A trio of significant rulings by the Appellate Division dominated the business divorce caselaw arena in 2023. The Second Department weighed in with a pair of rulings limiting the lower courts' authority to order a closed auction sale of a dissolved corporation's assets and, in an apparent ruling of first impression, recognized an estate's standing to seek judicial dissolution of a limited liability company under Section 608 of the LLC Law.

The First Department also contributed a novel ruling giving life to an oral voting agreement among members of an LLC.

Not to be left out of the spotlight, last year the Manhattan Commercial Division handed down a thoughtful decision reconciling case precedent concerning the circumstances under which a non-managing member of an LLC nonetheless can be saddled with fiduciary duties.

Corporate Dissolution and Liquidation in the Second Department

It's no secret that business-divorce litigators regularly turn to the provisions for judicial dissolution under Article 11 of the Business Corporation Law in a strategic effort to force a liquidity event for their clients.

A common strategy is to compel an equitable buyout of one owner's stock interest by the other for "fair value" under the Court of Appeals' seminal 1984 decision in Matter of Kemp & Beatley and its progeny, which afford courts a discretionary alternative to bringing about the demise of an otherwise functional business.

The case-law remedy of a judicially-compelled equitable buyout, however, is limited to dissolution sought on the grounds of shareholder "oppression" under BCL §1104-a, as opposed to "deadlock" under BCL §1104. When proceeding under BCL §1104, dissolution means dissolution.

Once a corporation is dissolved under BCL §1104, the shareholders may agree on the wind-up and disposition of the company's assets under BCL §1005 ("Procedure after dissolution"). If they can't agree as often is the case, the court has the discretion under BCL §1111 ("Judgment or final order of dissolution") to include in its dissolution order directives concerning "the distribution of the property of the corporation to those entitled thereto according to their respective rights." But according to the Second Department in ANO, Inc. v. Goldberg (216 AD3d 766 [2d Dept. 2023]), that discretion does not extend to directives ordering a private sale.

Last year's ANO decision arose out of a particularly contentious litigation involving 50/50 owners of a New York corporation, ANO, Inc., that owned a Massachusetts commercial property indirectly through majority interests in two other companies. The protracted litigation, which to date has spanned the better part of 15 years, first involved fights over the parties' percentage ownership of ANO, Inc. followed by a petition for dissolution under BCL §1104 based on deadlock and an inability to elect directors in one of the underlying companies.

The First and Second Departments were not the only courts last year to address novel issues and arguably fashion new precedent for businessdivorce litigators in the coming years

The Nassau County Commercial Division ultimately issued an order granting the dissolution petition without any directives as to the wind-up of ANO, Inc.'s business, i.e., the sale of its majority interest in the underlying company.

After the Second Department affirmed, the parties went back to the trial court to address their disputes over the disposition of ANO, Inc.'s assets, including the petitioner's motion to have a temporary receiver appointed to oversee the sale of its stock in the underlying company.

After the Second Department affirmed, the parties went back to the trial court to address their disputes over the disposition of ANO, Inc.'s assets, including the petitioner's motion to have a temporary receiver appointed to oversee the sale of its stock in the underlying company.

The trial court granted the motion and appointed a receiver to oversee a closed private auction at which the parties would each submit sealed bids to purchase the other's 50% interest.

The respondent moved to vacate the order of appointment, including the private-auction directives, arguing that it unfairly would require him as winning bidder to remove petitioner as personal guarantor of an outstanding $600,000 mortgage loan on the property. At the private auction, which was held while the motion was pending, the respondent failed to submit a bid, and the petitioner was declared the winner.

The trial court ultimately denied the respondent's motion to vacate. The respondent took another appeal, arguing that the private auction was invalid because he never consented to any terms concerning the disposition of the mortgage loan and the petitioner's personal guarantee.

The Second Department agreed, holding that "[w]hen the parties cannot reach an agreement amongst themselves with respect to the sale of the corporation's assets either to one another or to a third party, the only authorized disposition of corporate assets is liquidation at a public sale.

Because the parties were not able to reach a full agreement as to the terms of the private sale, the Supreme Court did not have the authority to authorize the sealed-bid auction" (citations and quotations omitted).

LLC Dissolution and Standing in the Second Department

The Second Department last year issued a novel ruling on the subject of dissolution in Andris v. 1376 Forest Realty, LLC (213 AD3d 923 [2d Dept. 2023])—specifically, on the subject of standing to seek judicial dissolution under Articles VI and VII of the Limited Liability Company Law.

The Manhattan Commercial Division, for example, considered the existence and scope of fiduciary obligations of non-managing LLC members amidst the backdrop of what it deemed "unclear" jurisprudence on the topic in 'Doeblin v. MacArthur.

There is an important distinction throughout the LLCL between a bona fide "member" entitled to the full panoply of rights and powers associated with owning and operating an LLC and an "assignee" whose ownership status is limited to an "economic interest holder." Under LLCL §603, an assignee holding a mere economic interest is simply "entitle[d]...to receive, to the extent assigned, the distributions and allocations of profits and losses to which the assignor would be entitled."

This distinction often is highlighted under circumstances involving the death of an LLC member whose interest passes to her estate. Absent an operating agreement containing specific provisions addressing the death of a member, the deceased member's estate is relegated to assignee status.

Section 608 of the LLCL would appear to address such circumstances, providing that "[t] he member's executor, administrator, guardian, conservator or other legal representative may exercise all of the member's rights for the purpose of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member."

Prior lower court decisions denying estate representatives standing to bring derivative actions on an LLC's behalf arguably implied the same restriction on judicial dissolution proceedings.

Andris proved otherwise. The case involved 50/50 owners of a real estate holding company with no written operating agreement. A few years after one of the members died, her estate sought dissolution of the LLC based on allegations of the surviving member's mismanagement and overall financial unfeasibility of the business. The estate also asserted a cause of action for an accounting.

The surviving member moved to dismiss the accounting claim, and the estate cross-moved for summary judgment on its claim for dissolution. After Supreme Court, Richmond County denied the estate summary judgment, the surviving member made her own motion for summary judgment dismissing the estate's dissolution claim, which the court granted. Neither party raised the issue of standing in the course of their briefing. Nor did the trial court raise the issue in its decisions on the parties' motions.

The estate appealed both summary judgment decisions concerning its dissolution claim. Again, neither party raised the issue of standing in their appellate briefs. The Second Department decided in the estate's favor and reinstated its petition for dissolution, holding sua sponte that "[a]lthough the death of a member of a limited liability company does not trigger dissolution of that limited liability company, Limited Liability Company Law §608 provides that a deceased member's executor may exercise all of the member's rights for the purpose of settling his or her estate.

Thus, contrary to the respondents' contention, the petitioner, as executor of the decedent's estate, has the authority to exercise the decedent's rights in the LLC for the purpose of settling the estate" (citations and quotations omitted).

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