Articles Posted in Dissolution

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  • Divorcing couples that own a business together must address business ownership issues as part of the matrimonial issues, in particular the distribution of assets.

  • An important issue when a couple divorces is how to address the family owned business in which one of the spouses was involved before the marriage.  Courts may  distribute the value of owner’s share to the non-owner spouse.

  • The divorcing couple may also have individual equity interests in a jointly owned business and must decide whether to buy out one of the spouses or continue on together as co-owners.

The divorcing couple that owns a business together has to manage the family and business relationships simultaneously. That typically involves terminating their relationship as well.

And if one of the parties owned the business before the marriage, such as a stake in a family business, it means dissecting the interests of the divorcing spouses in a way that may implicate the interests of still others.

portrait-of-a-confident-young-man-and-woman-workin-2023-11-27-05-08-51-utc-1024x683

Portrait of a confident young man and woman working together on a farm.

In a recent case before the Supreme Court in Montana, the issue was how to deal with a distribution of property when one of the sons of a ranching family was divorced from his wife after more than 30 years of marriage.

Business Divorce Issues Related to Divorcing Business Owners

The wife claimed an interest in the limited partnership that owned the ranch and argued that it should be valued for the purposes of the parties’ property settlement and not as a family business. The limited partnership vigorously disputed that she had any interest in the business.

Contact us for more information or to discuss your issue on business governance issues. 

The case, In re Frost, relies on the liberal provisions of state law that provide that anything owned in whole or in part by the married individuals is distributable in a divorce. The trial court rejected the claim of ownership, but the award in some ways treated the rancher’s wife as if she had. Continue reading

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  • The failure of the parties to submit evidence on an issue during arbitration caused a failure to decide all of the issues of the dispute.

  • A Court may modify an arbitration award rather than vacate and permit partial enforcement while permitting litigation of claims were not included in an arbitration hearing.

  • Failure to clearly define the mechanics of an arbitration and to agree on the issues that the arbitrator is to decide can make an award unenforceable.

This court decision addresses a recurring issue when parties agree to resolve their dispute by arbitration: exactly what was it that we agreed to arbitrate? Unless the answer to that question is clear and unambiguous, trouble is likely to follow. Continue reading

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  • The Internal Affairs doctrine requires a court to apply the law of the state where a business was formed, or organized, to disputes between the owners regardless of the circumstances.

  • New Jersey courts have applied a more traditional analysis of conflict of laws issues and may refuse to apply the law of another state if the parties or the issues have no connection to the state of formation.

  • The Revised Uniform Limited Liability Company Act provides that the law of the state of organization governs the rights of members and their liability to third parties.

 

A New Jersey need not necessarily honor a Delaware choice of law provision in an operating agreement if the company has no substantial relationship to the state where it was organized, the Appellate Division holds in a case involving a Delaware limited liability company and an Israeli corporation.

courthouse-gf011b4688_1280-300x287This holding in which the appellate court reversed and remanded a trial court’s decision rejected the per se application of the “internal affairs” doctrine in which courts apply the law of the state where a business was organized to internal disputes without regard to the other principles that often govern choices about which state’s law applies to a lawsuit.

The Importance of Choice of Law Decisions

This is a technical issue, but an important one that has some very practical decisions.  Business entities are formed under the laws of individual states, but have the right to do business in any state.  That means as a practical matter that corporations and limited liability companies often do business in states, or even countries, other than whether they were formed.  When a dispute arises in one state among the owners of a business formed in another state, the choice of law and authority of the court to act can be a thorny  issue. Continue reading

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  • Limited Liability Company laws in New Jersey and many states provide a cause of action for the oppression of minority members of company against those in control of the business.

  • Oppression of a minority LLC member is measured by the reasonable expectations of the minority member in those states that have adopted the Uniform Limited Liability Company Act

  • Courts assess reasonable expectations by looking at the operating agreement, the behavior of the members and purpose of the members in joining the business.

Oppression of minority llc members turns on reasonable expectationsMajority rule in any limited liability company is not without its risks, in particular the potential for the majority owners to oppress the minority members, together with the difficulty the minority member is likely to have in recouping the investment in the business.

Minority members of a limited liability company may always voluntarily dissociate, or resign, as a member, at which point they give up the right to participate in management.  As a “dissociated member,” the minority member who has resigned is entitled to his or her share of profits, but not to participate in decisions or get full information about the operations of the business. Continue reading

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  • Minority shareholders of a closely held corporation may be subjected to oppressive conduct by the controlling majority that deprives them of the benefits of their investment. 

  • Oppressed minority shareholder actions vindicate the rights of the minority owner to participate in the management and share in the economic benefits of the company.

  • A court may order the majority to buy the minority member’s interest at fair value, to sell the corporation as a going concern, for damages or take other actions to fashion an appropriate remedy.

anger-2728273_1920-1024x683Under New Jersey business law, minority oppression refers to conduct in which the majority shareholders or directors of a corporation engage in behavior that prejudices the rights or interests of the minority shareholders unfairly.

We see shared holder oppression in a variety of action: Continue reading

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  • A plaintiff seeking to bring a derivative claim on behalf of a corporation, limited liability company or limited partnership must be “suitable” and represent the interests of the business.

  • A member of a limited liability company may sue individually to recover or protect the member’s individual right.  New Jersey law does not, however, permit a member to bring a claim for involuntary dissociation, or expulsion, as a direct claim.

  • Courts have discretion to treat derivative claims as direct claims under New Jersey law, but may bar a derivate claim brought by a limited liability company that is antagonistic to the other owners.

Derivative claims in limited liability company lawsuit

Family in South Jersey Sand and Gravel Business Torn by Claims of Wrongdoing in Derivative Action

Hostility among the owners of a limited liability company is a staple in business divorce litigation, as are the derivative claims commonly asserted by the minority against the majority.  But one New Jersey court has dismissed minority derivative claims because that hostility, the court said, made the member an unsuitable derivative plaintiff.

Is this case, Cave v. Cave, from the Superior Court in Burlington County, an outlier?  Or does it merely reflect a more thorough analysis of the requirements for a derivative action.  If this decision were to be widely followed, it could change the landscape of litigation among the owners of closely held businesses. Continue reading

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  • The removal of a member from a limited liability company, known as involuntary dissociation, is permitted by statute in most states and may also be permitted in an operating agreement.

  • Removal is permitted when a member has engaged in wrongful conduct that has or will materially affect the company or when the member has repeatedly breached the operating agreement.

  • Removal may also be permitted when a member files for bankruptcy or if it is not reasonably practicable for the LLC to continue with them as a member.

There are plenty of choices that we make in our lives that we would like to undo. Some we can and some we can’t. Breaking up with a business partner is the topic of this discussion. More particularly, how a member of a limited liability company can be expelled from the business. We’ll cover the circumstances in which members can be expelled, when it’s easy and when it’s not.

Continue reading

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    • A business divorce is the process by which the owners of a business separate their business interests.  The process involves negotiation and may also require litigation.

    • These cases can be divided into four phases: the emergent phase, the examination phase, the valuation phase and the resolution phase.

    • Most owner lawsuits end in a negotiated transaction because it gives the parties more flexibility over the manner in which the case is resolved.

We’re going to look at business divorce in terms of the four phases that the typical case goes through from its start to the time that is resolved, either through settlement or trial.We should start with the most basic definition of what is a business divorce. I use the term to describe the process by which people who were in a business together disentangle themselves. Continue reading

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In most lawsuits, there is a presumption that the matter will, in most circumstances, go to trial.  A party involved in a dissolution action involving a closely held New York corporation needs to request a hearing, however, or risk having the matter resolved in a summary fashion.

That is the reminder from this decision of the Fourth Department of the Appellate Division affirming the decision of a trial court granting dissolution and the appointment of a temporary receiver for Brady Farms, Inc. in western New York.  (Opinion in Brady v. Brady)

The record does not include a request from respondents for an evidentiary hearing and, on appeal, respondents concede that they failed to make such a request. Consequently, respondents’ contention that the court abused its discretion in ordering dissolution summarily, without a hearing, is unpreserved.

Continue reading

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  • Courts determine whether an individual has an equity interest in a law firm partnership by examining the financial investment and risk taken by the claimed owner, such as payment of capital and guarantees of obligations.

  • The rise of the non-equity partner in law firms management has changed the status associated with the title partner.  Nearly half of all law firm partners are now classified as non-equity or limited equity.

  • The way in which the firm reports the income of a partner to the IRS in its tax filings are evidence of an equity interest in many cases, but describing an individual as an equity owner may not be conclusive.

The last refuge of the general partnership may be the law firm.  However, the term “partner” in a law firm can have a number of different meanings and it often does not identify only the traditional equity owner of the enterprise.  In many circumstances, “partner” is a title that indicates a senior attorney, usually at the top of the firm’s professional structure.  It does not, however, provide a particularly reliable indication of either management responsibilities or a financial interest in the firm.partnership-526413_1280-1024x562

Not all partners are created equally.  In fact, the rise of non-equity partner, those that do not share in the profits or capital of the law firm, is rising rapidly.  Only 56 percent of the partners in law firms in 2018 were equity partners.  (Above the Law, 3 Reasons to Embrace the Rise of Non-Equity Partners).  That trend is a 250 percent increase over the past two decades. In 1999 the figure was 17.1 %.(Altman Weil, Inc. What Should Law Firms Do about Non-Equity Partnership).

Not surprisingly, the existence of an equity interest, or not, is not an uncommon area for dispute.  In this post we consider here involving the effect of tax documents on the claim of an attorney that he held an equity interest in a well-known personal injury firm.  Treatment for income tax purposes is invariably a key component of holding equity.  Is it dispositive?  In this case, no. Continue reading

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