Temperatures in the 90's. Manhattan sidewalks sizzling. Judges on vacation. Lawyers under beach umbrellas squinting at their iPads. A perfect time to offer over-heated readers some short summaries of a few recent decisions of interest involving disputes between business co-owners.
First, we'll look at two trial court decisions in which the parties dispute the complainant's ownership interest in the subject business entities. In one, the court finds that the complainant sold his shares under duress but limited his remedy to damages. In the other, the court held that a prior Beth Din ruling governed ownership claims in subsequent civil litigation brought by one of the ex-spouses. The last case we'll look at is a split decision by an appellate panel concerning the authority to defend litigation brought against a deadlocked limited partnership.
Court Orders Money Damages in Lieu of Dissolution for Sale of Shares Under Duress
Ma v. J.C. Sake, Inc., 2011 NY Slip Op 50999(U) (Sup Ct Kings County June 3, 2011). The case involves a small restaurant in Coney Island that opened in 2007. The plaintiff, Ma, invested about $47,000 for what he thought was a one-third interest. Ma also was the cook and primary manager. About a year later Ma had a falling out with the other owners who threatened to kick him out if he didn't accede to their demands. The parties then agreed that Ma would leave upon a calculation of what was owed to him. After Ma rejected an offer of $47,000, the other owners locked Ma out of the restaurant, made a new offer of $35,000, and threatened to close the restaurant permanently and pay Ma nothing if he didn't accept the new offer. Shortly afterward Ma was paid $38,000 and signed a simple agreement acknowledging his sale of "all equity" in the corporation and stating that he would have no further involvement with the restaurant.
Ma, claiming that he was forced to sell his shares under economic duress, thereafter filed two lawsuits, the first seeking judicial dissolution of the corporation and the second asserting shareholder derivative claims for diversion of corporate assets. Brooklyn Commercial Division Justice Carolyn E. Demarest conducted a framed issue hearing to resolve the defendant owners' contention that Ma was not a shareholder by virtue of the sale and lacked standing to sue. Justice Demarest concluded that Ma had "capitulated" when faced with defendants' "unconscionable" threat to close the restaurant and leave Ma with nothing, and that such coercion "compelled" Ma to sell his shares for less than their value.
The court nonetheless refused to void the sale, finding that the parties had agreed to transfer Ma's shares to settle their irreconcilable differences, hence Ma lacked standing to obtain dissolution or to assert shareholder claims. Instead, Justice Demarest ruled, "the appropriate equitable remedy here is the voidance of the price and an award of money damages based upon an assessment of the value of plaintiff's shares" as of the date of the agreement to sell Ma's shares.
Beth Din Ruling Precludes Wife From Claiming LLC Membership Interest in Ex-Husband's Subsequent Lawsuit
Glatzer v. Webster, 32 Misc 3d 1202(A), 2011 NY Slip Op 51152(U) (Sup Ct Kings County June 23, 2011). In this case, also decided by Justice Demarest, Jay and Rose Glatzer were married in 1996 when they invested in several nursing homes operated by limited liability companies. The investments were held in the name of Rose's sister, Helen, as nominee. In 2005, Jay and Rose decided to get a civil and religious divorce, and entered into a contract of arbitration with the Beth Din which, in 2006, issued a ruling reflecting that Rose had "renounced and denied" having any partnership interest in the nursing homes. The civil court later confirmed the Beth Din's award. Meanwhile, in 2006, Jay sued his former sister-in-law Helen, Rose, and others, claiming that Helen had withheld distributions prior to his divorce from Rose and, after the divorce, repudiated Jay's ownership interest.
Jay moved for partial summary judgment declaring his ownership interest in one of the LLCs. Rose contested Jay's sole ownership of the interest. Jay argued that the Beth Din's ruling collaterally estopped Rose's assertion of ownership. Justice Demarest agreed, finding that "there was an identity of issue that was necessarily decided in the Beth Din's . . . decision regarding" the contested nursing home interests. Rose's position in the Beth Din, that the partnership interests were non-existent, "precludes her from taking an inconsistent position in this action." Justice Demarest also ruled that the doctrine of judicial estoppel barred Rose's ownership claim which was "manifestly at odds with her representation to the Beth Din denying and renouncing any such ownership." Under the doctrine, Justice Demarest added, "Rose cannot be permitted to simply change her position so as to frustrate plaintiff's recovery of interests where were proved before the Beth Din merely because her interests have changed."
Unanimity Requirement in General Partners' Stockholder Agreement Bars Defense of Foreclosure Action Against Limited Partnership
Crane, A.G. v. 206 West 41st Street Hotel Associates, L.P., 2011 NY Slip Op 05434 (1st Dept June 23, 2011). The case involves a failed hotel development project. The realty was owned by a limited partnership owned and controlled equally by two corporate partners. One of the partners lent the partnership the funds to acquire the realty in exchange for a note and leasehold mortgage. The partnership defaulted following which the lending partner brought a foreclosure action against the partnership. The lending partner moved for a default judgment after the partnership, because of the general partner's 50/50 deadlock, failed to answer the complaint. The other partner engaged counsel to apply to vacate the default and answer on the partnership's behalf, which the court granted. The lending partner appealed.
In a 3-2 decision, the Appellate Division, First Department, reversed the lower court and ordered the denial of the motion to vacate the default. The majority based its ruling on Section 2(c) of the stockholders' agreement of the corporate general partner, providing that "all action by the Stockholders shall require the unanimous approval of the Stockholders." The majority also found controlling the Court of Appeals' decision in Sterling Indus. v. Ball Bearing Pen Corp., 298 NY 483 (1949), which held that the presumption of actual implied authority was rebutted, or did not apply in the first instance, where the president of a corporation initiated a lawsuit notwithstanding that the corporation's board, by a deadlocked vote, had failed to authorize the litigation.
The two dissenting judges would have permitted the other partner to engage counsel to defend the foreclosure action based on other provisions in the stockholders' agreement which, they argued, gave its owner acting as president of the general partner "the power to act in his capacity as president without a resolution from the board of directors." The dissenters also reasoned that there were issues of fact whether the lending partner's refusal to allow a defense of the foreclosure action breached fiduciary duty owed the partnership.