The New York Times published an article yesterday titled Climate change enters the therapy room discuss people with “climate anxiety”. As a northeaster, the frigid winter, blessed with snow and freezing ground that we experience has eased my own worries after years of abnormally mild winters. Probably myopic. Probably irrational. We take comfort where we can find it.
Here is another soothing affirmation of winter: the annual of this blog Winter Case Notes. This year’s edition features four recent New York court decisions:
- dismissing a putative LLC member’s tax estoppel argument raised in opposition to a motion for summary judgment declaring his non-membership;
- reject the rejection of the individual claims of a shareholder pleaded in parallel with the derivative claims arising from the non-payment by the controlling shareholder of the social contributions;
- grant summary judgment affirming Plaintiff’s claimed membership of 49.9% LLC as recorded in the Operating Agreement despite Defendant’s objection that the transaction was in fact a loan disguised as a interest of LLC in circumventing Jewish law prohibiting loan interest; and
- denying summary judgment in a dispute between family members over ownership of a real estate holding company involving allegations of forged stock certificates.
Court dismisses tax estoppel in LLC ownership dispute
Business divorce litigation frequently involves disputes over a party’s claimed interest in the business, particularly when the interest is not certified or otherwise documented by agreement between the owners. In such cases involving intermediary tax entities, the company’s K-1 forms issued to partners usually take center stage, with one party claiming that the other is prevented from taking a position in court that contradicts the ownership indicated by the K-1s. A recent post on this site by Frank McRoberts explains the two competing strands of New York tax estoppel case law, one holding tax returns that do not determine property status, the other holding that they are. As you might expect, the outcome depends on who signed the tax returns and who provided the information they contain.
In Tradesman Program Managers, LLC v. Doyle, decided earlier this month by the Appeals Division, First Department, the court upheld a ruling by Manhattan Commercial Division Judge Andrea Masley rejecting the tax estoppel argument put forward by the putative holder (JCB) of an 18.75% interest in an LLC. The 18.75% would have consisted of a 2.5% stake held by JCB’s principal plus a 16.25% stake allocated effective January 1, 2017 by another of the original LLC members. The LLC’s 2017 tax return prepared and filed in 2018 included JCB’s K-1 declaring the 18.75% interest. Later in 2018, the controlling members of the LLC evicted the principal, bought out the 2.5% stake, and sued for a declaration that the assignment to JCB violated transfer restrictions in the trust agreement. exploitation and was nil.
On appeal, the court upheld the trial court’s judgment declaring that JCB was not a member. The court agreed with Judge Masley that the 2017 K-1 issued to JCB did not preclude the LLC from disregarding JCB’s claimed membership interest, for two reasons. Firstly, citing his recent opinion in PH-105 Realty Corp. against Elayaan, the court noted that tax estoppel applies when “the party seeking to contradict the factual statements regarding the property in the tax returns has signed the tax returns and has not shown a reason for not crediting the statements”. The applicant in Traderhowever, “did not sign the K-1 in question” and “provided a reasonable explanation why the statement contradicts reality – namely, the affidavit of one of his officials stating that he paid distributions to JCB solely on the basis of misrepresentations made to plaintiff” by the putative assignor. Second, the alleged assignment to JCB dated back more than a year before its inception. “Accordingly,” the court wrote, “the assignments were made to a non-existent entity incapable of receiving them, thereby rendering such assignments void”.
Plaintiff’s direct claims alleging potential personal liability for payroll taxes did not duplicate derivative claims
I recently wrote about the frequency of first-round skirmishes in business divorce litigation over the pleading of direct or derivative claims. Here we go again.
In another First Department decision earlier this month, the court in Newman versus Newman upheld a ruling by Manhattan Commercial Division Judge Barry R. Ostrager denying a motion to dismiss plaintiff’s son’s individual claims against his father for breach of fiduciary duty, unjust enrichment and constructive trust in as duplicate of the claims derived from the son on behalf of their co-ownership company, Port Parties, Ltd. In his complaint, the son alleged that the father’s non-payment of payroll taxes for the business exposed the son as owner of the business to potential civil and criminal liability. The Appeals Panel agreed that the alleged harm to plaintiff “is individual harm sufficiently ‘separate and distinct’ from the harm suffered by the company as a result of defendants’ non-payment of certain state and federal taxes” and that “the The benefit sought by the company to recover on its claim to compensate it for the alleged non-payment of certain taxes would not necessarily be the same benefit sought by the plaintiff, who seeks resolution of potential civil and criminal liability for the alleged conduct .
Court rejects allegation that membership interest recorded in operating agreement was disguised loan
Business divorce meets the Bible in YMSF Family Partnership LP v Beitel, featuring a dispute between Orthodox Jews over the plaintiff’s investment in an LLC real estate company. In 2013, the plaintiff family’s limited partnership paid $800,000 allegedly for a 49.9% stake in the LLC. In 2017, after defendant’s controlling member denied requests for access to books and records, plaintiff sued for a declaratory judgment that he is a member of the LLC with full membership rights, including access to books and records. In support of his motion for summary judgment, the plaintiff relied on the 2013 operating agreement recording his “contribution” of $800,000 “paid for the purchase of the entity” and his interest of 49.9%.
The defendants objected on the ground that the operating agreement was not intended to confer a right of ownership on the plaintiff. On the contrary, as stated in the decision of Judge Leon Ruchelsman of the Brooklyn Commercial Division, the defendants argued:
the transaction was only a loan made by the plaintiff and the operating agreement was drafted in this way to avoid the appearance of an interest-bearing loan prohibited by Jewish law. Defendants claim that both Plaintiff’s and Defendant’s principals are all Orthodox Jews and deliberately and intentionally designed the transaction as an operating agreement as such to avoid the appearance of a prohibited interest-bearing loan.
Judge Ruchelsman dismissed the argument and entered summary judgment for the plaintiff, finding that “the terms of the operating agreement are clear and not in any way ambiguous” and that its provision setting out “contribution” and Plaintiff’s $800,000 membership percentage “clearly and unequivocally entitle Plaintiff to have membership interests in the entity.” Judge Ruchelsman also dismissed as inadmissible oral evidence the Defendants’ reliance on a “heter iska” entered into by the parties, described as “a religious document used to circumvent the Jewish ban on interest by treating all loans as partnerships or business ventures.”
Court orders trial on issue of father’s gifting intent for inter vivos gift of shares in family business
Messy are the facts in Lurie vs. Lurie, where the Appellate Division, Second Department upheld another of Judge Ruchelsman’s orders, this time denying summary judgment in a dispute over ownership of a family real estate business. The case pits son Neil against his father Abraham and (indirectly) sisters Leila and Susan in a struggle over ownership of Lurie Management Corp. (LMC) which holds title to a commercial property in Brooklyn that houses other Lurie-owned operating companies. Neil, alleging that in 1998 his father offered him the father’s 100% interest in LMC via a share certificate signed by the father, filed suit in 2018 after the father’s lawyer sent Neil a letter stating that Abraham had transferred his 100% ownership of LMC to three trusts run by Neil’s sisters for the benefit of Neil (49%) and his sisters (51%), and that the father was considering selling the property .
It wasn’t until two years into the litigation that Neil found and produced the 1998 stock certificate after testifying that it had been destroyed in a 2006 fire in which the company’s accountant had perished. Abraham and the sisters’ trusts sought summary judgment on their counterclaim for declaration of ownership of LMC, claiming that Abraham’s signatures on the certificate were forged. Neil responded with a handwriting expert’s report concluding that Abraham’s signatures were genuine. Talk about messy tax returns: Judge Ruchelsman’s decision (read here) details ownership information in LMC’s Form 1120 tax returns between 2004 and 2019, showing 100% ownership of Neil in some years, 100% ownership of Abraham in some years, 75% ownership of Neil some years and partial ownership of the sister some years.
No wonder Judge Ruchelsman found factual issues regarding ownership of the company based on disputed testimony regarding the authenticity of the stock certificate, conflicting tax statements and other hotly contested facts. . Similarly, the Second Department devoted a few words confirming Judge Ruchelsman’s decision:
Here, the defendants have established, prima facie, a lack of gifting intent for Abraham’s alleged inter vivos gift of the LMC property to Neil in 1998. In opposition, however, the plaintiffs have raised justifiable questions of fact as to whether Abraham had the requisite gifting intention. to make a current irrevocable transfer of shares and whether such transfer has actually been made. [¶] Contrary to the defendants’ assertion, the testimony of Neil and LMC’s accountant as to how LMC’s share certificate, which these witnesses testified was lost in a fire in 2006, was found by the accountant in January 2020, only raised a credibility issue that cannot be resolved by a motion for summary judgment. [¶] The defendants’ other arguments are without merit. [Citations omitted.]
The appeal also challenged Judge Ruchelsman’s denial of summary judgment also challenging Neil’s 100% ownership by Abraham’s donation of three operating companies. The Appellate Division’s assertion without argument as to these entities is the subject of a motion being re-argued by Abraham and the Sisters’ Trusts.