Articles Posted in MIscellaneous

  • The fiduciary duties of loyalty and care may be different when a partnership is involved, rather than a corporation.

  • The duties that shareholders in a corporation owe to each other are different than those owed in a partnership.  Shareholders have more discretion to consider their own interests first. 

  • Understanding the duties owed by those in a business is important to avoid liability to business partners

This fight between accountants in practice together demonstrates the different ways that courts will look at corporations on the one hand and partnerships, an entity that the what the law calls an unincorporated business association.  Limitied liability companies are also unincorporated business assocations.

The case is also another lesson in the course: Bad Things Happen to People Who Don’t Bother with Contracts When They Start a Business with Others.


Fiduciary Duties Owed Between Partners

The takeaway from this case is that the duties that shareholders owe to each other are different from the duties that partners and LLC members owe to each other. That is not to say that there are no duties between shareholders in a closely held corporation, but those duties are not presumedto exist.  They have to be proven from the circumstances.  We will discuss some of the differences as we go through the details of the case.

Why does this matter?  Because understanding the duties owed by those in a business is important to understanding the rights and liabilities of those involved, Those who have fiduciary obligations are personally liable when they ignore these duties.  And those who are owed the fiduciary duty have a right to hold the fiduciaries responsible.

Accounting Partnership Dissolves

This dispute between the accountants turned into a lawsuit. The combatants were involved in Forward LLP, a poorly documented accounting partnership. Kristina Edwards and Sean Forman were locked out of the business, but they went to court and got temporary restraining orders (TROs) by the trial court.

These allowed them to get back to using  Forward software, email, Google Drive, and client files and communications at the outset of the case. The defendants appealed that decision and lost.

The case we are looking at is from the California Court of Appeals, Edwards v. Forward, but the legal principles here will apply in most states, including New York and New Jersey, where I practice. Continue reading

  • Agreements that limit former employees from soliciting customers or disclosing confidential information are critical to protecting the value of a closely held business.

  • Restrictive covenants and non-compete agreements are difficult to enforce and must be carefully drafted to assure that they are enforceable. 

  • Closely held businesses should rely more heavily on contracts to prohibit solicitation and disclosures.

Restrictive covenants such as non-compete and non-solicitation agreements are vital to the stability of a closely-held  business. Let’s examine how these agreements can be used to protect the value in the most important drivers of value, the intangible assets in your businesses.


Female entrepreneur in casualwear sitting at wooden table and signing contract after successful completion of negotiations with business partner, close-up shot

Intangible assets are things like intellectual property, customer relationships, and proprietary information. Businesses can prevent employees or rivals from misappropriating these assets by implementing  effective restrictive covenants.

Securing these intangible assets is essential in the business world for preserving a competitive edge, achieving long-term success, and increasing a company’s worth.

Contact me to answer your questions about restrictive covenants and how they should be used in your closely held business.

Are Restrictive covenants Becoming Unenforceable?

The restrictive covenant, however, is under attack from a number of sources. They may be difficult to enforce and in some states unlawful. Continue reading

    • 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

  • An arbitration award entered in a dispute between two parties over the alleged issuance of shares in a financing transaction was vacated by a court because of the arbitrator’s failure to issue the written award on time.

Cases-of-Note-CorporationsIn the Matter of the Application to Confirm an Arbitration Award of Theodore Papakonstadinou and AKTOR CORPORATION, Petitioners, against Nikolaos Sparakis, LIZBETH GOZZER and GOZZER CORPORATION, Respondents. 

Petitioner Theodore Papakonstadinou is a director and owner of 95% of the voting shares of respondent Gozzer Corporation (“Gozzer Corp.” or “Corporation”), a domestic corporation with its principal place of business at 1043 Broadway, Albany, New York. The remaining 5% of the shares are owned by respondent Lizbeth Gozzer (“Gozzer”).

  • In a business divorce case alleging the fraudulent acquisition of shares, once the defendant  established the existence of a release, plaintiff must prove it is invalid.

  • A claim of a fiduciary relationship does not relieve plaintiff of proving that he did not release a claim that he was the victim of fraud in the purchase of shares of a closely held business.

Cases-of-Note-CorporationsNilish Chadha, Individually, and Derivatively on Behalf of Wahed Inc. f/k/a Wahed Invest Inc., Plaintiff, against Junaid Wahedna, and Wahed Inc. f/k/a Wahed Invest Inc., Defendants.

An ordinary contract, even between close friends, does not create a fiduciary relationship from which a court will find an equity interest.

Dominic Thomas Karipaparambil, Plaintiff-Appellant, v Robert Michael Polus et al., Defendants-Respondents. Judgment, Supreme Court, New York County (Jennifer G. Schecter, J.), entered March 10, 2021, dismissing the complaint, unanimously affirmed, without costs.
Appeal from order, same court and Justice, entered on or about March 2, 2021, which granted defendants’ motion to dismiss the complaint alleging causes of action for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, unanimously dismissed, without costs, as subsumed in the appeal from the judgment.

  • Although a former executive was bound by a restrictive covenant, the fact that his duties after joining a competitor were directed to a different market made the scope of the restrictions unreasonable.

  • A restrictive covenant that is not narrowly tailored to protecting specific interests of the former employer at stake in a lawsuit is less likely to be enforced with a preliminary injunction. 

  • A company that relies on the inevitable disclosure doctrine faces a high hurdle to show the certain use of a trade secret in a competitive manner.

An attempt by United Health Care to block an executive from joining a competitor failed when a federal judge found the medical insurance and services company had failed to establish it was likely to succeed when the case goes to trial.  The dispute identifies some of the steps that a new employer take to prevent its just-hired employee from running afoul of a restrictive covenant.united-Logo

The defendant Carlos Louro in this this case, United Health Care v. Louro, was an executive supervising the underwriting of national accounts at United.  He had recently been promoted to vice president and served on a high-level, national accounts strategy group.  He had also received stock options and restricted stock awards, which contained restrictive covenants and non-disclosure provisions..

Anthem-logoThe trial court construed Louros agreements with United that and restricted him from:“[e]ngag[ing] in or participat[ing] in any activity that competes, directly or indirectly, with any Company activity, product, or service that [Louro] engaged in, participated in, or had Confidential Information about during [Louro’s] last 36 months of employment with the Company” or assist anyone in any of those activities for one year after Louro’s termination of employment.” Continue reading

  • Owners of a closely held business, be it a corporation, limited liability company or partnership, may enter into contracts that are triggered when the principals have become deadlocked.

  • Anti-deadlock provisions may provide for the appointment of an independent director,  for alternative dispute resolution, or for the compelled sale of an equity interest.

  • The owner of a business that invokes the terms of an anti-deadlock provision, particularly when the sale of interest is involved, is likely to be subject to duties of loyalty and care.

After a closely held business becomes deadlocked, it is extremely difficult to push the parties toward some mechanism that might either break the deadlock or preserve the current management system, or event let the parties separate themselves on mutually agreeable terms.

A Series Examining Deadlock Among the Owners of Closely Held Corporations, Limited Liability Companies and Partnerships

Human nature stands in the way.  The parties likely have financial and emotional positions that they are unwilling to compromise.  These may range from the ability to control some aspect of the operations of the business to the payment of dividends or bonuses.


Lawyers and their clients try to address the potential for future deadlock with these contractual provisions that are known by a number of descriptions, such as buy-sell agreements, shotgun

provisions, put-call terms.  In the world of closely held limited liability companies, corporations and partnerships, a buy-sell agreement that is triggered by a deadlock is the pre-nuptial agreement of business divorce.

In this and the following post, we examine these contractual provisions that are used to break deadlocks.  We consider first the scope of anti-deadlock provisions, when they may be invoked and whether they are subject to judicial controls.  In a following post, we will look at buy-sell agreements in more detail and, in particular, shotgun language that is intended to keep a forced sale on terms acceptable to both parties. Continue reading


A recent amendment to New Jersey’s limited liability company law changes the rights of creditors seeking to collect a judgment from a member of a limited liability company, eliminating the creditor’s right to foreclose the member’s interest.

Foreclosure of LLC Member Interests Eliminated

This particular aspect of the Revised Uniform Limited Liability Company Act (RULLC) is one of the more controversial provisions of the newly enacted statute because it eliminated a key asset protection aspect of LLCs.  Under the prior statute, a creditor’s right was limited to a “charging order.”  The amendment to the statute simply restores the prior law.

Under most state limited liability company statutes, a creditor has the right obtain a charging order that provides that when an LLC distributes money to its members, the debtors share goes to the party holding the charging order.  It only works if any money is actually distributed to the members.

The RULLC was based on a model act devised by the Uniform Law Commission and contained a provision that allowed judgment debtors to foreclose an interest under certain circumstances.  What that meant was that if the judgment creditor was being paid, it had a right to seek a foreclosure of the interest, meaning that it would be sold at a judicial auction.

Continue reading


Purchaser Alleges Mortgage Was Not Approved by All LLC Members

A mortgage given by a New Jersey limited liability company to one of its members can be challenged by the purchaser in a court-approved sale of the business, the Appellate Division holds, reversing the trial court.

This case arises out of the estate planning undertaken by John Best and his wife, defendant Patricia Ann Best, after Mr. Best learned that he was terminally ill.  The couple owned Sea Village Marina in Northfield (across the bay from Margate).  They had transferred 25 percent of the business to their son, John, in 1994.

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