September 6, 2016

Partnership Dissolution Presents Factual Issues

In a case turning on an unusual provision in West Virginia partnership law, the state Supreme Court sent a partnership dissolution action back to the trial judge to determine whether the plaintiffs were actually partners of the partnership that they were trying to dissolve.

The opinion in Sugar Rock, Inc. v. Washburn (Supreme Ct. Appeals June 3, 2016) turned on a specific, and unusual, provision in West Virginia law that requires that an interest in “mining partnerships” to be in writing. The existence of a statute of frauds, however, doesn’t mean that this is not a question that arises with some frequency.

Formation of General Partnership Under RUPA

August 12, 2016

Trial Judges Have Discretion to Dissolve an LLC or Dissociate a Member

by Jay R. McDaniel, Esq.

Limited Liability Company Attorneys Petitioning members and managers of limited liability companies need to choose carefully between dissolution and dissociation of a member when they initiate litigation to expel a “bothersome” member. If the petitioning member includes grounds for both, they will not be able to choose the preferred remedy. Rather, the trial judge has discretion to choose between the two remedies without consideration of the preferences of any of the parties. The District Court of Appeals has held that the D.C. Code “substantially mirror[s]” language in the Revised Uniform Limited Liability Company Act (RULLCA), which grants discretion to trial judges to decide between dissolution and dissociation when grounds for both causes of action are present.

‘Shall Be Disassociated’ Does Not Compel Remedy

The D.C. court’s decision in Reese v. Newman, 131 A.3d 880 (D.C., 2016) disagreed with the appellant’s interpretation that the statue’s language compelled trial judges to disassociate a member of an LLC when one of the enumerated grounds for expulsion has been established. C. Allison Defoe Reese, the appellant, argued that the language “a person shall be disassociated” was a command to the trial judge to disassociate the appropriate member and removed the judge’s discretion to choose between the remedies.

June 27, 2016

Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount

by Jay R. McDaniel, Esq.

Talk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

May 26, 2015

Limited Liability Company Breakup: Crossing the Hudson Makes a Difference

by Jay R. McDaniel, Esq.

LLC Divorce: Till Death Do Us Part, or Just Irreconcilable Differences

Should a business divorce be hard or easy? In the world of human divorces, it’s the difference between no-fault divorce and divorce only after a showing of cause. In the world of businesses, it turns on the
concept of court-ordered purchases and sales of minority interests. And in the area of law governing limited liability companies, it is the concept of “involuntary dissociation” – expulsion, if you will, of one of the members.

Involuntary Dissolution of LLC

Two recent cases in the past month demonstrate this concept. East of the Hudson River, we have the First Department of the Appellate Division in New York opinion in Barone v. Sowers, , 2015 NY slip OP 04195 (1st Dept May 14, 2015), in which the court held that allegations of oppressive conduct simply don’t make out a claim for relief under New York’s limited liability statute.

Compare this Empire State decision with one from the Garden State captioned IE Test, LLC v. Carroll, docket No. A-6159 (N.J. Super. App. Div., March 17, 2015)(Opinion Below). Here, the appellate court affirmed the expulsion of a member because it was clear that the parties personal animus prevented them from maintaining a working relationship.

March 27, 2014

Attachment of LLC Interest in Management Dispute

by Jay R. McDaniel, Esq.

A recent dispute involving the owners of a medical office building demonstrates, once again, how unexpected business governance issues can threaten an ongoing business.

This opinion from the Appellate Division, in New Jersey Realty Concepts, LLC v. Mavroudis, Docket No. A-2013-12T1 (App. Div. March 18, 2014)(opinion here), demonstrates how the failure to put a business enterprise into a business form with limited liability, be it a corporation, limited liability company or limited liability partnership, can make it impossible for the business to continue.

The case itself turned on the scope of authority of a special fiscal agent, which is a court appointee typically found in shareholder or limited liability company litigation. We’ll discuss this in more detail below.

Judgment Creditor Attaches LLC Interest in Rents

The real issue, however, is buried at the end of the opinion in which the Appellate Court held that a debtor could directly attach rents paid by the building tenants because the owners’ interest was itself assignable. And that is the big difference as far as asset protection goes – a joint tenancy offers no real protection to creditors.

Had the owners of the building placed it in some type of holding company, then the remedy against a debt owed by of one of the principals would have been much more limited — and would not have threatened the viability of the enterprise. Here, as a result of the form of the enterprise, a judgment creditor of one of the participants was able to levy against 60 percent of the rent roll, leaving the building itself apparently insolvent.

Had the building been held as a limited liability company, the best the judgment creditor could have done was a charging order against the individual interest of the member that was a judgment creditor. Similarly, in a corporation, the remedy would have been limited to the individual shareholder’s interest – assuming no buy-sell agreement restricted transfer.

September 19, 2013

No Shareholder Oppression in Refusal to Buy Minority Interests

by Jay R. McDaniel, Esq.

Holding a family business together gets more difficult as time passes, as this recent opinion
from the Appellate Division demonstrates. A rift between the family members still working for, and in control of H. Schultz & Sons, resulted in the minority members who stopped receiving dividends while the company was trying to remake itself from a retailer to a distributor.

No Shareholder Oppression in Exercise of Majority’s Business Judgment

The failure to pay dividends and a refusal to use the assets of the business to buy out the non-employee shareholders, however, in itself is the type of conduct that rises to shareholder oppression.

The group of minority shareholders who claimed that the corporation’s refusal to purchase their interests was shareholder oppression failed to establish a viable claim under New Jersey’s Oppressed Shareholders Act, says the Appellate Division

Affirming the trial court’s opinion in Goret v. H. Schultz & Sons, Inc., Docket No. A-4281-10T1 (App. Div. Sept. 10, 2013), the Appellate Division affirmed the holding that the refusal to repurchase minority interests no longer receiving dividends was an appropriate exercise of the business judgment rule.

February 25, 2013

Expelled LLC Members: No Right to Force Purchase

by Jay R. McDaniel, Esq.

Removal of LLC Member May Be ‘Prospective’ Conduct

In what is probably the most significant appellate decision involving New Jersey limited liability companies in a decade, the Appellate Division held that wrongful conduct is not required to expel a member from the LLC, nor is the member entitled to be paid for the value of the interests.

On the contrary, the opinion in All Saints University of Medicine Aruba v. Chilana, Docket No. A-2628-09T1, App. Div Dec. 24, 2012, makes clear the standard can be much lower: conduct that makes it not reasonably practicable to continue the business with the member. The former member, moreover, cannot compel purchase of their interests. They are relegated to the status of assignee, forfeiting all of their management rights but still retaining their financial interest in the business.

Removal of Members in Business Divorce Cases

Expelling a member from a New Jersey limited liability company requires a judicial order, unless the LLC’s operating agreement contains specific provisions that permit for the expulsion of members. Litigation over the expulsion of members, referred to in the New Jersey Limited Liability Company Act as involuntary dissociation, typically focuses on wrongful conduct by the member whose ouster is sought.

November 6, 2012

Shareholder Oppression Claim Requires Trial

by Jay R. McDaniel, Esq.

Claims of Shareholder Oppression Are Disputed by Majority Owner

A motion for judicial dissolution of a retail business based on the claims that the majority owner had oppressed the minority shareholders should be denied when the facts are in dispute. An evidentiary hearing is necessary to resolve the disputed issues. Ho v. Nest & Ginseng, Inc., 950 N.Y.S.2d 494 (Queens Feb. 28, 2012).

Two minority shareholders each holding 25 percent of the corporation brought suit as oppressed shareholders against the 50 percent owner of the business, which operated a J Mart in a shopping mall in Flushing, Queens, seeking dissolution of the business under Business Corporation Law 1104-a.

BCL 1104-a permits the dissolution of a corporation on application of the holders of 20 percent or more of the business based on the oppressive conduct of the majority or the directors of the corporation. The petitioners in this action alleged that the majority shareholder, Yuk Yung Yu, was operating the business in a suspicious manner and that he had been promoting the sale of her stock in the corporation in violation of the shareholders agreement.

October 4, 2012

No Jurisdiction of Claim Seeking Dissolution of NY Corporations

by Jay R. McDaniel, Esq.

Corporate Dissolution Claims of Foreign Entities Not Proper

Corporations and other business entities are creatures of the law of the state where they were organized. Delaware and Nevada, for example, compete as the state of choice when organizing a new business entity. And the simple fact is that most of the businesses organized under Delaware or Nevada law have no operations in those states.

Does that mean that other courts are limited in the ability to grant relief in the event that litigation develops among the owners over corporate governance issues? That was the issue in a recent decision by Chancery Judge Carroll in Lerner v. Heidenberg, BER-C-64-12 (Chancery Div. June 8, 2012). The decision is a warning that electing to organize a company under a particular state’s law may also be a commitment to have the courts of that state resolve certain disputes if things go wrong.

September 7, 2012

Expelled LLC Member Not ‘Employee’ In Age Discrimination Claims

by Jay R. McDaniel, Esq.

LLC Member Who Refused to Retire Was Expelled by Managers

The challenges in making the transition from the the founding members of a successful enterprise to the second generation of managers are often difficult, as this litigation involving that has endured for nearly a decade demonstrates. It may be that the business has moved in a new direction, or perhaps it is simply that the founding member no longer inspires the same type of confidence as when he or she was younger. The second generation of owners often has its own ideas about the way the business should run, but the founders are loathe to cede control.

And of course there are those cases in which the founding member simply refuses to retire long after they have ceased to be a productive contributor to their business. It is not particularly unusual that the more active members of a business, whether it is a partnership, limited liability company, or a close-corporation, will ultimately seek to expel the founder from the business.