The Business Divorce Law Report

June 24, 2021

Court Vacates Arbitration Award in Ownership Dispute

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.

In 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”).

June 23, 2021

Plaintiff Released Claims of Fraud in Purchase of Interest

by Jay R. McDaniel, Esq.

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.

Nilish 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.

June 21, 2021

Threats Against Partner’s Ex Not Intentional Infliction of Emotional Distress

by Jay R. McDaniel, Esq.

In a dispute among general partners, a single verbal threat against spouse of one of the partners does not create a claim for intentional infliction of emotional distress.

CHERYL E. CHAMBERS, J.P. SYLVIA O. HINDS-RADIX COLLEEN D. DUFFY ANGELA G. IANNACCI, JJ.

In August 2007, the plaintiff and the defendant allegedly entered into an oral agreement establishing a general partnership to own, manage, and maintain real estate and, in [*2]furtherance of that agreement, jointly held title to two properties in Port Chester.

June 21, 2021

No Breach of Fiduciary Duty in Ordinary Contract

by Jay R. McDaniel, Esq.

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.

June 9, 2021

Non-Solicitation Agreement May Be Enforceable Against Former Attorney

by Jay R. McDaniel, Esq.

An agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable.
Solicitation of the clients of a law firm by a former associate may be actionable, even if a potential restriction on practice, in limited circumstances.
The rule of professional conduct that precludes restrictions on practice will not bar a claim against a former non-lawyer employee.

June 8, 2021

CFAA is Now Less Help in Business Divorce Cases

by Jay R. McDaniel, Esq.

A former employee will violate the computer fraud and abuse act only by having unauthorized access to data, not by using data for an unauthorized purpose.
Former owners or employees that access computer systems after termination may be liable under the Computer Fraud and Abuse Act.
A federal claim based on the unauthorized use of data will likely no longer support a federal claim in a business divorce litigation.

So much impact from such a little word. The U.S. Supreme Court, resolving a split among the circuit courts, imposed significant limits on the reach of the Computer Fraud and Abuse Act (CFAA), severely restricting its usefulness as a tool to pursue unfaithful former employees and owners. cyberspace-2784907_1920-1024x683

The significance of the decision– which as discussed below turned on the construction of the work “so” in the statute’s definitions – in business divorce cases is that it will limit the ability of litigants to employ the statute as redress for some types of conduct and deprive a plaintiff in some cases of access to federal courts. (For the linquists and grammarians, the parsing of “so” is in the opinion, here.) Continue reading

June 7, 2021

Charging Lien Claim Requires Trial by Jury

by Jay R. McDaniel, Esq.

A charging lien protects the interest of a lawyer in fee that is to be paid from a contingent-fee recovery. A statutory lien may be enforced through a petition filed in an underlying action.
The amount of a charging lien, and the lawyer’s compensation, is determined using principles of quantum meruit, or “so much as he deserves. Quantum meruit creates an implied contract to pay an amount based on the contribution of the former lawyer to the ultimate result.
A charging lien claim is subject to the general requirements for trial by jury. Once a jury trial is demanded by either party, it can be waived only with consent. Whether a party is entitled to trial by jury depends on whether a jury trial is available in the underlying action.

New Jersey’s attorney charging lien statute (N.J.S.A. 2A:13-5) permits a discharged attorney to file a lien petition in a matter makes clear that the trial court has the authority, in the first instance, to establish and enforce the charging lien, but it is silent on the issue of whether a jury trial is required to determine the ultimate outcome. jury-box

When is a Charing Lien Subject to Trial by Jury?

That question – jury trial or not – is likely to turn on where the case was pending at the time the lien was asserted, according to a decision of the Appellate Division of Superior Court in Toscano Law Firm v. Haroldson (opinion here). The appellate reversed the trial court’s decision in a long-running fee dispute, made without a jury, and remanded the dispute for a new trial.

Thus, although discharged attorneys in contingent-fee matters are generally compensated under principles of quantum meruit, an implied contractual theory that is equitable in nature, the parties may have a right to trial by jury. In the Toscano, litigation, the Appellate Division held, the trial court had confused the equitable nature of a quantum meruit claim with the fact that it is a legal remedy. (The quantum meruit claim is one that results in money damages payable to the successful charging lien petitioner.) Continue reading

May 11, 2021

Independent Contractor Rule is Withdrawn

by Jay R. McDaniel, Esq.

Independent Contractor, or Not …

Divining the difference between the traditional employee and an independent contractor has an inherent level of uncertainty, particularly in this era of gig workers and home offices brought about by the Covid pandemic.

Shortly before the end of the Trump administation, the Department of Labor had announced a new standard under the Fair Labor Standards Act (“FLSA”) that was focused on a pair of core factors — worker control and opportunity for profit. The Biden administration has reversed course, however, and the Department of Labor has withdrawn the rule change.

May 7, 2021

Failure to Request Hearing is Fatal to Dissolution Action

by Jay R. McDaniel, Esq.

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.

March 23, 2021

Pharma Exec Bound by Restrictive Covenant After Sale

by Jay R. McDaniel, Esq.

Key employees of a company may be bound by restrictive covenants that are included in an agreement to sell the entity, but do not reference them individually.
A court should consider whether the restrictive covenant of a key employee was a significant element of the transaction and necessary to protect the good will of the business.
Restrictive covenants that are given in connection with the sale of a business may be broader than those given by an employee to an employer, and are more likely to be considered reasonable if they were an aspect of the transaction.

In some circumstances, an executive who received a portion of the proceeds of the sale of a business may be bound by the restrictive covenants that were part of the deal, even if he had not negotiated the covenant individually with the purchaser in a decision involving a pharmaceutical rebate company. drugs-2170816_1920-1024x576

The decisions we consider here frame an often relevant distinction between a restrictive covenant that is part of the sale of the business and a restrictive covenant that is part of a purely employment relationship. Here, the time period applicable to the restriction was three years, which may have been unenforceable against an employee but was reasonable when it was part of a sale of the business in which the defendant benefitted personally.

Executive with ‘Bonus on Sale’ Agreement

The defendant in this decision was James Larweth, an executive in the pharmaceutical rebate business, in which drug companies compete to have their products included on lists of preferred medications. Insurance companies receive rebates and engage pharmaceutical benefit management companies. The executive worked in an even narrower area of the business, “carve out” pharmaceutical rebates. 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.

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.

In a dispute among general partners, a single verbal threat against spouse of one of the partners does not create a claim for intentional infliction of emotional distress.

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

An agreement prohibiting a former associate of a law firm from competing with his former employer within 90 miles of New York City was void and unenforceable.

Solicitation of the clients of a law firm by a former associate may be actionable, even if a potential restriction on practice, in limited circumstances.

The rule of professional conduct that precludes restrictions on practice will not bar a claim against a former non-lawyer employee.

A former employee will violate the computer fraud and abuse act only by having unauthorized access to data, not by using data for an unauthorized purpose.

Former owners or employees that access computer systems after termination may be liable under the Computer Fraud and Abuse Act.

A federal claim based on the unauthorized use of data will likely no longer support a federal claim in a business divorce litigation.

A charging lien protects the interest of a lawyer in fee that is to be paid from a contingent-fee recovery. A statutory lien may be enforced through a petition filed in an underlying action.

The amount of a charging lien, and the lawyer’s compensation, is determined using principles of quantum meruit, or “so much as he deserves. Quantum meruit creates an implied contract to pay an amount based on the contribution of the former lawyer to the ultimate result.

A charging lien claim is subject to the general requirements for trial by jury. Once a jury trial is demanded by either party, it can be waived only with consent. Whether a party is entitled to trial by jury depends on whether a jury trial is available in the underlying action.

When is a Charing Lien Subject to Trial by Jury?

Independent Contractor, or Not …

Key employees of a company may be bound by restrictive covenants that are included in an agreement to sell the entity, but do not reference them individually.

A court should consider whether the restrictive covenant of a key employee was a significant element of the transaction and necessary to protect the good will of the business.

Restrictive covenants that are given in connection with the sale of a business may be broader than those given by an employee to an employer, and are more likely to be considered reasonable if they were an aspect of the transaction.

Executive with ‘Bonus on Sale’ Agreement