Fiduciary Duties

February 8, 2017

Good Faith and Fair Dealing Required Disclosure of Conflict

by Jay R. McDaniel, Esq.

Good faith and fair dealing are obligations implied in every contract, including contracts among owners of closely held businesses, and cannot be waived by the language in an operating agreement voiding fiduciary duties.
The duties of good faith and fair dealing require disclosure of conflicts of interest involving controlling LLC members or partners.
Contracts contain obligations that are so ‘obvious’ that they are not included in the written agreement; these obligations fall withing the scope of good faith and fair dealing.

January 27, 2017

Fight Over Transfer of Interests is Grounds to Expel Member of LLC and Partnership

by Jay R. McDaniel, Esq.

An Illinois appellate court affirmed a finding of breach of fiduciary duty and the expulsion of a limited liability company member under a version of the Uniform Limited Liability Company Act. The case is of interest for the way it construes the model partnership and limited liability company acts.

Explusion of LLC Member After Transfer of Interests

The court in Kenny v. Fulton Assocs., LLC, 2016 IL App (1st) 152536 (Ill. App., 2016) holds first that under Illinois’ LLC statute the actual activities of the parties determined their fiduciary duties, not the agreements. The management of the entities were vested in one side as manager, but the day-to-day operations actually handled by the other side. The management of the business creates a fiduciary duty under Illinois law. The other significant holding is that refusing to honor a valid transfer of an interest is not just a breach of contract, but a breach of fiduciary duty. Finally, the court affirms the holding that when one of the principals is a lawyer that represents the firm, his breach of duty as an attorney is also a breach of fiduciary duty as a member or partner.

December 14, 2016

Seven Business Litigation Best Practices that Address the Lack of Civil Trials

by Jay R. McDaniel, Esq.

Here is the hard reality. The chances that your case, or any case, will get to a real trial on the merits is way less than one in 10. The truth is that only between two and five cases out of 100 will be resolved with a trial.

What does that mean for a party drawn into civil litigation? The statistics point to a group of “best practices” that effective litigation counsel should employ. It is a blend of efficient trial preparation, motion practice, management of discovery and, perhaps most of all, advanced negotiation skills. We review some of those here as a starting point for developing a case strategy.

Civil Trials in Business Litigation is a Rare Event

October 27, 2016

LLC Member Enjoined from Competition

by Jay R. McDaniel, Esq.

An LLC member breached his fiduciary duty by competing with his own company, a trial court in New York City holds in issuing an injunction against one of the principals of a successful company that makes automated parking systems.

The case involves the company that makes Parkmatic parking systems, mechanical stickers and carousels for parking cars in limited spaces. The complaint in Zacharias v. Wassef alleges that the defendant Max Wassef responded to complaints of misconduct by his partner Zacharias by forming a new company to siphon off business using the Parkmatic name.

Limited Liability Company Member Claims Unfair Competition by Manager

October 26, 2016

Plaintiff Alleges Wrong in Derivative Suit Against Managers

by Jay R. McDaniel, Esq.

New York has recognized the right of limited liability company members and managers to bring derivative claims – that is, claims belonging to the LLC – against other members or managers. But, the derivative plaintiff needs to beware of the demand requirement or face having their case dismissed.

Derivative Suit Seeks Recovery for LLC of Management Fees

In a derivative case, the plaintiff is actually asserting a claim that belongs to the company. If there is a recovery, it goes to the company and the derivative plaintiff only gets individually what may, or may not, be passed through to the equity members. The law even provides for an award of attorney’s fees in some derivative cases to encourage shareholders or members to police the business.

October 10, 2016

An Apology at the Bargaining Table

by Jay R. McDaniel, Esq.

One of the hardest things about being an effective negotiator is the ability to leave your ego at the door. We need to listen, not impress.

Seasoned Negotiators, Effective Apologies

As negotiation trainer Jim Camp warns, an effective negotiator learns how to let the other side be “ok,” even when you’re not. The fact is that no matter how well we listen, no matter how well we employ our negotiator’s tool kit to learn the real interests of the other side, we’re going to make mistakes.

August 1, 2016

Fraud Claim Against Yankee Star Derek Jeter Survives

by Jay R. McDaniel, Esq.

Derek Jeter promised his new business partners that his ownership and support of the Frigo brand of men’s underwear would not conflict with the superstar Yankee’s obligations to sportswear giant Nike. In return, RevolutionWear, Inc. gave him 15 percent of the company and a seat on the board.

Apparently, Nike did not take too kindly to Jeter becoming well-known as one of the principal owners of a competitor, and when the athlete failed to embrace the brand — $50 undershirts and $100 briefs — the relationship spun out of control. Jeter filed suit first, seeking a declaration supporting his conduct. RevolutionWear counterclaimed, alleging fraud and breach of fiduciary duty.

The decision of the Delaware Chancery Court in Jeter v. Revolutionwear, Inc., C.A. No.11706-VCG (Del. Chancery July 19, 2016) points out some of the pitfalls in trading equity for services. Once Jeter was on board, according to the plaintiff’s counterclaim, he was loathe to be publicly associated with the enterprise, or in other words, to live up to his obligations.

June 27, 2016

Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount

by Jay R. McDaniel, Esq.

Talk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

February 11, 2016

Majority Rule Creates Fiduciary Duties

by Jay R. McDaniel, Esq.

The three majority members of a five-member limited liability company decide that they want to take a major action, such as selling the assets of the business or buying another business. They present the decision to the minority and proceed over their objections (We’ll assume for the moment that the action is permitted by the Operating Agreement.) The minority are bitterly opposed. Is this a problem? Often, it is.

Majority Rule and Minority Rights

The line between what is a right as an equity owner and what is a breach of fiduciary duty to the minority members is often blurry. We presume that as the owner of equity in a business, be it a limited liability, partnership, or a corporation, that we have the right to vote our economic self interest.

December 31, 2012

Five Expensive Mistakes When Forming a New Jersey LLC

by Jay R. McDaniel, Esq.

New Jersey Limited Liability Company Attorneys

Imagine that the limited liability company you and your partners started five years ago is involved in a nasty corporate governance lawsuit. Perhaps one of the partners needs to be expelled, or maybe one of the owners is involved in a competing business. Imagine that you are spending tens of thousands of dollars every month on legal fees, that the business is in a state of constant disruption and that you haven’t had a good night’s sleep in weeks.

And now, accept the fact that this could have been avoided.

The chances are that if a closely held business is involved in this type of litigation it is because the owners did not plan well when they started the business. How do I know? Having litigated many of these matters over the years, I see the same mistakes made early in the life of the business surfacing again and again as the source of litigation.

New Jersey Limited Liability Company Operating Agreement

This is my non-exclusive list of what I think are the most expensive mistakes that I see people make in their business. There are others, to be sure, but these are the ones that I see as the source of litigation among the members.

No Operating Agreement: Actually, I am not going to count not having an operating agreement as one of the five “mistakes.” It is not really a mistake, it is a colossal blunder, kind of like drunk driving – you may get away with it for a while, but you know how it’s going to end.

Good faith and fair dealing are obligations implied in every contract, including contracts among owners of closely held businesses, and cannot be waived by the language in an operating agreement voiding fiduciary duties.

The duties of good faith and fair dealing require disclosure of conflicts of interest involving controlling LLC members or partners.

Contracts contain obligations that are so ‘obvious’ that they are not included in the written agreement; these obligations fall withing the scope of good faith and fair dealing.

Explusion of LLC Member After Transfer of Interests

Civil Trials in Business Litigation is a Rare Event

Limited Liability Company Member Claims Unfair Competition by Manager

Derivative Suit Seeks Recovery for LLC of Management Fees

Seasoned Negotiators, Effective Apologies

Majority Rule and Minority Rights

New Jersey Limited Liability Company Attorneys

New Jersey Limited Liability Company Operating Agreement