§ 1.1. Introduction
This chapter provides summaries of developments related to business divorce matters that arose from October 1, 2020, to September 30, 2021, from mostly nine states. Each contributor used his or her best judgment in selecting 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 have rules that 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 To the extent unpublished cases are summarized, the reader should always consult local rules and authority to ensure the unpublished cases can serve as relevant and permissible precedent. 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
Ramirez v. Gilead Sciences, Inc., 66 Cal.App.5th 218 (Jul. 2, 2021). Beneficial owner of corporation’s shares filed a petition for a writ of mandate seeking to compel corporation to allow him to inspect its books and records. The petition was denied. A registered owner or record holder holds shares directly with the company. A beneficial owner holds shares indirectly, through a bank or broker-dealer. The appellate court affirmed the petition’s denial because only the record owner of the shares or holders of voting trust certificates have standing to inspect a corporation’s books and records under the plain language of Corporate Code section 1601.
§ 1.3. Business Judgment Rule
§ 1.3.1. Colorado
Walker v. Women’s Prof. rodeo Ass’n, Inc., 2021 COA 105M (Sep. 9, 2021). Members brought action against women’s professional rodeo association and rodeo company for breach of fiduciary duty, breach of contract, declaratory judgment, and injunctive relief against the association. The complaint was dismissed as failing to assert plausible claims for relief, considering the business judgment rule. The members’ claims were based on allegations that the association misapplied certain of its internal rules related to how members are compensated for participating in rodeo events. The court noted that fraud, self-dealing, unconscionability, and similar conduct are exceptions to the business judgment rule, which shields the actions of directors who engage in reasonable and honest exercise of their judgment and duties. Since the members had not alleged that the association engaged in fraudulent or similar wrongful conduct, the appellate court affirmed dismissal and chose not to override the association’s interpretation and application of its rules.
§ 1.4. Dissolution
§ 1.4.1. California
Cheng v. Coastal L.B. Assocs., LLC, 69 Cal.App.5th 112 (Sep. 1, 2021). This action involved the purchase of minority interests in an LLC that was equally owned by several siblings, pursuant to Corporations Code 17707.03, subd. (c)(1). Section 17707.03, subd. (c)(1), allows members of an LLC to respond to an application for judicial dissolution by purchasing the interests of the applicant members for fair market value of their interests. The applicant members in this action appealed the trial court’s order confirming the consensus valuation of three appraisers. The applicant members asserted on appeal that the trial court’s order instructing three disinterested appraisers to (a) review each other’s initial valuation reports, (b) confer with each other, and (c) try to reach a consensus valuation violated to Section 17707.03. The appellate court disagreed because there was no statutory language that prohibited or restricted a trial court’s authority to instruct the appraisers as it did.
§ 1.4.2. Delaware
Mehra v. Teller, 2021 WL 300352 (Del. Ch. Jan. 29, 2021). The Delaware Court of Chancery ordered dissolution of a two-member, two-manager LLC due to deadlock, despite also finding that the circumstances giving rise to the deadlock were contrived. In this action, the subject LLC had two members – Mehra and Teller. Teller held a greater membership interest, but Mehra was responsible for the company’s day-to-day management. Accordingly, the two agreed that the LLC would be managed by a two-person board, consisting of Mehra and Teller, and that board action required unanimity. The LLC agreement further provided that, if Teller and Mehra deadlocked, the company would be automatically dissolved.
After facing a series of business setbacks, Teller became critical of Mehra’s management and wished to exit the business partnership. Teller thus devised a plan in which he called a meeting of the board, and proposed a resolution that would remove Mehra from his role as CEO. When Mehra refused to vote on the resolution, Teller declared deadlock and sought to dissolve the company. The Court held that Teller proved that the parties have an irreconcilable disagreement concerning Mehra’s continuing management of Holdco and was sufficient to result in dissolution of the company. In so holding, the Court noted that, where unanimity is the voting threshold, either an abstention or a “no” vote may result in deadlock.
§ 1.4.3. New York
Garcia v. Garcia, 187 A.D.3d 859 (N.Y. App. Div. 2020). As part of a judicial dissolution proceeding, an LLC member appealed a special referee’s finding that he was lawfully expelled. The Appellate Division affirmed the Supreme Court’s interpretation of the operating agreement to allow for expulsion even without a listed mechanism for expulsion in the operating agreement. The court found that expulsion was valid using the general action procedure in the operating agreement, which was a majority vote of members.
§ 1.5. Jurisdiction, Venue, And Standing
§ 1.5.1. Delaware
Lone Pine Res., LP v. Dickey., 2021 WL 3211954 (Del. Ch. Jun. 7, 2021). In an action alleging breach of fiduciary duty for usurpation of corporate opportunities, theft of trade secrets and unjust enrichment, the Delaware Court of Chancery held that it did not have jurisdiction over defendant w entities under the conspiracy theory of jurisdiction where the only jurisdictional hook in Delaware was the formation of plaintiff Delaware entities, which action the Court held was not related to the conspiracy the Complaint sought to rectify relating to the Colorado entities.
In this action, plaintiff entities together operate a crude oil purchasing business. Together, they brought an action alleging that one of their co-founders leveraged his insider positions and the parties’ established structure to operate a secret side business, operated through Colorado entities formed by defendant Dickey, which he fed with the plaintiffs’ business opportunities and property. While the Court held that it had jurisdiction over Dickey for certain claims, it determined that it had no basis to exercise conspiracy theory jurisdiction over the Colorado entities, who had no well-pled contacts with Delaware. The Court held that Dickey’s actions forming Plaintiffs in Delaware was not reasonably related to the conspiracy by which the Colorado defendants were allegedly usurping business opportunities belonging to Plaintiffs. The Court additionally held that it did not have jurisdiction over Dickey for claims related to breaches of fiduciary duty to an LLC for which Dickey was not a manager.
United Food & Commercial Workers Union & Participating Food Indus. Emp’rs Tri-State Pension Fund v. Zuckerberg, 2021 WL 4344361 (Del. Sept. 23, 2021). The Delaware Supreme Court streamlined the standard for determining whether demand upon a board of directors is excused. The Court determined, as an initial matter, that exculpated care claims cannot establish that demand is futile. The Court further adopted the Court of Chancery’s three-part test for determining, on a director-by-director basis, whether demand should be excused as futile:
- whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;
- whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and
- whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
§ 1.5.2. Florida
Rappaport v. Scherr, 322 So. 3d 138 (Fla. Dist. Ct. App. 2021). In a dispute between a minority shareholder and a majority shareholder arising out of the majority’s shareholder’s self-interested conduct during negotiations for the sale of the business to a third party, the court addressed the requirement that a shareholder make a demand to institute litigation on the corporation’s board of directors prior to filing a derivative action. The Florida District Court of Appeal reversed a judgment entered in favor of the minority shareholder in his derivative action because the minority shareholder had not made a pre-suit demand to institute litigation on the board of directors.
The minority shareholder alleged that the majority shareholder breached his fiduciary duty during the sale of the business by concealing information from the minority shareholders and negotiating with the buyer of the business in a manner that furthered his own interests at the expense of the other shareholders. The defendant moved to dismiss the complaint as the plaintiff had not alleged that he had made a demand on the board of directors to institute the action as required by section 607.07401(2) of the Florida Business Corporation Act, which was in effect in 2017 when the complaint was filed. The trial court denied the motion to dismiss and subsequently entered judgment in favor of the plaintiff after a bench trial. However, the appellate court reversed, holding that, as it was undisputed that the plaintiff had not filed a pre-suit demand, the complaint should have been dismissed. The court noted that the plaintiff had made a demand after the filing of the suit but held that this post-filing demand did not comply with the statutory requirement.
The court also rejected the plaintiff’s argument that his failure to make a demand was excused because the demand would have been futile. The court noted that some jurisdictions do provide for a futility exception to the demand requirement. However, in 2017, when the complaint was filed, section 607.07401(2) of the Florida Business Corporation Act was in effect and governed the requirements for the filing of derivative actions by shareholders of corporations. That section did not contain a futility exception to the demand requirement making Florida, at that time, a “universal-demand” jurisdiction.
The court did note that, in 2019, the Florida legislature amended the statute, (now renumbered as section 607.0742). The amended statute, which became effective January 1, 2020, does contain a futility exception to the demand requirement.
Yarger v. Convergence Aviation Ltd., 310 So. 3d 1276, 1281 (Fla. Dist. Ct. App. 2021). In a suit brought by a corporation against a non-resident director, the court examined the issue of whether Florida’s long arm statute provides a court with personal jurisdiction over a non-resident director of a Florida corporation or non-resident manager of a Florida limited liability company for actions that the director or manager took within Florida on behalf of the corporation or LLC.
Orval Yarger, a resident of Illinois, was a director of Convergence Aviation, Ltd. (“Convergence”), a Florida corporation, as well as a manager of Convergence Aviation & Communications, LLC (CACL), a Florida limited liability company that Convergence had formed to purchase and manage property that would be used to house aircrafts that Convergence owned. Yarger was involved in an airplane accident involving an airplane owned by Convergence. The accident occurred in Kentucky while Yarger was returning to Illinois. Yarger kept certain parts that he purchased for the airplane and Convergence sued him for conversion in Florida state court. Yarger moved to dismiss the complaint for lack of personal jurisdiction. The trial court denied the motion to dismiss and Yarger appealed.
Convergence argued that Florida courts had jurisdiction over Yarger pursuant to Florida’s long arm statute (Fl. Stat. § 48.193(1)(a)), which provides, in pertinent part, that a person submits to the jurisdiction of Florida courts for any cause of action arising out of the person’s operating, conducing, engaging in, or carrying on a business or business venture in Florida or having an office or agency in the state. Convergence argued that Yarger was subject to personal jurisdiction under the long arm statute as he carried on activities on behalf of Convergence and CACL in Florida and as the conversion claim arose out of those actions. However, the appellate court held that, because Yarger’s actions within Florida were conducted as an agent of Convergence and CACL rather than for his personal benefit, the long arm statute did not provide a basis for Florida courts to exercise jurisdiction over him personally.
§ 1.5.3. Illinois
Tufo v. Tufo, 2021 IL. App. 192521 (1st Dist. March 24, 2021). This was a business divorce case between two brothers who operated the very successful Discount Fence Co. The Appellate Court affirmed the Circuit Court’s decision finding that the Plaintiff lacked standing under Illinois law to bring a derivative action because of his personal animosity toward the Defendant, and that therefore, he was not qualified to serve in a fiduciary capacity as a representative of the class of shareholders whose interests rests on the fair and impartial prosecution of the action. The Court recognized a conflict between the Plaintiff’s interests and the interests of the parties he purported to represent. The Court also disqualified the Plaintiff for lack of standing based upon the fact that the Plaintiff knew of the wrongdoing before he became a shareholder.
The Court, although having found that the Plaintiff proved the Defendant’s breaches of fiduciary duty by usurping corporate opportunities, also rendered that the Plaintiff failed to present clear and convincing evidence that the Plaintiff’s breach caused any damages.
§ 1.5.4. Massachusetts
Mullins v. Corcoran, 488 Mass. 275, 172 N.E.3d 759, 763 (2021). In a dispute between owners of a real estate development business, the court addressed the issue of whether the doctrine of issue preclusion bars a party from litigating the same issue in separate actions, where the party filed one action individually and the other action derivatively on behalf of an entity.
The case arose out of a dispute between Joseph Mullins, Joseph Corcoran and Gary Jennison, who jointly owned Corcoran, Mullins, Jennison, Inc. and indirectly owned Cobble Hill Center, LLC. Both entities engaged in real estate development and management. The parties’ dispute centered around plans that Corcoran and Jennison had generated for the development of a property known as the Cobble Hill Center site. Mullins initially consented to the plans, but then withdrew his consent. In 2014, Mullins sued Corcoran and Jennison for breach of an agreement that parties had entered into governing the operation of their business and for breach of fiduciary duty for proceeding with the development of the property after his withdrawal of consent (the “2014 Action”). Corcoran and Jennison counterclaimed against Mullins for breach of the agreement and breach of fiduciary duty for initially consenting to the development plans but then withdrawing consent. At the trial, Mullins introduced alternate plans for the development of the site as evidence that Corcoran and Jennison could have mitigated the damages on their counterclaim. The trial court entered judgment against Mullins on both his complaint and on the counterclaim but found that Corcoran and Jennison could have mitigated their damages through one of the alternate plans introduced by Mullins, and, therefore, reduced the damages awarded to them on the counterclaim.
In 2017, while the 2014 Action was still pending, Mullins filed a separate action in which he alleged breaches of the agreement and breaches of fiduciary duty that he alleged occurred after the filing of the 2014 complaint (the “2017 Action”). In the 2017 Action, Mullins also asserted derivative claims on behalf of Cobble Hill Center, LLC. The allegations in the 2017 action centered on Corcoran and Jennison’s refusal to proceed with any of the alternate plans for the Cobble Hill Center site presented by Mullins. Corcoran and Jennison moved for judgment on the pleadings based on the doctrine of issue preclusion. The trial court stayed the case until after the judgment in the 2014 Action had been entered, at which point, the motion for judgment on the pleadings was granted. Mullins appealed that decision and the Massachusetts Supreme Court then transferred the case to itself on its own motion.
The court observed that “[t]he doctrine of issue preclusion provides that when an issue has been actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties whether on the same or different claim.” With regard to Mullins’ individual claims, the court held that they were barred by issue preclusion because he had been presented about the alternate plans for development of the property at the trial in the 2014 Action.
However, the more complicated issue was whether issue preclusion barred Mullins’ derivative claims on behalf of Cobble Hill Center, LLC as, in order for issue preclusion to a bar a claim, the party against whom preclusion is asserted must have been a party or in privity with a party to the prior adjudication. The 2014 Action had been filed by Mullins individually not derivatively on behalf of the LLC. The court observed that, because corporations are treated as distinct from their shareholders, ordinarily the parties to direct actions by shareholders and derivative actions filed by shareholders on behalf of their corporations are not considered to be the same. Therefore, ordinarily, a direct action by a shareholder should not be preclusive of a separate derivative action brought by a shareholder on behalf of the corporation. However, the court recognized an exception to that rule for closely held entities where ownership and management are in the same hands. Because Cobble Hill Center, LLC had only three members, all of whom participated in the 2014 Action, the Court held that the LLC’s interests were adequately represented in the 2014 Action. Therefore, the court held that issue preclusion barred Mullins from asserting the same claims in the 2017 Action derivatively on behalf of the LLC that he had asserted individually in the 2014 Action.
§ 1.5.5. New York
Durst Buildings Corp. v Edelman Family Co., No. 652036/2021, 2021 WL 2910316 (N.Y. Sup. Ct. Jul. 8, 2021). An equal member of a Delaware LLC sought judicial dissolution in New York pursuant to a jurisdiction and venue clause selecting New York County in the LLC operating agreement. The Supreme Court dismissed the claim for lack of subject matter jurisdiction, citing that New York courts do not have the subject matter jurisdiction over judicial dissolutions of foreign entities.
§ 1.5.6. Minnesota
Poultry Borderless Co., LLC v. Froemming, No. 20-CV-1054 (WMW/LIB), 2021 WL 354087 (D. Minn. Feb. 2, 2021). The plaintiff, a Texas LLC, sued one of its co-owners, a Minnesota LLC, and its members in federal court invoking 28 U.S.C. § 1332 diversity jurisdiction. The plaintiff and defendant LLCs are both equal owners of TFC Poultry LLC. The court determined that the company, TFC Poultry, was an indispensable party because the plaintiff LLC’s claims were derivative claims alleged on TFC Poultry’s behalf. The plaintiff argued that the claims were direct, not derivative because the board’s composition directly injured the plaintiff. The court concluded that LLC members only have derivative standing when an alleged wrongdoer controls an entity, making TFC poultry an indispensable party. Once the court found TFC Poultry to be an indispensable party, the court dismissed the case for lack of subject-matter jurisdiction because TFC Poultry is a corporate citizen of both Mexico and Minnesota and therefore, there was not proper diversity jurisdiction.
Ross v. Dianne’s Custom Candles, LLC, No. A20-1543, 2021 WL 3852272 (Minn. Ct. App. Aug. 30, 2021). Plaintiff, a member of a Minnesota LLC, brought an action for oppressive conduct seeking judicial dissolution or buyout under Minn. Stat. § 322C.0701 against the LLC and its majority member. Alternatively, the plaintiff sought damages from the defendants for the breach of the duty of good faith and fair dealing. The plaintiff argued that he uniquely suffered losses from not receiving any salary or distribution to offset his tax liability from his ownership interest. As alleged, this injury was partly due to the LLC’s excessive compensation to the majority member. The Court of Appeals agreed with the district court that the claims were derivative, not direct, claims because improper use of corporate funds injures the corporation directly, not the member. The injury is the improper diversion of corporate funds, which requires a derivative action to remedy.
§ 1.5.7. Texas
Cooke v. Karlseng, 615 S.W.3d 911 (Tex. 2021). The Texas Supreme Court reversed and remanded the judgment of the Texas Court of Appeals that Texas courts lack jurisdiction to hear derivative claim asserted directly. In this case, a limited partner sued his business partners for looting the partnership of which he was a member by moving partnership assets to new business entities with which he was not associated without compensating him. The Texas Court of Appeals held that the claim for damages properly belonged to the partnership, not to plaintiff, and that, because the claim was not pleaded derivatively, the court lacked jurisdiction to decide the matter. Citing to Pike v. Texas EMC Mgmt., LLC, 610 S.W.3d 763 (Tex. 2020), the Texas Supreme Court reversed, holding that the authority of a partner to recover for injury to his partnership interest is not a matter of constitutional standing that implicates subject-matter jurisdiction. The Court additionally noted that statutory provisions “define and limit a partner’s ability to recover certain damages.” However, those provisions go to the merits of the claim and do not strip a court of subject-matter jurisdiction to render a judgment in such a case.
§ 1.6. Claims And Issues In Business Divorce Cases
§ 1.6.1. Accounting
§ 1.6.1.1. Colorado
Sensoria, LLC v. Kaweske, 2021 WL 2823080 (D. Colo. Jul. 7, 2021). Investor in a holding company for various cannabis-related entities, on its own behalf and derivatively on behalf of holding company, brought action seeking to recover its investment in holding company against holding company, its subsidiaries, its owner, its managers, its law firm, and other, separate entities that were in competition with holding company allegedly created by holding company’s owner and manager to siphon off assets and cash of holding company. The cannabis-related businesses were legal under Colorado state law. However, Defendants moved to dismiss all claims because the underlying illegality of the business under federal law (Controlled Substances Act, 21 U.S.C. §§ 802, et seq. (“CSA”)), which prevented the federal court from granting any relief that would endorse or require illegal activity or that would impose a remedy paid from assets derived from criminal activity. Since many of the forms of the sought-after remedy would require the court endorsing or implementing criminality, the court dismissed several of the investor’s claims. But one of the few claims that did survive was a claim for accounting. The court determined that the accounting claim was not subject to an illegality defense.
§ 1.6.2. Alternative Entities
§ 1.6.2.1. Delaware
Pearl City Elevator, Inc. v. Gieseke, 2021 WL 1099230 (Del. Ch. Mar. 23, 2021). The Delaware Court of Chancery construed limitations on the transfer of membership interests the subject LLC Agreement in deciding a Section 18-110 action to determine the proper makeup of the company’s Board of Governors. The Court determined that plaintiff Pearl City had complied with the requirements of the LLC Agreement and had acquired sufficient equity to change the composition of the Board. The LLC in question was owned 50% by plaintiff Pearl City and 50% by a disaggregated group of “General Members.” Both Pearl City and the General Members were each entitled to appoint three members to the LLC’s Board of Governors. The LLC Agreement permitted either party to appoint an additional member to the Board of Governors upon accumulation of more than 56% of the LLC’s units.
Pearl City subsequently initiated a campaign to cross the 56% threshold, doing so by engaging in private purchases of membership interests from disaggregated General Members. Members of the Board of Governors elected by the General Members refused to acknowledge such acquisition for purposes of appointing an additional board member, arguing that Pearl City failed to comply with the terms of the LLC Agreement when obtaining additional membership units. In construing the LLC Agreement, the Court held that the Agreement requires Board approval for membership transfers only where the transfer is to a non-Member. The Court further held that the Board may require a legal opinion relating to certain considerations set forth in the LLC Agreement and may defer recognition of any transfer until such opinion is obtained, and that advance notice of a transfer is not required before effectuation of a transfer of membership interests, but that the LLC Agreement provided that notice to the Board was required before such transfer would be deemed effective. The Court found that Pearl City complied with the foregoing requirements and was entitled to add an additional board member to the Board of Governors, thereby obtaining control of the company.
§ 1.6.2.2. New York
Eikenberry v. Lamson, No. 516653/20, 2021 WL 722837 (N.Y. Sup. Ct. Feb. 19, 2021). The plaintiff sued her alleged partner and various limited liability companies, claiming that the partnership oversaw the entities. The Supreme Court held that a plaintiff could demonstrate that a partnership operated a limited liability entity, but only if the plaintiff alleged facts showing that the partnership intended to survive the creation of the entity and that the entity was created to serve a specific purpose. The plaintiff did not meet that factual burden, and the Supreme Court dismissed all the plaintiff’s claims related to alleged corporate activity.
Farro v. Schochet, 190 A.D.3d 689 (N.Y. App. Div. 2021). The plaintiff, previously a 50% LLC member, commenced direct and derivative claims against the LLC, the other 50% LLC member, and a lender after a cash-out merger eliminated his interest. The Appellate Division found that appraisal is the exclusive remedy under New York’s Limited Liability Company Law § 1005. The plaintiff also could not seek recission of the merger on the grounds of fraud under § 1005, repeating that appraisal was a member’s sole and exclusive remedy under New York’s LLC Law. The plaintiff also could not maintain a derivative action for breach of fiduciary duty, removal of a manager, or equitable request for accounting because he lacked a membership interest, and his only remedy was appraisal.
Compare to Johnson v. Asberry, 190 A.D.3d 491 (N.Y. App. Div. 2021). The defendant LLC member appealed the denial of their motion to dismiss. The Appellate Division affirmed the denial because the plaintiff LLC member properly alleged fraud by omission that resulted in a freeze-out merger. The Appellate Division found that equitable relief would be an available remedy for the alleged fraud, citing New York’s Business Corporation Law § 623[k].
§ 1.6.3. Breach of Fiduciary Duty
§ 1.6.3.1. Florida
Taubenfeld v. Lasko, 324 So. 3d 529 (Fla. Dist. Ct. App. 2021). In a case arising out of a dispute between two fifty percent shareholders of a corporation, the court addressed the pleading requirements for claims of breach of fiduciary duty and aiding and abetting breach of fiduciary duty. The plaintiff, who had been the president of the corporation, alleged that the defendant usurped the position of president and assumed sole control over the company. The plaintiff further alleged that the mother of the defendant then established a separate limited liability company that provided the same services as the corporation. The defendant, with the assistance of his mother, father, and brother, transferred assets of the corporation including its business relationships, customer list, and vehicles to the new company. The plaintiff filed a derivative action on behalf of the corporation alleging that the defendant had breached his fiduciary duties of loyalty and care by wasting the corporation’s assets through causing them to be transferred to the new company. The plaintiff’s complaint also included claims of aiding and abetting breach of fiduciary duty against the defendant’s mother, father, and brother.
The trial court dismissed the complaint finding that the allegations lacked sufficient factual support regarding the specific duty that the plaintiff was alleging that the defendant owed and because the nexus between the defendant’s conduct and the damage to the corporation was unclear and speculative. However, the appellate court reversed, holding that the allegations that the defendant had mounted a takeover of the company, diverted the corporation’s relationships and revenues to the new company, and executed documents to transfer the corporation’s assets to a competitor were sufficient to state a claim that the defendant had breached his fiduciary duties as an officer of the corporation. The court further held that the plaintiff had stated claims for aiding and abetting breach of fiduciary duty against the defendant’s mother, father, and brother as he had alleged that each of these family members knew of the defendant’s breaches and assisted those breaches by, among other things, helping him divert assets to the new company.
§ 1.6.3.2. Minnesota
Clintsman v. Gervais, No. 62-CV-19-8677, 2021 WL 3417833 (Minn. Dist. Ct. Mar. 23, 2021). Two sibling plaintiffs commenced an action against their five siblings involving their family real estate business, which consisted of various Minnesota limited liability companies. Plaintiffs’ claims included oppression, breach of the duty of good faith and fair dealing, and breach of statutory and common law fiduciary duties. The district court granted summary judgment for the plaintiffs on their claims of oppression, breach of the duty of good faith and fair dealing and breach of fiduciary duties. The court found that undisputed evidence of multitudes of derogatory comments made by the defendants along with intentional exclusion from material communications and secret recordings supported finding that the defendants were liable for at least one act of unfairly prejudicial conduct constituting oppression and breach of fiduciary duties. The court then granted the plaintiffs’ motion for a fair value buyout from the family LLCs.
§ 1.6.3.3. Texas
Straehla v. AL Glob. Servs., LLC, 619 S.W.3d 795 (Tex. App. 2020). The Court of Appeals of Texas held that Plaintiff AL Global Services established a prima facie case that defendant Jorrie breached his fiduciary duty of loyalty and duty not to usurp corporate opportunities. In so holding, the Court noted that, while the Texas Business Organizations Code does not directly address the duties a manager or member owes to their LLC, the Court of Appeals has previously held that the Code “presume[s] the existence of fiduciary duties.” In this case, defendant Jorrie, a member and manager of AL Global diverted opportunities owned by the company to his own business, which had originally served as a subcontractor to AL Global. Among other things, Jorrie encouraged and exploited a personal relationship between his business partner and one of AL Global’s clients to move related business opportunities into his own, competing business. The Court additionally held that a prima facie case had been plead for knowing participation in breach of fiduciary duties against employees of the client, one of whom was engaged in the personal relationship with Jorrie’s business partner.
§ 1.6.3.4. New York
John v. Varughese, 194 A.D.3d 799 (N.Y. App. Div. 2021). The plaintiff brought a derivative breach of fiduciary duty claim against the managing member of the LLC. The Supreme Court entered judgment after a nonjury trial in favor of the managing member because of the operating agreement’s exculpatory clause, which exculpated the managing member from breach of fiduciary duty liability, except for actions or omissions that were “in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled.” Id. at 801. The Appellate Division reversed the Supreme Court as to one act and found that the managing member intentionally breached a fiduciary duty by transferring $50,000 from the LLC to an unrelated entity that he then used for his personal attorney’s fees not authorized by the LLC’s operating agreement. The court entered judgment in favor of the plaintiff on that claim.
Celauro v. 4C Foods Corp., 187 A.D.3d 836 (N.Y. App. Div. 2020). Celauro, a minority shareholder of a family-owned, closely held corporation, 4C Foods Corp., filed suit against the majority shareholders for breach of fiduciary duty and breach of the implied covenant of good faith and fair dealing. The Supreme Court awarded summary judgment for the defendants regarding these claims. The Appellate Division affirmed, finding that the defendants did not breach a fiduciary duty or an implied covenant of good faith and fair dealing by following a valid stock transfer restriction that required majority consent for any transfer of shares. The defendants acted appropriately to avoid disrupting the corporation’s operations. The transfer of shares would have given the plaintiff more than 20% of voting shares, allowing the plaintiff to pursue a judicial dissolution proceeding under N.Y. Bus. Corp. Law § 1104-a. The Appellate Court also found that the plaintiff did not suffer damages by increasing the authorized amount of non-voting shares and issuing a non-voting share dividend because the defendants adopted an amendment to the shareholder agreement that appraised the non-transferable shares at pre-dilution value.
Shilpa Saketh Realty, Inc. v. Vidiyala, 191 A.D.3d 512 (N.Y. App. Div. 2021). A minority shareholder sued the other shareholders of a pharmaceutical corporation for fraud, breach of fiduciary duty, and unjust enrichment in connection with the sale of the corporation. The plaintiff alleged that it relied on the defendants to negotiate on its behalf. Before the sale, a stock purchase agreement reduced only the plaintiff’s percentage of shares, which the plaintiff alleged was misrepresented by the defendants. The plaintiff signed the stock purchase agreement, which included a general release of claims against the corporation and its equity holders. The Supreme court dismissed the plaintiff’s claims as barred by the release as a matter of law. The Appellate Division reversed, finding that plaintiff’s claims were not barred as a matter of law by the release because the plaintiff may have reasonably relied on the defendants to act on its behalf. The court noted the plaintiff alleged a united relationship at the time of negotiations. The court also excused the plaintiff from reading the agreements, though the court did not explain its reasoning.
CIP GP 2018, LLC v. Koplewicz, 194 A.D.3d 639 (N.Y. App. Div. 2021). An investment company sued its business partners from a cannabis laboratory venture for breach of contract, promissory estoppel, unjust enrichment, breach of fiduciary duty, minority oppression, and misappropriation of trade secrets. The plaintiff appealed the Supreme Court’s dismissal of its claims of promissory estoppel, unjust enrichment, breach of fiduciary duty, minority oppression, and misappropriation of trade secrets. The Appellate Division found that the plaintiff adequately alleged an oral partnership and then reversed the Supreme Court’s dismissal of the plaintiff’s unjust enrichment and promissory estoppel claims. The court found these claims not to be duplicative because a plaintiff may pursue both quasi-contract theories and breach of contract. The Appellate Division affirmed the dismissal of the breach of fiduciary duty and minority oppression claims as duplicates of the breach of contract claim. The court further affirmed the dismissal of the misappropriation of trade secrets claim because the plaintiff failed to allege that business methods it shared willingly were trade secrets.
§ 1.6.4. Breach of Contract and Breach of Covenant of Good Faith and Fair Dealing
§ 1.6.4.1. Delaware
In re Cellular Telephone P’ship Litig., 2021 WL 4438046 (Del. Ch. Sept. 28, 2021). The Delaware Court of Chancery held that a majority partner did not breach the subject partnership agreement by “manag[ing] the Partnership however it wished” because a Management Agreement executed by the Partnership delegated broad authority to manage the business and affairs of the Partnership to AT&T, despite the efforts of the minority partner to demonstrate that AT&T exceeded the scope of authority delegated in the Management Agreement. The Court noted that, because the Management Agreement was between AT&T and the Partnership, a derivative claim for breach of the Management Agreement might have succeeded. This was because AT&T’s failure to comply with the provisions of the Management Agreement would give rise to a breach that is cognizable only derivatively, while Plaintiffs’ direct claim was focused on AT&T exceeding the scope of its delegated authority.
The action involved a general partnership between AT&T, which held 98.119% of the partnership interest, and the minority partners, who collectively owned the remaining 1.881% partnership interest. The partnership agreement provided that governance of the partnership was delegated to an Executive Committee. The Partnership Agreement provided for a three-member Executive Committee, with two representatives appointed by the majority partner and one by the minority partners. In practice, however, AT&T only acted through the Executive Committee on formal matters, such as authorizing a distribution to the partners, and generally ran the business of the Partnership as it pleased.
Plaintiffs sought to prove a direct claim for breach of the Partnership Agreement under Section 15-405(b)(1) of the Delaware Partnership Act by demonstrating that AT&T exceeded its delegated authority under the Management Agreement. The Court held that the delegation of authority was expansive and ruled in favor of AT&T on the direct claim. The Court noted, however, that AT&T’s failure to comply with its contractual commitments regarding how AT&T would exercise its delegated authority could support a claim for breach of the Management Agreement, a claim that could only be brought derivatively. Because plaintiffs failed to assert such a claim, the Court ruled in favor of AT&T.