indicated in any way that it would favor such relief. As stated above, I believe the preferable way to proceed with this application for judicial dissolution is by way of petition, and, exercising my discretion, I therefore deny Plaintiffs' cross-motion without prejudice.

There's no question that Justice Fried's conclusion reflects the practical reality. I have brought, defended and otherwise seen any number of LLC dissolution cases commenced by summons and complaint in a plenary action, as well as by order to show cause and verified petition in a special proceeding whose accelerated procedures are governed by CPLR Article 4. Curiously, the courts routinely accept petitions for LLC dissolution by way of special proceeding notwithstanding the absence of statutory authority for doing so, as seemingly required by CPLR 103(b) ("All civil judicial proceedings shall be prosecuted in the form of an action, except where prosecution in the form of a special proceeding is authorized.").

As noted in my previous post on this case, the subject company is a Florida LLC headquartered in New York. In a footnote Justice Fried refers to but does not describe the defendants' opposition to dissolution on the merits. I can only speculate that one of the grounds raised is the so-called internal affairs doctrine which, at least as developed in the context of non-domestic business corporations, prohibits a New York court from ordering dissolution of a foreign entity. On the other hand, I know of one lower court case which denied dismissal of a foreign LLC dissolution petition. We'll just have to wait and see if the plaintiff in Ficus takes up Justice Fried's suggestion to file a dissolution petition.

Court Rejects Bid by Corporate Dissolution Petitioner to Voluntarily Withdraw Case Without Prejudice

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 19 Jan 2009 12:00:00 GMT

If you're going to accuse your business partner of bad acts and ask for judicial dissolution of the business, be prepared to settle or take the case all the way to trial. That seems to be the message given to the petitioner in one recent dissolution proceeding when the court turned down her request to discontinue the case "without prejudice" to her bringing a future dissolution proceeding based on the same allegations. Matter of Holland (Romper Nursery, Inc.), Short Form Order, Index No. 8871/07 (Sup Ct Nassau County Dec. 30, 2008).

The underlying dispute is a fascinating one involving one of the toughest nuts to crack in the realm of business divorce: What should a court do when a 50% shareholder seeks judicial dissolution of a profitable operating company under the deadlock statute (BCL 1104) on the ground of "internal dissension" due to personal animus between the two shareholders? I wrote an October 2004 article for the New York State Bar Association Journal on the subject, in which I concluded that

Cases decided under the internal dissension statute exhibit something of a split personality, depending on whether the court views the corporation, successful or not, as more akin to a partnership terminable at will, or as an entity distinct from its owners, to be maintained if financially viable notwithstanding internecine warfare. Arguably, this duality is inherent in the statute’s requirement that the petitioner establish both the existence of internal dissension and that the factions are so divided that dissolution would be beneficial to the shareholders. In other words, the statute can be read such that the cessation of shareholder hostilities itself is an adequate benefit of dissolution, or it can be read to require some other benefit (i.e., financial) that may be hard to show when the business is otherwise viable and making money.

The Romper Nursery Case Background

The Romper Room Nursery School seems an unlikely setting for a bitter shareholder dispute. Jeanie Holland and Margaret Zack as 50-50 shareholders opened the nursery school in 1975. During the summer a day camp operates at the school's two locations in Great Neck and East Williston on Long Island. The school also offers bus transportation.

The nursery school prospered over the following three decades despite extreme alienation between the co-owners. As related in a January 2008 decision by Nassau County Commercial Division Justice Ira B. Warshawsky , for 13 years, between 1989 and 2001, Holland and Zack did not even speak to each other. They have no shareholders' agreement and never held meetings of the Board of Directors. They nonetheless devised a workable division of labor which keeps the business profitable. Each performs separate duties and works on two separate days of the week. They take equal salaries and distributions.

In 2005, Holland filed the first of two successive petitions for judicial dissolution of Romper Nursery under BCL 1104. The first proceeding was withdrawn without prejudice in March 2007 so that the parties could negotiate a buyout. As things developed, the parties could not even agree which one would be the buyer, much less could they agree on price.

Two months later, Holland filed her second deadlock dissolution petition accusing Zack of the same "divisive acts" including waste of corporate assets and property; permitting child transportation on unsafe buses; dereliction of payroll duties; keeping school open during inclement weather; and involving employees in management disputes. Zack denied all allegations of misconduct and asserted that Holland was trying to push her out of the business.

In his January 2008 decision mentioned above, Justice Warshawsky ruled that the issues raised in Holland's dissolution petition required an evidentiary hearing. The court noted with apparent understatement that the communications arrangement between the parties was "unusual," but went on to say:

Yet, the system has inured to the benefit of the corporation according to the record now before me. Seemingly, each generation of new parents send their children to the nursery school they attended. . . . There is no evidence, nor factual proof, before the court that the personal animus between the shareholder-directors prevents efficient management and corporate success. . . . Each case turns on its facts. The court cannot make a determination on the facts in the record whether this is a case of a business which is profitable, but the dissension is so pervasive that dissolution is warranted for the benefit of the shareholders.

The Bid to Withdraw the Second Proceeding

It's not clear from the decisions whether the evidentiary hearing was held. What is clear is that Holland subsequently changed lawyers and that her new lawyer applied for an order pursuant to CPLR 3217(b) permitting Holland to voluntarily discontinue the dissolution proceeding without prejudice. Holland gave as her reasons for withdrawing the case the financial and emotional costs of the litigation, and the uncertainty of its outcome despite the "rosy predictions" of her first lawyer.

Zack contended that any dissolution must be with prejudice, meaning that Holland would be unable later to start a new dissolution proceeding based on the same factual circumstances. Holland countered that a discontinuance with prejudice would "serve as an absolution of [Zack's] potentially or actually bad behavior" and that "should [Zack's] behavior in the future cause a threat to the safety and well being of the children attending Romper Nursery it would be a 'travesty' to allow [Zack's] past behavior to be considered irrelevant."

Justice Warshawsky agreed with Zack in his December 30, 2008 decision. He denied Holland's application to discontinue without prejudice and instead offered her the choice of accepting a dismissal with prejudice or proceeding to trial on a date certain. Here's the crux of his ruling, omitting the case citations:

[T]he court directs that those acts by [Zack] which are central to this special proceeding are precluded from serving as a basis for initiating another lawsuit. To allow [Holland] to sue [Zack] for the same acts as have been vigorously defended in this lawsuit would prejudice a substantial right of [Zack] to have a timely resolution of the matter after committing substantial resources to her defense, or to be free of litigation. But, subject to the application of evidentiary rules by the justice presiding over any future matter any prior acts may be introduced into evidence for other purposes.

Justice Warshawsky then elaborated on his ruling as follows:

Seemingly [Holland] has figuratively weighed the perceived danger to the nursery school children against the tangible and intangible costs she has paid to protect them, and found the costs to be greater than the danger. The future will not change the present, only perceptions of it, and [Holland's] decision based on facts known to her now is final. The law does not permit a litigant to change his or her mind based on hindsight once given a full and fair opportunity to seek redress for a wrong.

For obvious reasons, courts like it when litigants voluntarily withdraw a case. A "with prejudice" discontinuance just as obviously is a deterrent to voluntary withdrawal, so courts tend to use sparingly their power under CPLR 3217(b) to impose "with prejudice" as a condition of discontinuance. Here, a number of factors justified the condition: it was the second successive dissolution petition asserting the same claims; the respondent, Zack, incurred substantial legal fees defending herself in the two proceedings spread over three years; and the two successive requests to discontinue raise an inference that the litigation's tactical purpose to force a buyout was at least as large a factor in bringing the case as the petition's professed alarm over mismanagement and school safety issues.

Disputed Allegations of Shareholder Oppression Require Evidentiary Hearing

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 24 Nov 2008 13:36:41 GMT

There's nothing special about the corporate dissolution case brought by David Wenger involving a family-owned construction business. The facts of the case are garden variety, as these things go. The case presents no novel legal issues. The court's decision, ordering an evidentiary hearing to determine the petition's disputed allegations of oppression, is nothing if not anti-climactic.

But that's exactly why I want to write about it, to illustrate what happens in the ordinary dissolution case, where there are no knockout punches in the first round. That plus, it's my first occasion to highlight a decision by Suffolk County Commercial Division Justice Emily Pines.

The court's decision in Matter of Wenger (L.A. Wenger Contracting Co.), Index No. 31701/08 (Sup Ct Suffolk County Nov. 12, 2008), describes a case of corporate and family dysfunction pitting father against son. In August 2008, the son, David, as a 31% shareholder filed a petition to dissolve L.A. Wenger Contracting Co. of which his father, Louis, is majority owner. Upon filing the petition David obtained a temporary restraining order enjoining his father from disbursing company funds to any shareholder, officer or director except in the ordinary course of business. David's petition also sought appointment of a receiver pursuant to Section 1113 of the Business Corporation Law.

The petition sought dissolution under BCL Section 1104-a based on allegations of shareholder oppression and fraudulent conduct by his father over a period of years, including the conveyance of company-owned real property to David's father and sister for no consideration; denying David access to company information; and failure to make distributions. Louis's answer to the petition denied that he wasted or improperly diverted corporate assets; denied that David was frozen out of corporate governance; and contended that the alleged real property transfers were for the corporation's benefit. Louis also countered that David had "deliberately removed himself" from the family business over seven years earlier and was using the dissolution proceeding "in an improper attempt to take over a business run by [Louis] for over fifty nine years."

What happens when the litigants file such contradictory written submissions at this early stage in the proceedings? The answer requires some familiarity with judicial dissolution procedure. Unlike lawsuits commenced by ordinary summons and complaint, BCL Section 1106 requires that a corporate dissolution case be commenced by petition and Order to Show Cause signed by a judge which, among other things, fixes a so-called "return date" for the hearing of the petition. The initial return date normally is not an evidentiary hearing. Rather, it typically is handled by the court as a conference or oral argument by the lawyers to state their positions for and against dissolution. Some judges take the papers "on submission", i.e., without any in-court appearance by the lawyers, and will later issue a written decision. Either way, the threshold question for the court is whether, based on the papers alone, it can make a ruling granting or denying the dissolution petition, or whether the papers raise material issues of fact that cannot be determined without an evidentiary hearing. Essentially it's the same question judges face all the time when deciding motions for summary judgment: Are there disputed issues of fact?

In the Wenger case, Justice Pines concluded that the determination of David's petition requires an evidentiary hearing because of the disputed facts. Here she succinctly states the governing law and its application to the case before her:

The appropriateness of an order of dissolution or other related remedy pursuant to [BCL Section 1104-a] is in each case vested in the sound discretion of the court considering the application. Matter of Kemp & Beatley v. Gardstein, 64 NY2d 63, 484 NYS2d 799 (1984).

Where the allegations in a Petition by a minority shareholder to dissolve a closely held corporation pursuant to BCL 1104-a are disputed, the courts of this State have held that a hearing is mandatory both to determine whether the oppressive conduct set forth by the statute exists and to decide the appropriate remedy. In re WTB Properties, Inc., 291 AD2d 566, 737 NYS2d 654 (2d Dept 2002); Matter of Steinberg v. Cross Country Paper Products Corp., 249 AD2d 341, 671 NYS2d 341 (2d Dept 1998). . . .

In this case, the minority and majority shareholders have set forth far differing versions of the facts. When contested as they are here, the Court must, through a full record, including the testimony of the parties, determine whether the majority shareholder has, in fact, been engaged in improper transfers, self dealing, or whether, as stated by [Louis], all actions have been appropriate under the circumstances.

Justice Pines also ruled that there was not "sufficient information at this stage" to determine that appointment of a receiver was necessary to preserve the assets of the corporation. She did, however, continue the temporary restraining order barring disbursements to preserve the status quo.

There have been numerous cases in which courts grant or deny dissolution without holding an evidentiary hearing. For instance, in Matter of HGK Asset Management, Inc., 228 AD2d 246 (1st Dept 1996), the appellate court affirmed an order of dissolution without a hearing where the respondent shareholders' papers opposing the petition failed to raise a factual issue of oppression. Wenger nonetheless is a good reminder for petitioners that their ultimate objective, whether it be liquidation of the company or inducing the other side to purchase their shares, may not be achievable in the first round of litigation, and that they may have to incur the additional time and considerable expense of an evidentiary hearing.

Timing is Everything When it Comes to the Buyout Election in Corporate Dissolution Cases

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 17 Nov 2008 12:00:00 GMT

A recent decision by Queens County Commercial Division Justice Orin R. Kitzes in Matter of Weingarten (Thirty First Street Realty Corp.) calls attention to a critical issue in corporate dissolution proceedings, namely, the timing of the statutory election to purchase the petitioning shareholders' stock interest. First, some background.

Section 1104-a of New York's Business Corporation Law authorizes a petition for judicial dissolution of a close corporation brought by a shareholder holding at least 20% of the voting stock on the ground of "oppressive actions" by the controlling shareholders. The dissolution statute is counterbalanced by BCL Section 1118 which gives the respondent shareholders the absolute right to stay the dissolution proceeding and, ultimately, to avoid dissolution altogether by electing to purchase the petitioner's shares for fair value.

The right of election is not open-ended. Section 1118 requires that the election be made within 90 days after the petition is filed. Practitioners know that only the rare dissolution petition is decided on the merits within 90 days. This poses a quandary for the respondent inclined to fight the allegations of oppression but also not willing to put the company at risk of dissolution if the petitioner prevails on the merits.

Section 1118(c)(1) provides a semi-safety valve for this situation. It provides that if an election is made after 90 days,

and the court allows such petition, the court, in its discretion, may award the petitioner his reasonable expenses incurred in the proceeding prior to such election, including reasonable attorneys' fees.

The court's authority to grant or deny a tardy election is discretionary, and there is not much case law on the subject. In Matter of Ambrosio (NYLJ 11/20/92, Sup Ct Suffolk County), the court permitted an election to purchase three years post-petition, conditioned on the respondent paying the petitioner's pre-election counsel fees and giving an undertaking to secure the fair value award. In Sobol v. Les Pieds Nickles, Inc., 262 AD2d 194 (1st Dept 1999), the court affirmed an order rejecting an election made eight years after commencement of the proceeding. In Matter of Flushing Office Center, Ltd., 276 AD2d 629 (2d Dept 2000), the court affirmed an order permitting a late election, observing that the "petitioners' rights to the fair value of their shares in the corporation shall be preserved by the appointment of an independent Referee whose responsibility will be to report to the Supreme Court as to the amount of such fair value."

The Weingarten case pits Victor Weingarten against his brother Fred and the Estate of Jacob Popovic as the three equal shareholders of a corporation that owns a commercial property in Long Island City. In May 2007, Victor filed a petition to dissolve the corporation under Section 1104-a, alleging that the other two shareholders without his consent had leased and subleased the property to other companies owned by the two of them to operate a taxi management business. Fred and the Popovic Estate denied the petition's allegations of oppression but offered to consent to dissolution provided the leases remained undisturbed.

In a decision dated April 29, 2008, Justice Kitzes ruled that the parties' conflicting allegations raised issues of fact requiring a hearing to determine whether judicial dissolution is warranted. In August 2008, Fred and the Popovic Estate moved for authorization to purchase Victor's shares under Section 1118. In a decision dated October 17, 2008, Justice Kitzes denied the motion, offering the following reasons:

First, movants offer no excuse for their failure to timely exercise the right of election. Second, there is no indication that continuing the corporation is a viable and worthwhile endeavor. Third, movants' claims that allowing the election would save further litigation and expense is not supported by any evidence and fails to take into account the work involved with a valuation under an election to purchase shares. Furthermore, movants have also failed to demonstrate irreparable harm, likelihood of success on the merits, or a balance of the equities in their favor in support of their application for a stay of the dissolution proceedings.

It's difficult to extract much guidance from Weingarten and the few earlier cases cited above. The facts and equities are unique in each case. In many instances a petitioner prefers even a late buyout to dissolution, but that's not always the case, particularly when the corporation's value mainly consists of real estate or other readily marketable hard assets. For the respondent shareholder who wants to fight the allegations of oppressive conduct but who also wants to preserve the buyout option until the court determines the merits, it may be prudent to make a motion promptly after the petition is filed, seeking to toll the election period pending the court's ruling.

But wait, there's more. The New York Court of Appeals, in its 1984 Kemp & Beatley decision (64 NY2d 63) adopting the reasonable expectations test for "oppressive actions" under Section 1104-a, stated that "[e]very order of dissolution . . . must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder's stock at fair value." In that case, where the respondent shareholders never sought to elect to purchase, the orders of the lower courts and the Court of Appeals directing dissolution nonetheless all included extensions of the time for exercising the election to purchase, long past the original 90 days. I have yet to see a case that reconciles Kemp & Beatley's seemingly inflexible command with the court's discretionary authority under Section 1118(c)(1) to grant or deny an untimely election. Until that happens, we may continue to face the anomalous circumstance in which a respondent who fails to elect within the first 90 days but later decides to do so, may be better off waiting for a conditional order of dissolution than moving for leave to make an untimely election.

Spouses Holding Shares as Joint Tenants Must Jointly Petition for Corporate Dissolution

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 22 Sep 2008 12:00:00 GMT

When husband and wife hold shares as joint tenants with right of survivorship, can one of them seek corporate dissolution without joining the other?

The answer is "no," according to a recent decision by Queens County Supreme Court Justice Patricia P. Satterfield in Matter of Mouzakitis (Pearl Nightlife, Inc.) (read decision here).

Petitioner Marianthi Mouzakitis and her husband, Leonidas, own 15% of the common shares of Pearl Nightlife, Inc. as tenants by the entirety. The corporation operates a restaurant in Bayside, New York, that opened in March 2008. The Mouzakitises contributed $125,000 for their interest. Ms. Mouzakitis alleged that the controlling shareholders failed to make required contributions, failed to pay salaries and dividends, withheld access to corporate books and records, and diverted corporate funds and assets including liquor and food allegedly diverted to other restaurants separately owned by the corporation's president. In May 2008, the other shareholders allegedly had the petitioner arrested at the restaurant.

As a 15% shareholder, Ms. Mouzakitis lacked standing to seek judicial dissolution under Sections 1104 (deadlock - 50%) or 1104-a (oppression - 20% minimum) of the Business Corporation Law. She therefore petitioned for common law dissolution of the corporation which, as framed by the New York Court of Appeals in Leibert v. Clapp, 13 NY2d 313 (1963), can be sought by any minority shareholder where the majority shareholders "so palpably breached their fiduciary duties they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by the statute."

The respondents contended that the petitioner could not bring the action without her husband since they owned the shares as tenants by the entirety, a form of ownership whereby each spouse holds an undivided interest in the whole of the property with rights of survivorship. Respondents relied on Rust v. Turgeon, 295 AD2d 962 (4th Dept 2002), where the court dismissed a deadlock dissolution claim for lack of standing under BCL Section 1104. The petitioner in Rust alleged that he and a second shareholder owned 100% of the corporation's shares as joint tenants with right of survivorship. The court ruled that if Rust

were determined to be a joint tenant of all of the shares, his interest would be an undivided interest in all of the shares, and he could not be deemed a holder of one half of the shares as required by [BCL] 1104(a).

In opposition, Ms. Mouzakitis relied on case law permitting one cotenant to enforce and preserve jointly held property rights. Her attorney also advised the court that he spoke by phone with the husband, Leonidas, who was in Greece, and that the husband "agreed to this action to enforce the parties' rights."

Justice Satterfield agreed with the respondents and denied the petition without prejudice to renewal, stating that the petitioner, "if she is so advised, may remove the unnecessary obstruction to her case which has appeared at its early stage by having her husband join a new proceeding."

I confess, I'm a little puzzled by the disposition in light of the fact that, according to the docket information available online, the caption of the proceeding names both husband and wife as petitioners. Under rules of New York practice, when there are multiple petitioners united in interest, only one of them need verify the petition (CPLR 3020(d); BCL 1105). I can only speculate that something in the record indicated to the court that the husband never authorized counsel to name him as a petitioner.

I also wonder if the necessary-party doctrine isn't the better analysis of the problem in Mouzakitis. In Rust, the petitioner lacked standing to proceed under BCL 1104 because, as a joint owner with the respondent of 100% of the corporation's shares, he could not under any circumstances satisfy the statute's requirement of a 50% stock interest. The common law dissolution sought in Mouzakitis has no standing requirement other than being a shareholder, which Ms. Mouzakitis certainly is. Given her husband's joint, undivided interest in the shares and his right of survivorship, he should be deemed a necessary party under CPLR 1001(a) whose joinder likely cannot be excused given that a judgment of dissolution would terminate his interest in the shares.

Anatomy of a Dissolution Slugfest: Part III

pmahler@farrellfritz.com (Peter A. Mahler) — Mon, 10 Mar 2008 11:30:00 GMT

This is the third in a series of postings on a multi-faceted corporate dissolution battle waged in Nassau County Supreme Court called Matter of Marciano (Champion Motor Group, Inc.) involving three partners and a luxury automobile dealership.

Part I of the series (read it here) reviewed the basic facts of the case and discussed the defendants’ initial, unsuccessful challenge to Marciano’s standing to seek dissolution based on allegations that he deliberately sought to conceal from tax authorities and federal prosecutors his stock ownership interest. Part II (read it here) reviewed a number of additional issues addressed in the court’s September 2006 initial decision in the case, including the defendants’ argument that they acted reasonably by excluding Marciano from the business after his criminal indictment; Marciano’s request to dissolve the related LLC’s; and Marciano’s application for various forms of interim relief and for extensive discovery.

In this Part III, we turn to the second of Justice Warshawsky’s four written opinions in the case, dated June 15, 2007, in which he considers Marciano’s motions to compel payment to him of distributions pending the litigation and for leave to amend his complaint to add claims based on defendants' alleged financial abuses in the year following commencement of the litigation.

1. Marciano’s motion to compel interim distributions.

A minority shareholder who is frozen out of the business and subsequently files for judicial dissolution is hardly surprised when the controlling shareholders cut off distributions while the litigation rages. The Appellate Division, First Department's decision in Matter of HGK Asset Management, Inc. (Greenhouse), 238 AD2d 291 [1997], authorizes a court to order payment of salary and benefits to the excluded shareholder pending the dissolution proceeding. The Second Department's decision in Deborah Int’l Beauty Ltd. v. Quality King Distributors, Inc., 175 AD2d 791 [1991], also gives courts authority to enforce provisions in shareholder agreements mandating distribution of net income pending dissolution proceedings.

Marciano took a different tack toward the same end, but came up short. He alleged that, prior to litigation, he had received shareholder distributions including monthly payments of $6,250 on account of interest due him for his $1 million letter of credit and for "services rendered". After suit was filed, initially the defendants voluntarily continued the monthly payments which they used as evidence that Marciano was not being oppressed. A couple of months after the court’s first ruling in September 2006, however, the defendants cut off the payments after they secured a release in favor of Marciano from all liabilities arising from the letter of credit and other personal guarantees, and because Marciano was no longer providing any services.

Justice Warshawsky agreed with defendants, stating that "[u]nder these factual circumstances, the plaintiff has not established his entitlement to injunctive relief compelling the defendants to continue making the monthly payments which they have since terminated".

2. Marciano’s motion to amend his complaint.

The life cycle of a corporate dissolution case can run from a few weeks to several years. The longer it goes on, the more incentive and opportunity the excluded shareholder has to add new claims to his or her original petition or complaint for alleged post-commencement wrongdoing by the controlling shareholders who continue to operate the business and control the finances.

Marciano did just that, about a year after starting his lawsuit, by moving for leave to amend his complaint to add individual and derivative claims for an accounting, breach of fiduciary duty and for repayment of a personal loan to one of the defendants. The proposed pleading included a new section alleging wrongful acts that occurred or that Marciano discovered after initiation of the action including denial of access to corporate records, excessive compensation and personal expenses taken by the defendants, and other alleged looting and waste of corporate assets.

Citing New York’s liberal policy favoring amendment of pleadings, Justice Warshawsky granted Marciano’s motion to amend although he also cautioned that the newly added derivative claims were contingent on his being a shareholder at the time of the alleged wrong.

To be continued . . .