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Business Law Today

April 2023

Recent Developments in Business Divorce Litigation 2023

Byeongsook Seo

Recent Developments in Business Divorce Litigation 2023 Chittamai

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§ 1.1 Introduction

The term “business divorce” includes disputes that cause business partners to end their partnership, situations that require owners to separate, or circumstances where a business partner wishes to change the composition of management. This chapter provides summaries of developments related to such business divorce matters that arose from October 1, 2021, to September 30, 2022, from mostly nine states.

Contributors to this chapter used their best judgment in selecting business divorce cases to summarize. We then organized the summaries, first, by subject matter, then, by jurisdiction. This chapter, however, is not meant to be comprehensive.

The reader should be mindful of how any case in this chapter is cited. Some jurisdictions prohibit courts and parties from citing or relying on opinions not certified for publication or ordered published. To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. The reader should also be mindful that this chapter provides a “snapshot” of developments within a single year. Any development in a particular year covered by this chapter may be altered by legislation or cases in subsequent years.

We hope this chapter assists the reader in understanding recent developments in business divorces.

§ 1.2 Access to Books and Records

§ 1.2.1 California

Fowler v. Golden Pac. Bancorp Inc., 80 Cal.App.5th 205, 295 Cal.Rptr.3d 501 (2022). A trial court granted a director plaintiff’s petition for a writ of mandate against a corporation to enforce his statutory and absolute right to inspect corporate books and records as a director under Cal. Corporations Code § 1602. The corporation appealed, then moved to dismiss the appeal as moot due to another company acquiring the corporation and eliminating the plaintiff as a board member during the pendency of the appeal. The court agreed that the primary issue on appeal is moot because plaintiff is no longer a member of the corporation’s board of directors and, therefore, has no director’s inspection rights. But the court exercised its discretion to reach the merits because it presented an issue of substantial and continuing public interest: whether a director’s “absolute” right of inspection under § 1602 may be curtailed because the director and corporation are involved in litigation and there is a possibility the documents could be used to harm the corporation. The court concluded that the mere possibility that information could be used adverse to the corporation is not by itself sufficient to defeat a director’s inspection rights. Rather, any exception to the general rule favoring unfettered access must be limited to extreme cases, where enforcing an “absolute” right of inspection would produce an absurd result, such as when the evidence establishes the director’s clear intent to use the information to breach fiduciary duties or otherwise commit a tort against the corporation.

Grove v. Juul Labs, Inc., 77 Cal.App.5th 1081, 293 Cal.Rptr.3d 202 (2022). This case addresses, among other things, the demand of a former California employee who is a shareholder (through post-employment, exercised options), to inspect the books and records of his former employer, a Delaware company, headquartered in San Francisco, that operated under a corporate charter that required the shareholder to pursue his claims in Delaware. The company responded to the shareholder’s inspection demand letter by filing an action for declaratory and injunctive relief in Delaware, to seek a judgment to establish that the shareholder’s inspection rights are governed by Delaware law and that the shareholder contractually waived his inspection rights, and that he is prohibited from asserting an inspection right under California law. The shareholder then sued the company in California to enforce his shareholder inspection rights, under Cal. Corporations Code § 1601, but that action was stayed due to the Delaware action. The Delaware court first ruled that the shareholder had not surrendered by contract his right to inspect documents under California law because the parties’ agreements addressing inspection rights pertain specifically and exclusively to inspection rights under California law, § 1601. But under the internal affairs doctrine, the Delaware court determined the shareholder’s inspection rights were not dictated by California law, but under Delaware law, because Delaware was the state of incorporation and the corporate charter contains a forum selection clause making the Delaware Chancery Court the sole and exclusive forum for any shareholder to bring an action related to any provision of Delaware corporate law or asserting a claim against the company governed by the internal affairs doctrine. The shareholder then tried to restart the stayed California action in an attempt to have the California court void the forum selection clause. Ultimately, the California trial court determined that the shareholder’s inspection request had been adjudicated in the Delaware Court of Chancery, whose decision is entitled to full faith and credit in California. The appellate court affirmed this decision under the principles of collateral estoppel and full faith and credit. The shareholder was precluded from relitigating a dispute in California that was already adjudicated in the Delaware action.

§ 1.2.2 New York

O’Donnell v. Fleetwood Park Corp., 203 A.D.3d 1048 (NY App. Div. 2022). The court affirmed the trial court’s order compelling a corporation to provide books and records to a petitioning shareholder. A shareholder of a corporative corporation sought to be provided with an unredacted list of the corporation’s current shareholders so that he could communicate with the shareholders as he campaigned for a position on the corporation’s board of directors. The corporation allowed the shareholder to view at its offices an outdated list of shareholders in which the names and addresses of some of the shareholders had been redacted. The shareholder filed a petition to compel the corporation to provide him with an updated, unreacted shareholder list. The trial court granted that petition, finding that the shareholder had established a proper purpose for his request by asserting that he requested the list to campaign for a position on the corporation’s board of directors. The appellate court affirmed, observing that, “Under New York law, shareholders have both statutory and common-law rights to inspect a corporation’s books and records so long as the shareholders seek the inspection in good faith and for a valid purpose”. As the shareholder had established a proper purpose, the corporation was required to provide him with an updated, unredacted list of shareholders.

§ 1.3 Business Judgment Rule

§ 1.3.1 Nevada

In re Newport Corporation Shareholder Litigation, 507 P.3d 182 (Nev. Mar. 30, 2022). Shareholders brought action against the former board members of Newport for breach of fiduciary duties in their approval of a merger. The court affirmed the district court’s summary judgment ruling, finding that Newport’s CEO’s alleged self-interests in the merger were not actionable conflicts: the evidence did not show that he sought the merger out of fear of being fired or to achieve a more lucrative severance package. Moreover, the CEO’s alleged self-interest in the merger, alone, was insufficient to rebut the business judgment rule. Shareholders did not carry their burden to demonstrate that the CEO concealing his alleged self-interests from the Board impacted the Board’s overall independence. The evidence showed that the Board knew of the activist shareholders’ pressure on the CEO’s job performance, and knew of the CEO’s change-of-control severance package. Lastly, the court found that even if the shareholders could defeat the business judgment rule, they did not show an actionable injury; i.e., that the Board breached their fiduciary duties and that those breaches involved intentional misconduct, a knowing violation of law, or fraud.

§ 1.3.2 New York

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director of a corporation brought suit against the other two directors alleging breach of fiduciary duty among other claims. As set forth in the motion court’s decision, the amended complaint alleged that the directors undertook a series of decisions that deviated from the corporation’s previous business model. The trial court held that these decisions were protected by the business judgment rule and dismissed the complaint. The appellate court affirmed, observing that, the complaint merely alleged that a course of action other than that pursued by the board of directors would have been more advantageous.

§ 1.4 Dissolution

§ 1.4.1 Arizona

IMH Special Asset NT 168 LLC v. Beck, 2022 WL 1580864 (Ariz. Ct. App., Div. 1 May 19, 2022). RNMA I was a New Mexico limited partnership that, pursuant to the terms of its Partnership Agreement, was set to dissolve in December 2015. Pursuant to the Partnership Agreement, the dissolution would follow “a liquidation period not to exceed 12 months.” None of its limited partners took any action to extend the dissolution date prior to its passing. A year later, in December 2016, more than 75 percent of the limited partners gave notice that they were “retroactively” extending the term of the limited partnership. Subsequently, in January 2017 RNMA I made a capital call on the limited partners and, also, in July 2017 took out a loan.

IMH Special Asset NT 161, LLC and IMH Special Asset NT 168, LLC (collectively “IMH”) obtained an interest in RNMA I through a post-foreclosure deficiency action. Although the underlying litigation and arguments are complex, the superior court held that the receiver IMH had appointed did not have authority to manage RNMA I and could not make capital calls and IMH appealed. Initially, the court of appeals concluded that the limited partners’ “retroactive” attempt to extend RNMA I’s term was invalid as it had occurred after the dissolution date and liquidation period and remanded the case so the superior court could determine the effect of RNMA I’s failure to wind up by the date set by the Partnership Agreement. On remand, the superior court held that the January 2017 capital call and the July 2017 loan agreement were ultra vires and not proper winding-down acts. Again, IMH appealed. On the second appeal, the court of appeals confirmed the superior court’s ruling and held that RNMA I was in a wind-up period and, thus, continued to have a legal existence as a limited partnership during that wind-up period but that the capital call and loan were ultra vires as they were not proper winding down acts.

§ 1.4.2 California

Guttman v. Guttman, 72 Cal.App.5th 396, 287 Cal.Rptr.3d 296 (2021). In this case, a plaintiff-partner-plaintiff sued to dissolve a limited partnership. In response, the remining defendant-partners initiated a statutory procedure to buyout plaintiff’s interest in the partnership. Pursuant to this procedure, court-appointed appraisers submitted to the court their valuations of the partnership’s properties. Plaintiff, believing the appraisals undervalued the properties, dismissed his complaint without prejudice. The court then granted defendants’ motion to vacate the dismissal. On appeal, which was treated as a writ of mandate, the court of appeals denied the petition. The court explained that Plaintiff’s dismissal of the dissolution action would frustrate the statutory scheme for permitting buyout of any partner moving to dissolve a limited partnership. Under Cal. Corporations Code § 15908.02, once the buyout procedure has been ordered, a plaintiff’s dissolution action is stayed, and the buyout procedure goes forward in its place. Since the order granting the buyout motion effectively disposed of the dissolution action, such disposition, together with the policy considerations of discouraging tactics of repeatedly filing and dismissing dissolutions until an appraisal acceptable to a plaintiff is issued, deprived the plaintiff in this case of his right to dismiss his dissolution action after the buyout motion was granted.

Friend of Camden, Inc. v. Brandt, 81 Cal.App.5th 1054, 297 Cal.Rptr.3d 732 (2022). Plaintiff, a 1 percent membership owner of an LLC initiated a judicial dissolution of the LLC under Cal. Corporations Code § 17707.03. Defendants, the other members of the LLC who held 50 percent of the membership interests, filed a motion to avoid the dissolution by purchasing plaintiff’s 1 percent interest, under § 17707.03(c). Then, the plaintiff with other members owning 49 percent membership interest—for a total of 50 percent of the membership interests in the LLC—voted to voluntarily dissolve the LLC pursuant to § 17707.01(b). The issue on appeal was whether the vote of 50 percent of the membership to dissolve the LLC extinguished the right defendants otherwise would have had to purchase plaintiff’s 1 percent interest and avoid dissolution of the LLC. An issue on appeal was whether § 17707.03(c)(6) supports defendants’ contention that plaintiff cannot prevent a buyout, even though plaintiff never dismissed the dissolution action, and the buyout procedure did not commence, before the other 50 percent of the membership voted to dissolve the LLC. The court ruled that based on the plain language of § 17707.01, the vote of 50 percent of the LLC membership interests to dissolve the LLC must be given effect and the trial court must dismiss the buyout proceeding as moot and direct the members to wind up the activities of the LLC because the LLC was dissolved in accordance with the vote before a buyout could be implemented, and § 17707.01 says an LLC is dissolved by the “happening of the first to occur,” either “the vote of 50 percent” or “[e]ntry of a decree” of judicial dissolution.

§ 1.4.3 Delaware

In re Doehler Dry Ingredient Solutions, LLC, 2022 WL 4281841 (Del. Ch. Sept. 15, 2022). The Court of Chancery dismissed a petition for dissolution of a limited liability company, finding that the petitioner minority member had failed to plead facts that could reasonably support an inference that the company was deadlocked or could no longer fulfill its defined purposes. The company is owned by two 25 percent Members, including Russell Davis (“Davis”), and one 50 percent Member. Following disputes with Davis, the other two Members together executed a written consent removing Davis as a Manager. Davis subsequently accused the other Members of various wrongdoing, including breaches of fiduciary duty and the operating agreement. After a lawsuit was initiated in federal court to force Davis’s compliance with a buyback provision in the operating agreement, Davis petitioned the Court of Chancery for dissolution arguing, among other things, that Davis would “decline to approve ‘nine actions critical to the LLC’ for which unanimous consent is required under the LLC Agreement” thus creating deadlock.

The Court of Chancery dismissed the petition, holding that prospective deadlock was insufficient under the statute to prove actual deadlock. The Court further held that, even if Davis carried out his plan, deadlock could not exist because the operating agreement contained a mechanism by which to resolve potential deadlock in the form of a buyout provision in the operating agreement. The Court additionally noted the existence of a contractual provision for dissolution that could be invoked in the event of deadlock.

§ 1.4.4 New York

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (N.Y. App. Div. 2022). After Stile, a shareholder of the defendant corporation, signed a settlement agreement, the personal representative of Stile’s estate sued the corporation and its other shareholders for withholding distributions and for minority shareholder oppression, among other claims. After holding that the personal representative was bound by the settlement agreement signed by Stile and thus was not entitled to distributions or to seek dissolution of the company per the terms of the agreement, the court agreed with the personal representative that Stile “did not cease being a shareholder by virtue of the settlement.” Rather, the agreement merely required Stile to not “assert any of his rights as a shareholder,” so long as the payments provided for in the settlement are made to him. While the settlement also provided that if Stile transferred any of his shares, the settlement would be terminated, the court determined that “it [was] unclear if ‘transfer’ includes . . . the transfer to Stile’s estate when he died.” Thus, Stile’s estate remained a shareholder of the corporation.

As to the oppression claim, the court dismissed the claim to the extent it was based on the corporation’s refusal to allow the personal representative to examine the corporation’s books and records, as Stile had relinquished that right in the settlement agreement. However, “to the extent the claim is based on the defendants’ refusal to recognize the plaintiff as a shareholder, it was properly permitted to continue.”

Hoffman v. S.T.H.M. Realty Corp., 207 A.D.3d 722 (N.Y. App. Div. 2022). A 25 percent shareholder, who had inherited her shares, filed a petition for dissolution under Business Corporation Law § 1104-a, in which she alleged shareholder oppression. The day-to-day operations of the corporation were managed by the petitioning shareholder’s brother and cousin, each of whom also owned 25 percent of the shares. After a bench trial, the trial court denied the shareholder’s petition for dissolution holding that she had not established shareholder oppression. The appellate court affirmed, noting that, “Oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” As the trial evidence demonstrated that, after inheriting her stock, the petitioning shareholder did not seek employment or responsibilities in the day-to-day management of the corporation, or express an interest in shareholders’ meetings, but, rather, remained, for many years, a passive shareholder, acquiescing in the exercise of control by her brother and cousin, the trial court’s decision that the petitioning shareholder had not established shareholder oppression was supported by the evidence.

Fernandes v. Matrix Model Staffing, Inc., 2022 WL 1172487 (N.Y. Sup. Ct. Apr. 20, 2022). The plaintiff shareholder in a closely held corporation pursued dissolution after discovering that the corporation, through its director, failed to pay the corporation’s tax liabilities and then improperly informed the IRS that the plaintiff was the party responsible for accounting and employee tax withholding, resulting in $200,000 in tax penalties levied on the plaintiff. Reciting the standard under New York law for judicial dissolution of a company, the court stated that “[f]ailing to pay tax liabilities is corporate mismanagement which defeats a petitioner’s reasonable expectations sufficient to constitute oppression.” Further, the court stated that “[i]t is beyond argument that a shareholder, who is not responsible for payroll and accounting, has an objectively reasonable expectation that the corporation will not designate the shareholder as the responsible party for payroll withholdings in IRS filings.” Such conduct on the part of the defendant “is oppressive, if not fraudulent or criminal behavior.” Therefore, “the petition alleg[ed] a demonstrated risk to petitioner’s rights—chiefly continued future tax and other financial liabilities arising from respondent’s oppressive conduct.” However, recognizing dissolution as an extraordinary remedy, and because the defendant “questioned the need for dissolution,” the court referred the matter to a referee to establish the underlying facts and report on the issue of dissolution.

Epstein v. Cantor, No. 506730/19, 2022 WL 3597646 (N.Y. Sup. Ct. Aug. 19, 2022). In a law firm partnership dispute, after the court initially held that the firm was not a partnership and that, even if it were a partnership, the plaintiff was not a partner, the plaintiff moved for re-argument to resolve an apparent conflict between Steinbeck, a 1958 partnership case and Congel, a case decided in 2018. After 14 years in a law partnership with the defendant, Epstein, the plaintiff, sued Cantor, alleging that Cantor formed his own firm without his consent and transferred all the firm’s clients to the new firm. Cantor moved to dismiss, arguing that Cantor was the firm’s sole principal, that the firm was not a partnership, and that the plaintiff was not a partner.

In its first decision, the court applied Steinbeck’s rule that “an indispensable essential of a contract of partnership . . . both under common law and statutory law, is a mutual promise or undertaking of the parties to share in the business and submit to the burden of making good the losses” and dismissed Epstein’s claims. While there was an agreement naming the firm a partnership and naming Epstein as a partner, the agreement allocated profits and losses solely to Cantor. Therefore, the firm could not have been a partnership as a matter of law.

However, citing the 2018 Congel decision holding that partners “as between themselves, may include in the partnership articles any agreement they wish concerning the sharing of profits and losses,” the court granted Epstein’s motion to reargue the case. Ultimately, as to which line of cases controlled, the court sided with the defendants, stating that “it is unclear that Congel controls when the very issue is whether a partnership was formed or whether a partnership agreement can include that no profits and losses would be shared.” (emphasis in original). Nevertheless, applying the indicia of partnership formation outlined in Steinbeck, the court held that “issues of fact abound sufficient to warrant reinstating the claims against the Cantor Defendants.”

Chen v. 697 Dekalb LLC, No. 527902/2021, 2022 WL 2870138 (N.Y. Sup. Ct. Jul. 18, 2022). Alleging multiple violations of the LLC’s operating agreement and that his $300,000 contribution to the LLC was mismanaged by the defendant, the plaintiff sued for dissolution and requested a return of his investment. The defendants argued that the plaintiff was required to provide additional capital contributions to the business and that the standard for judicial dissolution had not been triggered.

Despite the operating agreement provision dealing with capital contributions among members not expressly requiring the consent of all members to make additional contributions to the company, the court interpreted the agreement to require unanimity and held that, contrary to the defendants’ argument, “there can be no reasonable reading of [the operating agreement] that limits the number of members that may impose a capital contribution.”

§ 1.4.5 Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50 percent membership in the LLC. The court noted that while she would be compensated for her 50 percent membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50 percent member of the LLC.

§ 1.5 Jurisdiction, Venue, and Standing

§ 1.5.1 California

Sirott v. Superior Court of Contra Costa County, 78 Cal.App.5th 371, 293 Cal.Rptr.3d 408 (2022). The court of appeals granted a petition for a writ of mandate to instruct a trial court to reverse its refusal to dismiss an LLC member’s derivative action for lack of standing. Defendants, members of the LLC, demurred on the ground that plaintiff-member lacked standing under Cal. Corporations Code § 17709.02 to pursue them, because during the litigation, plaintiff relinquished its interest in and was no longer a member of the LLC. In overruling the demurrer, the trial court determined that it had statutory discretion to allow the plaintiff-member to maintain the derivative claims even though it was no longer a member of the LLC. On appeal, the appellate court based its decision on § 17709.02, which requires both “contemporaneous” membership—meaning the party seeking to bring a derivative claim was a member in the LLC at the time of the challenged transaction (or became a member by gaining an interest from a party who was a member at the time of the transaction)—and “continuous” membership—meaning the party was a member throughout the litigation of a derivative claim. It was uncontested that the plaintiff-member met the contemporaneous membership requirement under § 17709.02, but did not meet the continuous membership requirement because plaintiff relinquished its membership interest in the LLC during litigation. As the appellate court explained, § 17709.02(a)(1) grants a trial court discretion to permit a derivative action by any “member” who does not meet these requirements but does not include such discretion to confer standing on a plaintiff, who is not a member. The plaintiff was no longer a member of the LLC. Thus, it could not satisfy the requirement for continuous membership and the trial court erred in not sustaining the demurrer for lack of standing.

§ 1.5.2 Illinois

Staisz v. Resurrection Physicians Provider Group, Inc., 2022 IL App (1st) 201316, 2022 WL 1446843 (Ill. App. May 9, 2022). In this case, the court held that a former shareholder lacked standing to bring a claim for shareholder oppression under Section 12.56 of the Illinois Business Corporation Act because shareholder status was needed at the commencement of the lawsuit and not, as the plaintiff argued, at the time of the alleged oppressive conduct. The plaintiff also lacked standing to bring a claim for breach of fiduciary duty because the alleged injuries of lost dividends and diversion of corporate funds were common to all shareholders and the claim was derivate, which requires active status as a shareholder.

Smith v. Lucas, 2022 IL App (1st) 210960-U, 2022 WL 4233767 (Ill. App. Sep 14, 2022). In this case, the court held that a plaintiff lacked a membership interest in a limited liability company because she received her rights as a transferee in an inheritance and did not receive the unanimous consent of the non-transferring members to admit a new member as required by the operating agreement. The court reversed the entry of summary judgment on a claim for a forced buy-out under the operating agreement, holding that there were issues of fact whether the accountant had the qualifications to properly value mineral rights and whether he changed portions of his valuation to favor the company.

§ 1.5.3 New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father, his son, and two daughters jointly owned several LLCs, most of which involved the ownership and management of real estate. Over the course of years, the family formed several additional LLCs. The father filed an action against the son alleging breach of fiduciary duty, unjust enrichment, and seeking an accounting for several of the companies. However, with regard to certain of the companies, the operating agreements for those companies established that the father was not actually a member. The son moved to dismiss the father’s derivative claims on behalf of the companies for which the operating agreements established that the father was not a member. The trial court denied the son’s motion; however, the appellate court modified that order and dismissed the claims related to the companies for which the operating agreements established that the father was not a member. The court explained that, in order to maintain a derivative action on behalf of an LLC, one must be a member of the company. Because the operating agreements established that the father was not a member of certain of the companies at issue, his derivative claims relating to those companies should have been dismissed for lack of standing.

Sajust, LLC v. Mendelow, 198 A.D.3d 582, (NY App. Div. 2021). The court affirmed the dismissal of the direct claim of an LLC member, which had alleged that the value of its capital account was reduced through the diversion of a company asset, as the claim was a derivative rather than direct claim. The court explained that the determination of whether a claim is direct or derivative hinges on whether the company or the suing members individually suffered the harm and whether the company or the suing members individually would receive the benefit of a recovery. The court further explained that the lost value of an investment in a company is a quintessential derivative claim. Because the company was allegedly injured by the diversion of the company asset, the claim was derivative rather than direct. Accordingly, the member’s complaint was dismissed for lack of standing.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). The court affirmed the denial of a motion to dismiss the direct claim brought by a shareholder of a closely-held family business against his father, the other shareholder, arising out of the father’s misappropriation from the corporation and having caused the corporation to fail to pay certain state and federal taxes. The son had alleged that the father’s having caused the corporation to fail to pay state and federal taxes subjected the son to potential civil and criminal liability. The court held that the son’s potential civil and criminal liability was an individual harm that was separate and distinct from the loss to the corporation, which was the subject of a separate derivative claim. Additionally, because the father and son were family members, the father owed the son an independent fiduciary duty that was separate from the duty that the father owed to the corporation. Therefore, the trial court properly denied the motion to dismiss the son’s direct claim as it was not duplicative of his derivative claim.

Mohinani v. Charney, 208 A.D.3d 404 (NY App. Div. 2022). Two minority members of an LLC sued the estate of the company’s majority member and manager alleging breach of fiduciary duty. The claims arose out of a special distribution that the majority member received, the majority member’s personal receipt of an acquisition fee that the minority members alleged should have been provided to the LLC, and a management fee paid by two other companies to a management company owned by the majority member that the minority members alleged should have been paid to the company owned jointly by the parties. The minority members brought their claims as direct rather than derivative claims. The case proceeded to a bench trial, after which the court dismissed the minority members’ claims, finding that the claims were derivative rather than direct.

The appellate court affirmed, holding that damages are an essential element of a breach of fiduciary duty claim and that the individual members had failed to establish any personal damages as all of the damages that they had alleged were losses to the company than the individual minority members. The fact that the minority members were the only other members of the company did not change this analysis.

The court rejected the minority members’ argument that the majority member’s personal representative waived this defense by failing to plead lack of standing in his answer or through a motion to dismiss. The court further noted that the minority members had never sought leave to amend their complaint to seek recovery derivatively on behalf of the LLC despite numerous opportunities to do so.

Roche Cyrulnik Freedman LLP v. Cyrulnik, 582 F. Supp. 3d 180 (S.D. N.Y. 2022). A law firm limited liability partnership brought an action for declaratory relief and for breach of fiduciary duty against a former partner in federal court in New York. The defendant partner moved to dismiss the action for lack of subject matter jurisdiction and, in the alternative, called on the court to abstain from hearing the case in favor of a stayed action in Florida state court.

In response to Cyrulnik’s abusive behavior and other misconduct, the firm voted to oust him from the partnership. A fight ensued over the firm’s right to remove Cyrulnik and the amount the firm was obligated to pay him. After the firm filed the suit in federal court, Cyrulnik sued the firm in Florida state court. The firm argued that the court had diversity jurisdiction, as Cyrulnik was no longer a member of the firm. However, the court held that the relevant time for determining diversity of citizenship was the time of the filing of the original complaint, not any amended complaint.

Citing the “intertwining rule,” which provides that “where jurisdiction is so intertwined with the merits that its resolution depends on the resolution of the merits, the court should use the standard applicable to a motion for summary judgment and dismiss only where no triable issues of fact exist,” the court denied the defendant’s motion to dismiss for lack of subject matter jurisdiction. Instead, the court held that “[t]he determination of the firm’s citizenship . . . cannot be separated from [the firm’s] claim that Cyrulnik was properly dissociated from the firm.”

§ 1.5.4 Utah

Hills v. Nelson, 506 P.3d 552 (Utah Feb. 10, 2022). This case arose from the judicial dissolution of an LLC owned by two equal members in which one member filed a lawsuit seeking the dissolution of the LLC. In lieu of dissolution, the LLC and the other member filed elections to purchase the other member’s interest in the LLC pursuant to Utah Code § 48-3a-14(1). The district court, however, denied the elections on equitable grounds and ordered, sua sponte, the dissolution of the LLC. The member that elected to purchase the other member’s interest appealed, and her standing to appeal the dissolution ruling was challenged.

The supreme court found that the appellant had standing because she was a party to the action below and that she was aggrieved by the district court’s judgment given that, upon liquidation, she would lose her 50 percent membership in the LLC. The court noted that while she would be compensated for her 50 percent membership, liquidation typically garners less value than interests sold without any compulsion to sell. The appellant also satisfied the requirement of having standing under the traditional test in the original proceeding because dissolution of the LLC would cause the appellant to lose her status as a 50 percent member of the LLC.

§ 1.6 Miscellaneous Claims and Issues in Business Divorce Cases

§ 1.6.1 Accounting

§ New York

Harounian v. Harounian, 198 A.D.3d 734 (N.Y. App. Div. 2021). A father was a member of an LLC managed by his son. The father filed a complaint, inter alia, demanding an accounting. The son filed a motion to dismiss, which the trial court denied. However, the appellate court modified that portion of the trial court’s order denying the motion to dismiss the accounting claim as the father’s complaint did not allege that he had made a demand for an accounting that had been refused. The court explained that, to prevail on a cause of action for an accounting, an LLC member must show that a demand for an accounting had been made, which was refused. Additionally, the company’s operating agreement provided that members were entitled to inspect the company’s books and records for the immediately preceding three-year period upon 10 days written notice. Because the complaint did not allege that the father had made a demand to inspect the books and records or that such a demand had been refused, the court held that the accounting claim should have been dismissed.

Grgurev v. Licul, 203 A.D.3d 624 (N.Y. App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered the forced buyout of their shares by the petitioning shareholders. However, the trial court denied the petitioning shareholders’ request for an accounting. The appellate court modified the order to provide that the non-petitioning shareholders were required to provide an accounting. While the non-petitioning shareholders had produced extensive books and records that had been reviewed by a special referee, an accounting was still warranted as the bookkeeping was described as inadequate and sometimes nonexistent, and there was evidence that key financial data had been destroyed during the litigation.

§ 1.6.2 Alternative Entities

§ Delaware

Freeman v. Qualizza, 2022 WL 3330377 (Del. Ch. Aug. 12, 2022). In an action seeking a declaration as to the proper manager of a Delaware limited liability company, the Delaware Court of Chancery determined that the manager of the owner of 99.99 percent of the membership interest of the subject entity had the power to cause the 99.99 percent owner to replace the manager of the subject entity because the removal was properly within the manager’s duties as manager under the operating agreement. On a cautionary procedural point, practitioners should take note that the Court initially granted a motion to expedite the action and a status quo order but ultimately vacated both due to a failure to proceed with alacrity on the part of both parties.

The subject entity, UDF, was formed in Delaware. Its membership interests were owned 99.99 percent by Aries Community Capital, LLC (“ACC”) and .01 percent by Michael Qualizza (“Qualizza”). Qualizza was designated Manager of UDF. ACC was owned 46 percent by Aries Capital, LLC, which was, in turn, owned by Neil Freeman (“Freeman”). QSG owned another 46 percent of ACC and was, in turn, itself owned by Qualiza. The remaining 8 percent of ACC was owned by Edward Keledjian. Aries Capital was designated Manager of ACC, and its sole duties were to control ACC and manage its sole asset, UDF. After a falling-out among the three business partners, Freeman caused Aries Capital to cause ACC as 99.99 percent Member of UDF to replace Qualizza with Freeman as Manager of UDF. Qualizza challenged the action as outside the scope of Aries Capital’s duties as Manager of ACC. The Court, however, found that because Aries Capital’s duties as Manager of ACC were solely to cause ACC to manage its sole asset, UDF, the written consent was valid, and Freeman was the proper Manager of UDF.

Avgiris Bros., LLC v. Bouikidis, 2022 WL 4672075 (Del. Ch. Sept. 30, 2022). In an action to determine the proper Managers of an LLC pursuant to 6 Del. C. § 18-110, the Court held that the majority Members of the LLC properly removed the Managers appointed by the minority Members. The Court further held that Plaintiff’s attempts to compel the return of company property were outside the scope of an 18-110 action and declined to enter such relief.

In this case, Plaintiff owned a 65 percent Membership interest, while defendants owned a 35 percent Membership interest. The Court declined to entertain any of defendants’ arguments by which they contended that Plaintiff’s Membership interest should be reduced to below a control threshold via reallocation or any other theory. The Court additionally declined to enter an order in favor of plaintiff compelling the defendants to return company property, including passwords and surveillance equipment, because the defendants are no longer Managers. Rather the Court held that “Section 18-110 grants this court jurisdiction ‘to determine who validly holds office as a manager of a Delaware limited liability company.’ It does not address the retention of property by removed managers. . . . It does not contemplate that the court will bar former managers from the premises of company property. That ancillary relief is beyond the scope of this particular proceeding.”

§ Minnesota

Johnson v. Wright, No. 27-CV-20-2012, 2021 WL 7630246 (Minn. Dist. Ct. Oct. 13, 2021). In an action for employment-based oppression and breach of contract arising out of Johnson’s alleged membership interest in associated corporate entities, the Minnesota district court held that the employment agreement between the parties did not grant Johnson a membership interest but was merely “an agreement to agree.”

Two members of LLCs operating memory care facilities asked Johnson to serve as president of the entities due to her experience in the industry. According to the complaint, the two defendants instructed the attorney drafting the employment contract to include that Johnson would receive a 5 percent interest in all current and future companies related to the memory care business and real estate holding companies. After Johnson signed the agreement, the defendants then represented to their creditors that the plaintiff had a 5 percent interest in all related entities. However, two years after executing the employment agreement, Johnson’s employment was terminated. When Johnson requested access to financial records, she was informed that she had no ownership interest in any of the associated LLCs.

Responding to Johnson’s claims arising out of her alleged membership interest, the court held that the employment agreement was an unenforceable “agreement to agree,” and thus did not grant Johnson a membership interest, for two reasons. First, the contested provision “contain[ed] several instances of prospective language that unambiguously contemplate future documentation and memorialization.” Second, the employment agreement, in referencing Johnson’s membership interests, did not specify in which entities Johnson would be a member. Rather, the agreement failed to mention any of the then-existing LLCs and merely anticipated that “Johnson could have membership interests in entities yet to be formed.” Therefore, because Johnson failed to establish that she possessed a membership interest in any of the LLCs, the court awarded the defendants summary judgment on Johnson’s claims for breach of contract and equitable relief.

§ 1.6.3 Breach of Fiduciary Duty

§ Arizona

Zambezi Holdings, LLC v. Proforma Health, PLLC, 2022 WL 3098020 (Ariz. Ct. App. Div. 1, Aug. 2, 2022). Proforma Health, PLLC (“Proforma”) was formed to do business as Munderloh Chiropractic. Munderloh Holdings, LLC and Zambezi Holdings, LLC (“Zambezi”) were simultaneously created with Munderloh Holdings owning 75 percent of Munderloh Chiropractic and Zambezi owning the remaining 25 percent. Timothy Munderloh (“Tim”), a chiropractor, and his wife, Siobahn, owned Munderloh Holdings and Mark Love (Siobahn’s brother), an entrepreneur, owned Zambezi. The parties later formed a new holding company, Timark, Inc., to own and operate a Massage Envy franchise in Flagstaff, Arizona. A dispute arose when Mark wanted to open a Massage Envy franchise in Prescott, Arizona. Mark wanted to own the Prescott franchise 75/25 and Tim wanted the ownership split to be 50/50. After much discussion and negotiation, Tim declined the opportunity to participate in the Prescott franchise. Mark obtained the Massage Envy Prescott franchise and opened for business. Tim responded by freezing Mark/Zambezi out of Proforma by cutting off the twice-monthly cash distributions they had been receiving from Proforma. Mark filed suit against Tim, Proforma and Munderloh Holdings alleging breach of contract for failure to pay cash distributions and, also, sought judicial dissolution of Proforma. Tim filed counterclaims against Mark alleging that Mark had breached his duties to Tim by usurping the corporate opportunity of the Prescott franchise.

After a jury trial, the superior court granted judgment as a matter of law in favor of Tim on the corporate opportunity claim and Mark appealed. The jury issued a verdict in favor of Mark on the breach of contract claim. Tim moved for a new trial on Mark’s breach of contract claim. The motion was denied and Tim appealed.

On appeal, the court reversed the judgment as a matter of law in Tim’s favor on the corporate opportunity claim. In doing so, the court of appeals focused on the issue of who had an expectation regarding the corporate opportunity of the Prescott franchise. The court focused on the fact that the Flagstaff franchise was owned by Timark and that Timark (a) was not a party to the litigation; and (b) due to language in the Flagstaff franchise agreement, Timark had no expectation that it would own anything other than the Flagstaff franchise. The court also found that even if Tim, as a 50 percent owner of Timark, had an individual expectation of the Prescott franchise opportunity, the undisputed facts made clear that judgment as a matter of law should have been granted in Mark’s favor, and not Tim’s, because the Prescott franchise was never a corporate opportunity belonging to Tim. The court based this finding on evidence that Massage Envy was not interested in granting the franchise to Tim without Mark because: (a) Tim’s chiropractic business conflicted in part with Massage Envy’s business; and (b) Tim could not devote full-time efforts to the Prescott Massage Envy. Finally, the court held that even if Tim did have an individual expectation in the opportunity, Tim could have no such expectancy after he had previously rejected the opportunity. Specifically, it was inequitable for Tim to decline the opportunity, let Mark open the franchise and take all the risk, wait for almost three years after declining the offer and almost two years after the Prescott franchise opened, and then claim that Mark had usurped a corporate opportunity.

The court affirmed the jury verdict in Mark’s favor on the breach of contract claim and upheld the denial of Tim’s motion for a new trial. The court of appeals found that the instruction given the jury on the issue of the distributions that had been made to Mark by Proforma mirrored the language of former A.R.S. § 29-703(B) and (C)(1) which provided that in the absence of distribution instructions in the Proforma operating agreement, that Proforma had been making distributions to Tim and Mark in proportion to the value of their capital contributions and Proforma should have continued making such distributions to Mark until “each member has been repaid his capital contribution.”

§ Colorado

Li v. Colo. Reg. Cntr. I, LLC, 2022 WL 5320135 (D. Colo. Oct. 7, 2022). Two sets of foreign investors asserted several actions against a Colorado LLLP, its general partner and others related to the partnership’s investments. The Colorado LLLP served as an EB-5 Regional Center, an entity approved by the federal government to promote economic growth by encouraging investments by foreign persons in exchange for permanent resident cards (green cards). As described in Liu v. SEC, 140 S. Ct. 1936, 1941 (2020), “[t]he EB–5 Program, administered by the U.S. Citizenship and Immigration Services, permits noncitizens to apply for permanent residence in the United States by investing in approved commercial enterprises that are based on proposals for promoting economic growth.” Although the lawsuits involved federal and state securities and common law claims, the focus of this summary relates to the breach of fiduciary duty claims against the general partner.

The first set of foreign investors brought a derivative-breach-of-fiduciary-duty claim against the general partner. They alleged that the general partner failed to adequately ensure that a loan the partnership issued was sufficiently collateralized and that the general partner failed to demand complete repayment of the loan and by providing misleading information about it. The second set of foreign investors separately brought both direct and derivative breach-of-fiduciary-duty claims against the general partner, alleging that the general partner provided them with misleading marketing materials and took advantage of the investors lack of English proficiency to convince them to invest in the limited partnership. These claims were dismissed under Colorado’s economic loss rule and the contemporaneous ownership rule, under Federal Rule of Civil Procedure 23.1(b). Under the economic loss rule, if a plaintiff alleges only economic loss from the breach of an express or implied contractual duty, the plaintiff may not assert a tort claim for such a breach absent an independent duty of care under tort law. The contemporaneous ownership rule provides that a plaintiff bringing a derivative action must allege that he or she “was a shareholder or member at the time of the transaction complained of.” Fed. R. Civ. P. 23.1(b). Under Colorado’s limited partnership statue, “member” means a general partner or a limited partner. The complaint was deemed not subject to the economic loss rule because it alleged that the fiduciary relationship arose from contract; so, the court determined that they were contract claims and not subject to the economic loss rule. But to the extent their claims were based on pre-investment misrepresentations, they were dismissed because the alleged malfeasance occurred before the investors became “members” of the partnership in violation of the contemporaneous ownership rule. The second set of investors, however, failed to allege a contractual breach of fiduciary duty claim without establishing an independent source of fiduciary duty and was subject to the economic loss rule.

§ Delaware

Manti Holdings, LLC v. Carlyle Group Inc., 2022 WL 444272 (Del. Ch. Feb. 14, 2022). The Delaware Court of Chancery held that the terms of a “drag along” provision in a stockholders agreement was not sufficient to cause a waiver of the right of minority stockholders to challenge the sale of the subject company by minority stockholders based on a breach of fiduciary duties. Notably, the Court did not reach the question of the general waiverability of fiduciary duties in this opinion.

The stockholders agreement provided that: “In the event that . . . a Company Sale is approved by the Board and . . . the holders of at least fifty percent (50%) of the then-outstanding Shares . . . , each Other Holder shall consent to and raise no objections against such transaction . . . .” The Court held that the provision did not rise to the level of a waiver of bringing a claim for breach of fiduciary duties because “a waiver must be clear and unequivocal” while the provision in question never mentioned the waiver of fiduciary duties. The Court noted that the provision did specify certain other actions stockholders agreed not to take when being “dragged along,” including voting against the transaction, asserting appraisal rights, and refusing to execute certain transaction documents.

§ New York

Miami Firefighters’ Relief & Pension Fund v. Icahn, 199 A.D.3d 524 (N.Y. App. Div. 2021). Shareholders of Xerox Holdings Corporation (Xerox) filed a derivative action against Carl Icahn, Xerox’s largest single shareholder, without filing a demand on Xerox’s board of directors to initiate the litigation. The trial court dismissed the action finding that the shareholders had not sufficiently pled that a demand would have been futile. However, the appellate court reversed, holding that the shareholders had sufficiently pled demand futility as four of the seven members of the board of directors lacked sufficient independence from Icahn to impartially decide whether to bring suit against him. Icahn at least tacitly conceded that he controlled two of the board members. Another board member, who served as the corporation’s CEO, received a level of compensation that called into question his independence as he would be putting his employment at risk if he voted to bring suit against Icahn. A fourth board member had served as a managing director of another company owned by Icahn and had served as Icahn’s representative on at least ten other boards.

The case arose out of Icahn and two partnerships that he controlled allegedly using Xerox’s confidential information regarding its planned acquisition of HP, Inc. (“HP”) to purchase HP shares before news of the sale became public. In addition to dismissing the case based on the shareholders’ failure to make a demand, the court trial court also found that the shareholders had not sufficiently pled a cause of action for breach of fiduciary duty as they had not pled that Xerox had been damaged by Icahn’s actions. However, the appellate court reversed this decision as well, holding that damages are not an essential element of a breach of fiduciary duty claim. The court explained that the function of a breach of fiduciary duty action is not just to compensate the plaintiff but to prevent breaches of fiduciary duty by removing any temptation on the part of fiduciaries to breach their duty.

Newman v. Newman, 202 A.D.3d 442, 443 (NY App Div. 2022). A shareholder in a closely-held, family corporation sued his father, the other shareholder, alleging breach of fiduciary duty and other claims. The son’s allegations arose out of the father’s alleged misappropriation of corporate assets and causing the company to fail to pay state and federal taxes. The trial court denied the father’s motion to dismiss. The appellate court affirmed, holding that, because the father and son were family members in a closely-held corporation, the father owed a fiduciary duty to the son that was independent of the fiduciary duty that the father owed to the corporation.

Max v. ALP, Inc., 203 A.D.3d 580 (NY App. Div. 2022). A shareholder and director sued the other two directors for breach of fiduciary duty among other claims. The motion court dismissed the shareholder-director’s breach of fiduciary duty claims finding that they were barred by both the business judgment rule and by an exculpatory provision in the corporation’s certificate of incorporation. As set forth in the trial court’s decision (2021 WL 2416518), the exculpatory provision in the certificate of incorporation tracked the language of New York Business Corporation Law § 402(b) and limited the liability of directors for breach of fiduciary duty subject to certain exceptions. Those exceptions include bad faith and intentional misconduct. The appellate court affirmed the trial court’s holding that the plaintiff shareholder-director’s allegations of bad faith and intentional misconduct were conclusory and, therefore, did not overcome the protections provided to the directors by the exculpation language of the certificate of incorporation.

Salansky v. Empric, 208 A.D.3d 983 (N.Y. App. Div. 2022). Plaintiff minority shareholder sued the corporation’s other two shareholders for breach of fiduciary duty and breach of the shareholder agreement after the defendants made additional capital contributions to the corporation in exchange for shares, diluting the plaintiff’s interest from 45 percent to less than 3 percent. The shareholder agreement required the written agreement of all shareholders to amend the certificate of incorporation (“CI”), but the defendants had raised the number of authorized shares by a mere majority vote. The defendants argued that the shareholder agreement violated BCL § 803(a), which states that a CI may be amended by a simple majority vote. However, the court held that § 803 does not prohibit parties from entering into a separate agreement that requires unanimity among the shareholders to amend a CI.

Troffa v. Troffa, No. 6095102016, 2022 WL 3140457 (N.Y. Sup. Ct. Aug. 02, 2022). Son and 50 percent shareholder sued his father, also a 50 percent shareholder, alleging that his father breached his fiduciary duties by usurping corporate opportunities in purchasing land in his own name and then wasting corporate assets in making rent payments to a third-party entity with no ownership interest over the property. The plaintiff claimed that in 1999 his father told him their corporation would be leasing a compost yard but did not tell him that the rent would be applied to pay down the purchase price on the property. The father also allegedly failed to mention that he was the actual party leasing the property and charging rent to the corporation. The father argued his lease to purchase the compost yard was a prudent business decision conferring tax advantages on the corporation and that the son was informed of the arrangement. Further, a third-party entity belonging to the father was receiving the corporation’s rent payments. Ultimately, the court held that the son demonstrated his prima facie entitlement to judgment as a matter of law that his father breached his fiduciary duties to the corporation by wasting corporate assets in the payment of rent to the third-party corporation, which had no ownership interest in the compost yard. However, the father raised “a triable issue of fact” regarding whether his son consented to the arrangement.

§ 1.6.4 Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing

§ Delaware

In re Morrow Park Holding LLC, 2022 WL 3025780 (Del. Ch. Aug. 16, 2022). In a cautionary tale, the Court of Chancery denied both parties’ claims of breach of contract against the other in connection with their attempts to wind up their mutual business affairs. The parties were real estate developers and, after deciding they could no longer work together, “established limited liability companies with operating agreements governing the continued operation and subsequent division of their jointly owned assets.” The process, however, was derailed by impatience coupled with “mutual animus” that resulted in actions that could only be characterized as “spiteful retribution.” Ultimately, after a six-day trial, during which the parties submitted 931 joint exhibits and called 12 witnesses, the Court found that, even if there were breaches of contract, no damages had been suffered. Accordingly, the Court “leaves the parties as they are.”

§ Minnesota

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). One of three brothers and shareholders in two closely held corporations sued in 2005 for a fair value buyout from both companies. That action resulted in a 2006 settlement agreement which required the sale of one of the companies and the provision of successive rounds of bonus distributions to the brothers. However, a 2012 IRS audit scrutinizing the tax deductibility of the bonus payments made to the brothers resulted in the two defendants suspending the payments, and the plaintiff sued for breach of the 2006 settlement. The court found that the use of the word “bonus” as opposed to “dividend” in the 2006 settlement agreement left open the question of whether tax deductibility was an essential feature of the payments to be made under the settlement. In answering the question whether the settlement agreement required bonuses to be made regardless of whether they were tax deductible as employee compensation, the jury sided with the plaintiff and awarded him $12,000,000.

§ 1.6.5 Fraud

§ Arizona

AOW Management LLC v. Scythian Solutions LLC, 2022 WL 2813523 (Ariz. Ct. App. Div. 1, July 19, 2022). Demitri Downing (“Demitri”) was a board member of a not-for-profit marijuana dispensary and entered into an oral agreement with Alex Lane (“Lane”) to transfer his board seat to Lane purportedly to hide the board seat (and its resultant income) from Demitri’s wife in a pending divorce. Demitri contended that, despite his official resignation, Lane agreed that Demitri would maintain a 50 percent interest in the board seat. The superior court granted summary judgment in Lane’s favor on Demitri’s claim for rescission of his transfer of the board seat to Lane. The appellate court reversed that decision and held that if Demitri could establish he surrendered his seat on the board to Alex due to fraud, then rescission or avoidance may be the appropriate remedy.

§ 1.6.6 Equitable/Statutory Relief

§ California

Siry Invest. L.P. v. Farkhondehpour, 13 Cal.5th 333, 513 P.3d 166, 296 Cal.Rptr.3d 1 (2022). In an action involving alleged improper diversion of a limited partnership’s cash distributions through fraud, misrepresentation and breach of fiduciary duty, the California Supreme Court addressed whether Cal. Penal Code § 496(c)’s treble damages and attorney fees were available as civil remedies to address partnership distribution disputes. Under § 496(c), any person who has been injured by the crime of receiving stolen property “may bring an action for three times the amount of actual damages, if any, sustained by the plaintiff, costs of suit, and reasonable attorney’s fees.” A person commits the crime of receiving stolen property, under § 496(a), when that person “buys or receives any property that has been stolen or that has been obtained in any manner constituting theft or extortion, knowing the property to be so stolen or obtained, or who conceals, sells, withholds, or aids in concealing, selling, or withholding any property from the owner, knowing the property to be so stolen or obtained.” The Supreme Court noted that § 496(c) is unambiguous, and when read together with other sections of the Penal Code, § 496(c) must be understood to mean that a plaintiff may recover treble damages and attorney’s fees under § 496(c) when property has been obtained in any manner constituting theft. The fraudulent diversion of partnership funds in the case at issue was deemed to be within criminal definition of theft because the defendants received property (the diverted partnership funds) belonging to plaintiff, having obtained the diverted funds in a manner constituting theft. The court also found that defendants concealed or withheld those funds from plaintiff. Defendant did all of this knowing the diverted funds were so obtained.

§ Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). In a shareholder oppression claim based on alleged wrongful withholding of dividends, the Minnesota court of appeals affirmed the district court’s ruling that the decision to delay payments to the plaintiff was made in good faith and in the best interest of the corporation. The plaintiff, a physician and shareholder in an association of entities operating eye clinics, brought a shareholder oppression claim under Minnesota Statute § 302A.751 based on the clinic’s alleged denying of his governance rights, giving him inadequate meeting notice and accommodations, withholding his distributions, and frustrating his reasonable expectations in valuing his shares. As to the delayed distribution theory, the trial court merged its shareholder oppression analysis under § 302A.751 with the standard for breach of fiduciary duty. On appeal, Steffen argued the court erred in not “separately analyzing the legal requirements of a claim of unfairly prejudicial conduct” under § 302A.751 from that of a breach of fiduciary duty claim.

While the court of appeals agreed with Steffen that the trial court “relied on its breach-of-fiduciary-duty analysis,” the court affirmed the trial court’s analysis and holding, stating that “it identified legitimate reasons that justified the delay, including advice of counsel . . . and the parties’ disagreement regarding the proration date.” The court continued that “the determination that respondents did not breach their fiduciary duty is plainly relevant to the question of whether [Steffen’s] reasonable expectations were frustrated . . . . [H]ere, no breach occurred, and the conduct was reasonable under the circumstances . . . .”

Dualeh v. Abdulle, No. A21-1615, 2022 WL 3581812 (Minn. Ct. App. Aug. 22, 2022), review denied (Nov. 15, 2022). In a dispute over ownership of a business providing non-emergency medical transportation services, the court of appeals affirmed both the district court’s summary judgment ruling that the plaintiff owned a 50 percent interest in the LLC and the eventual court ordered buyout of the defendant’s 50 percent interest. In 2017, Abdulle, the defendant, began negotiations to buy Byro Consulting LLC (“Byro”). In March 2018, Abdulle and Dualeh signed an operating agreement identifying them as the two members and stating that each would provide $60,000 for the purchase of the business. Dualeh, a part-owner of a competing business, was to join Abdulle in buying Byro, as she had experience in the industry. However, the purchase agreement with the previous owner was signed only by Abdulle and identified only Abdulle as the purchaser. In December, Dualeh sued Abdulle seeking control of Byro and a buyout of Abdulle’s interest, and Abdulle counterclaimed, arguing that Dualeh did not hold any interest in Byro at all.

On Abdulle’s motion for summary judgment, the district court ruled in Dualeh’s favor on the question of whether she held an interest, determining that she was a 50 percent owner. Relying on contract principles, the court reasoned that the operating agreement was enforceable, as between Abdulle and Dualeh, after the previous owner transferred his 100 percent interest to Abdulle, based on their joint payment of the purchase price. Additionally, Abdulle represented to the IRS and a business partner that he and Dualeh were co-owners. In support of this argument, the court also cited to Minnesota Statute § 322C.0401, subd. 4(1)–(3), which provides for the addition of members to an existing LLC “as provided in the operating agreement” or by consent of all members.

§ New York

Grgurev v. Licul, 203 A.D.3d 624 (NY App. Div. 2022). This case involved the four shareholders of the corporation that operates Delmonico’s Steakhouse. The trial court found that two of the shareholders, who had exclusive control over the corporation’s finances, had committed shareholder oppression and ordered equitable dissolution of the corporation through the forced buyout of their shares by the petitioning shareholders. The court also ordered a money judgment in favor of the petitioning shareholders against the non-petitioning shareholders personally. The value of the shares that the non-petitioning shareholders were forced to sell was offset against the money judgment. The appellate court affirmed this decision based on the closely held nature of the corporation, the non-petitioning shareholders’ exclusive control over its finances, and the breach of fiduciary duty findings.

Stile v. C-Air Customhouse Brokers-Forwards, Inc., 204 A.D.3d 429 (NY App. Div. 2022). The court held that a settlement agreement in which a 33 percent shareholder agreed not to: seek dissolution of the company, seek dividends from the company, commence any derivative actions on behalf of the company, or seek to inspect the company’s books and records was binding on the personal representative of the shareholder’s estate. Although the settlement agreement did not explicitly reference whether or not the agreement would be binding on the shareholder’s personal representative, the presumption is that a contract is binding on the personal representative of the estate of a party to the contract unless the contract involves a personal quality of the testator or explicitly excludes the personal representative of the party’s estate from coverage. Therefore, the appellate court affirmed the dismissal of the personal representative’s claims for relief that the shareholder had agreed not to seek including a books and records inspection, issuance of distributions, recovery of corporate assets that had allegedly been misappropriated, and dissolution of the company.

The corporation had claimed that the estate never became a shareholder. The personal representative also alleged a shareholder oppression claim based on the refusal to recognize the personal representative as a shareholder. The court affirmed the trial court’s refusal to dismiss this claim and allowed this claim for dissolution based on shareholder oppression to proceed.

§ 1.6.7 Tax Estoppel

§ New York

Tradesman Program Managers, LLC v. Doyle, 202 A.D.3d 456, 457 (NY App Div. 2022. An LLC sought judgment declaring that a corporation that claimed to be a member of the LLC was not a member. The corporation claiming to be a member asserted that the LLC was estopped from claiming that it was not a member because the LLC had distributed a Schedule K-1 that identified the corporation as having a profit and loss share and a capital share. The court discussed the doctrine of tax estoppel, which provides that a party may not contradict factual statements as to a company’s ownership contained in its tax returns, proved that the party signed the tax returns and has failed to assert any basis for not crediting the statements contained in them. The court held that that tax estoppel did not apply because the company had not signed the K-1 in question. The court further held that tax estoppel did not apply because the company had offered a reasonable explanation as to why the K-1 contradicted the actual ownership, namely the affidavit of one of its managers stating that it paid distributions to the corporation based on the misrepresentations of one of its members. As tax estoppel did not apply, the appellate court affirmed the trial court’s grant of summary judgment in favor of the company declaring that the corporation was not a member.

§ 1.7 Valuation and Damages

§ 1.7.1 California

Crane v. R.R. Crane Investment Corp., Inc., 82 Cal.App.5th 748, 298 Cal.Rptr.3d 759 (2022). Shareholder brought action for involuntary dissolution of family-owned investment corporation, after which his brother, who was the other 50 percent shareholder, and corporation invoked statutory appraisal and buy-out provisions, Cal. Corporations Code § 2000. After the appraisal process, the trial court confirmed the fair value of the shares as of the date the shareholder filed for dissolution but refused to award prejudgment interest on the valuation of his shares. On appeal, the shareholder argues he was entitled to interest at a rate of 10 percent per annum from the date he first sought dissolution until the eventual purchase of his shares more than three years later. The shareholder predicated his arguments on Cal. Civil Code § 3287(a) and § 3288. Section 3287(a) governs damages in civil cases. Since the option to exercise a buyback of shares is not considered damages, § 3287(a) was deemed inapplicable. Similarly, since § 3288 grants a jury the discretion to award interest in cases of oppression, fraud, or malice, interest could not be awarded to the shareholder because the shares were bought-out pursuant to a statutory appraisal and buy-out provisions of the Corporations Code. Finally, the court noted that the shareholder should have, but failed to, seek a deferred valuation date under Corporations Code § 2000(f).

§ 1.7.2 Delaware

In re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56, 2022 WL 698112 (Del. Ch. March 9, 2022). This case involves a dispute regarding the valuation of minority owners’ interests in freeze-out transactions in several partnerships which held licenses to provide cellular telephone services in specified geographic areas. The court determined that the defendant failed to prove that the freeze-outs were entirely fair to the minority partners, did not employ sufficient procedures that assured fairness to the minority partners, and instead sought to capture the future value for itself. In addition, the court considered that the valuation firm had a long relationship with the defendant and found that improperly influenced the outcome of the valuations.

§ 1.7.3 Louisiana

Shop Rite, Inc. v. Gardiner, 333 So. 3d 506, 2021 La. App. LEXIS 2081, 21-371 (La. App. 3rd Cir. December 29, 2021). This case addresses the fair value of the minority interests of a dissenting shareholder who was withdrawing their shares in two corporations: a 3.8 percent interest in a grocery and convenience store business and a 3.95 percent interest in a tobacco and alcoholic beverage store business. The trial court accepted the adjusted net asset method of valuation which was selected by experts for both parties because the corporations owned large amounts of real estate, and also allowed a discount for “trapped” capital gains taxes that would be owed in the event the underlying real estate was sold. The appellate court rejected the discount for capital gains taxes, stating that there must be a factual basis for a discount to be taken and that a sale of the underlying real estate assets was an unknown future event.

§ 1.7.4 Michigan

Pitsch v. Pitsch Holding Co., 2022 Mich. App. LEXIS 2730, 2022 WL 1508774 (Mich. App. 2022). This case pertains to challenges to the valuation quantification recommended by a special master and accepted by the trial court in a forced stock sale in a shareholder deadlock case. The special master had determined that a sale of shares from one shareholder to the other would yield more value than if the company was dissolved. In this matter, the special master determined a “modified liquidation value” which approximated the middle of the range between liquidation value and fair market value. The appellate court considered that all parties initially expressed a willingness to sell their stock for the amount determined by the special master, that the appellants do not explain why the company would net a higher value, and that the appellants had recommended the particular special master. As a result, the appellate court rejected the appellant’s claims and affirmed the trial court’s decision.

§ 1.7.5 Minnesota

Steffen v. Uttley, No. A22-0042, 2022 WL 3711487 (Minn. Ct. App. Aug. 29, 2022). When Steffen was a shareholder-physician with the clinic, four other shareholders were bought out using a valuation method that diverged from the valuation method provided in the shareholder agreements. Strict adherence to the terms of the agreements would provide for a lesser buyout, and, upon discovering that these previous buyouts were not in compliance with the valuation method provided in the agreements, the remaining shareholders agreed that future buyouts would be valued according to the agreements’ actual terms.

Then, Steffen announced his departure from the clinic. When the clinic offered to purchase his shares in accordance with the terms of the agreements—and not the terms of the repurchase of the shares of previous departing doctors—Steffen declined. He commenced a shareholder oppression claim under Minnesota Statute § 302A.751 arguing the clinic frustrated his reasonable expectations in valuing his shares.

The trial court ruled that Steffen’s “expectation upon signing the Agreements was that his buyout would be calculated as set forth in the Agreements.” In reaching this determination, the court relied on the fact that neither Steffen nor the other shareholders were aware that the previous valuations were not in compliance with the agreements and that, after the shareholders discovered the error, Steffen was aware of the decision to bring the buyback program into compliance and had an opportunity to voice his objection but failed to do so. The court of appeals affirmed, citing the fact that Steffen attended board meetings where the issue was discussed and agreed to use the formulas set forth in the agreements to calculate future buyouts. Therefore, Steffen “had no reasonable expectation for his shares to be valued contrary to the Agreements.”

Koch v. Koch, No. 27-CV-18-20579, 2022 WL 1467980 (Minn. Dist. Ct. May 06, 2022). In this shareholder dispute among three brothers of two closely held corporations, a battle of valuation experts eventually resulted in the largest reported fair value buyout in Minnesota state history, with the court siding with the plaintiff’s expert “[o]n almost every issue.” The plaintiff brother brought both breach of contract claims and equitable claims for breach of fiduciary duty and unfairly prejudicial conduct under Minnesota Statute § 302A.751 against his two brothers. After a jury verdict for the plaintiff on his breach of contract and breach of the duty of good faith and fair dealing claims (awarding him $12,000,000), the parties stipulated that a buyout should occur but could not agree as to the valuation of the plaintiff’s interest in the two companies, which was tried to the court as a bench trial.

While both experts considered the firms’ income, their respective markets, and their assets in arriving at their valuations, the weight the experts gave to the three approaches differed significantly; therefore, they arrived at wildly divergent estimations of the value of the plaintiff’s interest. Ultimately, the court found that “[the plaintiff’s expert’s] primary reliance on the income and market approaches is more credible than [the defendants’] primary reliance on the asset approach.” Because the two corporations were “strong, solid enterprises” with no expectation of being liquidated or dismantled, the court determined that “a buyer for these companies is more likely to be interested in the income they have the potential to earn than in the liquidation value for their assets.” Therefore, because the plaintiff’s expert’s fair value opinions were “more reasonable, better supported, and closer to a proper valuation” of the plaintiff’s interest in the two firms, the court awarded the plaintiff a total of $58,501,760 based on his expert’s valuation of the two companies. Plaintiff was also awarded his fees and costs incurred in the action.

§ 1.7.6 Nebraska

Bohac v. Benes Serv. Co., 310 Neb. 722, 969 N.W.2d 103 (Neb. 2022). This case encompasses an election to make a purchase in lieu of judicial dissolution of a minority ownership interest in the shares of a corporation which operates an agricultural equipment dealership. The appellate court determined that the trial court did not use the correct definition of “fair value” pursuant to the Nebraska statute and, consequently, it should not have subjected the value of the shares to minority or lack of marketability discounts.

§ 1.7.7 New Jersey

Robertson v. Hyde Park Mall, 2022 N.J. Super. Unpub. LEXIS 848, 2022 WL 1572600 (N.J. Super. Ct. App. Div. May 19, 2022). In this partnership dispute case, the appellants assert that the trial court erred by not applying discounts to the fair value of the dissociated partners’ ownership interests for lack of control and marketability. The partnership owns and operates a major shopping mall. The appellate court determined that the trial court “appropriately considered the equities of the case when it decided not to apply discounts for lack of control and marketability, and its findings and conclusions are supported by the record and applicable law.”

Sipko v. Koger, Inc., 251 N.J. 162, 276 A.3d 160 (N.J. 2022). This case involves a shareholder dispute regarding computer design services businesses and whether a marketability discount should be applied to a shareholder’s interest in the two businesses. On the second appeal, the Supreme Court of New Jersey determined that no marketability discount should be allowed. The appellate court made this determination based upon findings that the comprehensive accounting ordered by the trial court showed that the defendants had attempted to render the corporation worthless to thwart the plaintiff and to create false evidence of the plaintiff giving up one of their ownership interests.

§ 1.7.8 New York

Collins v. Tabs Motors of Valley Stream Corp., 2021 N.Y. Misc. LEXIS 6058, 2021 NY Slip Op 32438(U) (Sup. Ct. N.Y. Cnty. Nov. 23, 2021). This case addresses whether a Shareholder Agreement is determinative in a dissolution to determine the value of a 25 percent ownership interest in a corporation that operates an automotive repair business. In this case, the buy-sell sections of the Shareholder Agreement state, “if any shareholder files a petition to dissolve the Corporation; . . . the Corporation firstly, and then the other Shareholders shall have the option to purchase all, but not part of the shares owned by such Shareholder,” and an accompanying schedule executed contemporaneously with the Shareholder Agreement stipulates the value per share is a specific dollar amount. The court determined that the Shareholder Agreement and the stipulated value in the accompanying schedule were enforceable.

Ng v. Ng, 2022 N.Y. Misc. LEXIS 3755, 2022 NY Slip Op 31750(U) (Sup. Ct. N.Y. Cnty. May 27, 2022). This case considers a valuation dispute regarding the “separation of a number of businesses previously owned by two brothers and former partners” pursuant to a dissolution agreement which the court considered “a global business divorce between the two brothers.” The valuation dispute arises from the assertion by one brother that “the entire interest” defined in the dissolution agreement only includes the shares of the stock but not the company’s goodwill. The court noted that although the dissolution agreement does not have a restriction on competition, it is well established in case law that there is an “important distinction between the duty to refrain from soliciting former customers which arise from the sale of good will of an established business.” The court determined that the sale terms do include the goodwill and consequently limited preliminary injunctive relief to only apply to the extent of the implied duty to not engage in solicitation impairing the company’s goodwill.

§ 1.7.9 North Dakota

Sproule v. Johnson, 2022 ND 51, 971 N.W.2d 854 (N.D. 2022). This case arises from a valuation dispute in a partnership dissolution of a family farm business. The appellants assert that taxes should have been deducted from the value which the trial court determined for the buyout of the plaintiff’s ownership interest. The appellate court found that there was no intention to currently liquidate, that the proffered tax analysis of what would happen if a liquidation would occur is hypothetical, and that the agreements in principle negotiated by the parties regarding the valuation methods were consistent to valuations without discounts for taxes. Ultimately, it concluded that such a taxes discount would be speculative.

§ 1.7.10 Tennessee

Boesch v. Holeman, 2022 Tenn. App. LEXIS 335, 2022 WL 3695977 (Tenn. Ct. App. Aug. 26, 2022). This is a dispute case regarding the buyout price for a disaffiliated partner in a three-partner business that distilled flavored moonshine. In the initial appeal, the appellate court determined that a “discount for lack of control by the minority partnership is inappropriate because the statute calls for determining value based on a sale of the entire business as a going concern” and remanded the case to the trial court to adjust the valuation accordingly. In this second appeal, the court rejected the appellant’s new challenge to the business valuation, which claims that the income-based method of business valuation was not properly applied. Ultimately, the appellate court determined that under the Tennessee Code, the buyout price after disassociation is measured as “the amount that would have been distributable to the disassociated partner on the day of disassociation if the assets of the business had been sold that day,” that the appellant’s request to include the revenue from stores which opened after the dissociation date should be rejected because it is not consistent with the requirements of the Tennessee Code and that the expert witness for the defendant partner “provided the court with a fully supported and properly calculated method of business valuation in conformity with the court’s previous instructions.”

Buckley v. Carlock, 652 S.W.3d 432 (Tenn. Ct. App. 2022). In this minority shareholder oppression case, the appellate court evaluated the appellant’s challenge to the valuation methodology accepted by the trial court to determine the fair value of the minority owner’s interest in a luxury automobile dealership. The appellate court considered that “The trial court accepted a valuation methodology . . . that is considered acceptable in the financial community. Authoritative automotive publications endorse the blue-sky approach. And it is used in the ‘great majority’ of ultra-high-end dealership transactions. The [trial] court also found the blue-sky method admissible and reliable.” Furthermore, the appellate court considered that “The method was based on fair value, not fair market value.” Consequently, the appellate court concluded that the valuation method was appropriate.

§ 1.7.11 Utah

Diversified Stripping Systems Inc. v. Kraus, 516 P.3d 306 (Utah Ct. App. Jul. 21, 2022). In an appeal from a complex business dispute involving a joint venture, the court of appeals found that the district court’s damages awards were unsupported. The joint venture, a construction business, was owned by two parties with 80 percent and 20 percent equity share. The parties’ agreement to form the joint venture was memorialized in a series of documents, including an asset purchase agreement and a profit advance agreement. In the asset purchase agreement, a third entity, owned the majority owner of the joint venture, purchased all the construction equipment from the minority owner, which would then lease this equipment to the joint venture. In the profit advance agreement, the joint venture agreed to pay the minority owner $70,000 per year for two years as an advance on profits, not a salary. And the minority owner agreed that if his 20 percent share of the joint venture’s profits fell below $70,000 per year, he would repay the joint venture for any overage. Shortly after the joint ventures’ inception, the parties’ relationship deteriorated, and the majority owner pushed the minority owner out of the joint venture. The majority owner later shut down the joint ventures’ operations and caused his equipment entity to sell all the equipment. The parties brought suit, and the district court found that the majority owner breached its fiduciary and contractual duties.

For damages, the district court awarded the minority owner its lost profits of $227,500 by determining that, based on the profit advance agreement, all parties to the joint venture envisioned that the joint venture’s profits for the first two years would by $350,000. The court extrapolated that estimate over five years, awarding the minority owner 20 percent of that estimated profit, less certain payments he had already received. The district court also awarded the minority owner 20 percent of the proceeds of the equipment sale after the joint venture was discontinued.

The majority owner appealed the damages award, arguing that the district court’s lost profit award was unsupported by evidence and that the minority owner was not entitled to the proceeds of the equipment sale. The court of appeals agreed, finding that the district court relied solely on profit advance agreement to calculate the lost profits, making its lost profit calculation speculative and unreliable as it was not based on reasonable assumptions or projections. There was no evidence that the $70,000 figure in the profit advance agreement was based on any projections, profitability analysis, or reasonable expectations of the joint venture’s profitability. The court of appeals also remanded the minority owner’s award of the portion of the equipment sales proceeds because the equipment was owned by an entity wholly owned by the majority owner, not by the joint venture.

Contributors to this publication include: Melissa Donimirski, Janel M. Dressen, Jennifer Hadley Catero, John Levitske, Samuel Neschis, Tyson Prisbrey, and John C. Sciaccotta.