Source: https://www.msek.com/publication/
Timestamp: 2019-04-18 22:23:03+00:00

Document:
Counsel is presented with an opportunity to represent a petitioner (or a respondent) in a corporate dissolution proceeding. As petitioner’s counsel, a petition under N.Y. Business Corporation Law (“BCL”) § 1104 cannot be filed as the client does not own at least one-half of the votes of all outstanding shares of the corporation. However, as the client owns an excess of 20% of such shares, she is permitted to file under BCL § 1104-a. Respondent’s counsel receives the petition and has two choices: (1) defend on the grounds that a dissolution is not legally viable under § 1104-a or under “common law”; or (2) within 90 days after the filing of the petition, the respondent can elect to purchase the shares owned by the petitioner at their fair value “upon such terms and conditions as may be approved by the court” under BCL § 1118.
Why even consider opting to purchase the minority’s shares if respondent believes that dissolution should not be granted? There are a number of factors that can play into this decision. First, considering the fact that under BCL § 1118 the valuation will be as of the date of the filing of the petition, this may inure to the respondent’s benefit. Respondent may expect a marked change in the success of the company subsequent to the date of the filing of the petition now that the dissatisfied shareholder may no longer be involved in day-to-day operations. Respondent may also believe that, notwithstanding her fervent belief that dissolution is unwarranted, by electing to purchase the shares she removes the uncertainties that any litigation engenders and avoids the costs associated with fighting the aggrieved shareholder who has requested to exit the corporate entity. One of those risks is that if the dissolution is granted, there will be even more costs and court intervention as the company winds down its operations for the purpose of liquidating its assets to effect a distribution to petitioner and any other shareholders. This is a costly and risky proposition for any ongoing concern and may result in a diminution of the value of those assets throughout the dissolution process. Finally, respondent may have no interest in having to deal with the almost constant haranguing that an aggrieved shareholder may engage in – even if his initial attempt at dissolution was unsuccessful.
A decision is made to go the BCL § 1118 route, so what is next?
For either petitioner or respondent’s counsel what comes next is fairly formulaic. The matter is a special proceeding whose procedural aspects are governed by the provisions of Article 4 of the CPLR.[i] There will be an exchange of relevant financial documents which will eventually lead to a hearing where the court will determiner “fair value.” Where the BCL does not define “fair value,” courts are in agreement that “fair value” is the price which a hypothetical “willing purchaser, in an arm’s length transaction, would offer the corporation as an operating business.”[ii] Fair value is not ascertaining the value of an interest in the “throes of liquidation.”[iii] In such a proceeding, neither side has a burden of proof. Rather, it is the court that determines fair value based upon the evidence presented at the hearing, usually through the testimony of experts.[iv] Both sides also know that the date of valuation, as stated above, is the date prior to the date on which the petition was filed.[v] So how do the respective sides begin to determine “fair value,” and what other considerations are there for each side as they try to convince the court that their valuation is more accurate?
There should be no doubt that expert assistance in this matter is essential. Professional appraisers understand the valuation techniques regularly accepted in the industry and by the courts. While a lawyer involved in this line of work should have some working knowledge as to how a business is appraised, no lawyer can be expected to have the level of knowledge that a professionally-certified business appraiser has acquired over years of study. In addition, no matter what skills an attorney may have at cross examination of a business valuation expert, the court is going to want to have a competing valuation to compare and contrast against the valuation of the other side.
With that said, it is time to engage the services of an expert. What should counsel look for when hiring a business valuation expert? Certainly the expert should be “certified.” There are a number of organizations which require appraisers to go through a certification process. Some of the accrediting organizations are USPAP, NACVA, IBA and ASA.[vi] One should also look to an expert who has specific knowledge of the industry which she will be evaluating. The more the expert knows about the particular industry the better.
There are essentially three predominant methodologies to determine fair value, to wit, (1) net asset value; (2) investment value; and (3) market value.[ix] Net asset value is an asset-based approach focusing on the balance sheet of the company and more appropriate for holding companies with significant tangible assets, i.e., family limited partnerships. Investment value is also known as the “income approach” which is to determine a value that is equal to the present value of future benefits such as revenues, operating profits and cash flow. This involves a capitalization of a single benefit stream or discounting multiple benefit streams. Finally, there is the generally-recognized market approach or market value. Market approach is determining value by observing transactions in the market place that are similar in nature thus ascribing value to the transaction at issue. For most closely-held corporations, it will be difficult to establish a market value approach because of the uniqueness of the company’s operations irrespective of the industry in which the company is involved. Moreover, there may not simply be enough comparables that are similar enough to warrant reliance on such an approach.
In sum, notwithstanding the seemingly mechanical process by which value may be determined, the lawyer still has the ability to use his or her talents to affect the outcome.
[i] See In Re WTB Prop., Inc., 291 A.D.2d 566 (2d Dept. 2002); see also In Re Quail Aero Serv., Inc., 300 A.D. 2d 800 (2d Dept. 2002).
[ii] Matter of Pace Photographers (Rosen), 71 N.Y.2d 737, 748 (1988); Matter of Penepent Corp., 96 N.Y.2d 186, 193 (2001); and Matter of Seagroatt Floral Co., Inc. (Riccardi), 78 N.Y.2d 439, 445 (1991).
[iii] Matter of Seagroatt Floral Co., Inc., 78 N.Y.2d at 445.
[iv] Matter of Cohen, 636 N.Y.S.2d 994 (Sup. Ct., N.Y. Co. 1993), aff’d 240 A.D.2d 225 (1997).
[v] See BCL § 1118.
[vi] Uniform Standards of Professional Appraisal Practice (USPAP), National Association of Certified Valuation Analysts (NACVA), Institute of Business Appraisers (IBA), American Institute of Certified Public Accountants (AICPA), American Society of Appraisers (ASA): CFA Institute (CFAI): Chartered Financial Analyst (CFA).
[vii] The engagement letter should specify that the expert will solely look to the client for payment of all invoices.
[viii] U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961).
[ix] Matter of Friedman v. Beway Realty, 87 N.Y.2d 161, 167 (1995).
[x] Matter of Friedman, 87 N.Y.2d at 170.
[xi] Seagroatt, 78 N.Y.2d at 442.
[xii] Ferolito v. Arizona Beverages USA, 2014 WL 5834862, *18-19 (Sup. Ct., Nassau Co. 2014).
[xiii] Giaimo v. Vitale, 101 A.D. 3d 523 (1st Dept. 2012).
[xiv] See Giaimo, 101 A.D.3d at 526 (the court awarded prejudgment interest at the “equitable rate” of four percent).
[xv] Rodriguez v. Estevez, 19 Misc.3d 1116(A) (Sup. Ct., N.Y. Co. 2008).
[xvi] Blake v. Blake Agency, Inc. 107 A.D.2d 139, 151 (2d Dept. 1985).
[xvii] McDaniel v. 162 Columbia Heights Housing Corp., 25 Misc.3d 1024 (Sup. Ct., Kings Co. 2009); Hall v. King, 177 Misc.2d 126 (Sup. Ct., N.Y. Co. 1998); Ferolito, 2014 WL 5834862 at *22.
Reprinted with permission by the Nassau County Bar Association.
On March 7, 2019, the United States Department of Labor released its long-gestating plan to increase the number of individuals eligible to earn overtime under the Fair Labor Standards Act (“FLSA”). Under the proposed rule, individuals earning less than $35,308 per year ($679 per week) would be eligible to earn overtime.
The FLSA requires that employers compensate its employees at time and a half for all hours worked over forty (40) in a workweek unless that individual is exempt from earning overtime. Generally, in order to be exempt from overtime, individuals must pass both a duties test and a salary basis test. The duties test requires an employer to establish that the employee is either an executive employee (primarily responsible for managing the company, directs the work of 2 or more employees and has the ability to affect individuals’ job status) or an administrative employee (performs office or non-manual work related to the management or operation of the company and exercises discretion and independent judgment). The salary basis test requires that an individual earn above a certain salary on a weekly basis.
Under current law, an individual must earn $23,660 (or $455 per week) in order to pass the salary basis test. The propose rule would require an individual to earn $35,308 per year (or $679 per week) in order to pass the salary basis test.
The proposed rule would result in more than one million workers becoming eligible to earn overtime under the FLSA. Employers should review the salaries of their exempt employees in order to determine whether their exempt employees would pass the salary basis test under the proposed rule. If there are any exempt employees who would no longer be exempt, employers should determine whether to increase that employee’s salary or reclassify them as a non-exempt employee. However, employers should also examine applicable state law as many states, such as New York where exempt employees must earn between $832.50 and $1,125.00 per week depending upon location, have a higher minimum salary threshold in order for individuals to pass the salary basis test.
The proposed rule will be published shortly in the Federal Register. Once the proposed rule is published, it will be subject to a 60-day public comment period.
Victims of child sexual abuse have a powerful new weapon to achieve justice against their abusers.
(under age 18) may bring a civil suit against the person or institution causing or allowing the abuse.
The period of time (statute of limitations) allowed for criminal prosecutions of such crimes was also increased. The Bill applies the Criminal Law statute of limitations for the specific crime and begins to run from the person’s twenty-third birthday or from the time the offense is reported to a law enforcement agency or statewide central register, whichever occurs first.
Notice of claim provisions (which generally require written notice to a municipality within 90 days of an event) are eliminated in cases of child sexual abuse.
This Bill was passed in response to recent widespread findings of sexual abuse of children in religious institutions and other settings.
Child sexual abuse victims may now bring suit for sexual abuse until they reach age fifty-five. There is a one-year extension to commence suit for those over the age of fifty-five. This extension begins six months from the time the bill is signed into law. It is expected that the governor will sign this bill immediately.
If you or someone you know is a victim of child sexual abuse, you should consult an attorney, even if you have been told previously that no legal action could be taken.
For more information on Meyer Suozzi’s Personal Injury Law Practice, click here.
A year has elapsed since the Federal Tax Cuts and Jobs Act (the “TCJA”) became effective1 and it has been nearly five years since New York’s estate tax law was last overhauled. Since New York’s estate tax law changes were scheduled to become fully phased-in as of January 1 of this year, now is an excellent time to review the key principles under the Federal and New York State transfer tax laws, along with planning opportunities to which taxpayers may avail themselves in the current favorable wealth transfer environment.
The Federal estate and gift tax exemption for 2019 has increased to $11.4 million per person, from $11.18 million in 2018. The exemption, which is indexed annually for inflation, was temporarily doubled in 2018 from $5 million (indexed for inflation) under the TCJA and is set to return to $5 million (indexed for inflation) at the end of 2025.
Federal estate and gift taxes are “unified” under a single transfer tax system, with a unified rate schedule, and a unified credit. Taxable gifts made during lifetime reduce the amount of the exemption available for estate tax purposes at death.
having used more than the available exemption. This circumstance is commonly referred to as a “clawback” scenario, and the TCJA includes language authorizing the Treasury to prescribe IRS regulations to address the issue. The IRS issued proposed regulations in November of 2018 that provide that taxpayers who take advantage of the increased exemption will not be adversely affected by the post-2025 decrease in the exemption. The regulations have not yet been adopted as final.
Present interest gifts that do not exceed the statutory gift tax exclusion amount will not reduce the amount of exemption available for estate tax purposes at death. The gift tax exclusion amount is $10,000, indexed for inflation occurring after 1997. The exclusion amount for 2019 is $15,000, unchanged from 2018. The exclusion covers gifts a donor makes to each donee, each year. If the donor of the gift is married, gifts to donees made during a year can be treated as split between the spouses, even if the gift is actually given to a donee by only one of them, by the filing of a gift tax return signed by both spouses.
Federal Provisions For Married Taxpayers.
Married taxpayers may leave an unlimited amount of assets to a spouse and qualify for the marital deduction, if such assets are given outright, or in a qualifying trust, typically a “qualified terminable interest property trust” (“QTIP Trust”). At the surviving spouse’s death, such assets may be subject to estate tax depending upon the surviving spouse’s available exemption.
Under the portability provisions initially implemented in 2010, any Federal gift and estate tax exemption that remains unused at the death of a spouse is generally available for use by a surviving spouse, as an addition to the surviving spouse’s exemption, through the timely filing of a Federal estate tax return. A surviving spouse may use the predeceased spousal carryover amount in addition to his or her own Federal exemption for taxable transfers made during life or at death. The amount received by the surviving spouse is called the deceased spousal unused exclusion, or DSUE amount.
The Generation-Skipping Transfer Tax (GST) is the Federal transfer tax which may be imposed on transfers that “skip” a generation (generally transfers by gift or at death to grandchildren and more remote descendants). The GST tax is in addition to gift and estate taxes. Currently, the GST exemption amount runs in tandem with the gift and estate tax exemption and is $11.4 million as of January 1, 2019, scheduled to revert to $5 million at the end of 2025, as indexed for inflation. The portability rules do not apply to the GST Exemption.
The Federal estate, gift and GST tax rate remains at 40%.
New York’s estate tax law includes a quirky feature commonly known as the “cliff.” If the New York taxable estate exceeds the Basic Exclusion Amount by more than 5%, the credit is phased out completely and the entire taxable estate will be subject to NYS estate tax. This tax structure has been referred to as “confiscatory,” in that it can lead to the absurd result of causing the beneficiaries of estates between $5,740,000 and approximately $6,286,700 to receive, after estate taxes, less than the beneficiaries of an estate valued at $5,740,000. Taxpayers whose estates are valued near the “cliff” may wish to include a formula provision, sometimes referred to as a “Santa Clause,” pursuant to which a portion of the estate will pass to charity if the formula results in the imposition of less NYS estate tax.
New York does not impose a gift tax. A temporary provision requiring inclusion of gifts made within 3 years of death in the gross estate of a New York resident decedent sunsetted on January 1, 2019, but the recently released Fiscal Year 2020 NYS Executive Budget includes proposed legislation that would extend the sunset to January 1, 2026, to coincide with the expiration of the increased exemptions under the TCJA. The proposed law must now make its way through the NYS Legislature, but passage seems likely in light of the current political configuration in Albany.
NYS Provisions For Married Taxpayers.
An unlimited marital deduction is available under New York’s estate tax law.
New York law does not provide for spousal “portability” to allow a surviving spouse to use his or her deceased spouse’s unused gift and estate tax exemption.
New York does not impose a GST tax for transfers made on or after April 1, 2014.
The top New York estate tax rate is 16%.
Credit Shelter Planning. While the federal exemption amount, coupled with federal spousal portability, currently renders it possible for married couples to shelter from federal estate tax up to $22.8 million without the need to rely on complex testamentary documents, credit shelter trust planning for married couples nevertheless continues to occupy a vital estate planning role for several reasons.
State Estate Taxation. New York is one of a handful of states that continues to impose a separate estate tax, and does not recognize spousal portability. Accordingly, credit shelter planning is necessary so as not to lose the benefit of the NYS exemption of the first spouse to die.
Trust Protection. Establishment of any trust can provide protections not present with an outright distribution. These include protecting assets from both the beneficiary, a divorcing spouse, and third-party creditors, and providing greater assurance that children and grandchildren will receive an inheritance.
Asset Appreciation. The potential for asset appreciation is a consideration which runs across a range of planning concerns. Establishment of a credit shelter trust may prevent the post-transfer appreciation in the value of the assets from being subject to estate tax on the death of the survivor. However, no income tax basis step-up will be available for the assets held in a credit shelter trust upon the death of the surviving spouse.
Formula Planning Caution. Testamentary formulas based on the federal exemption amounts, including credit shelter planning (as well as GST formula planning), must be reviewed periodically, particularly in times such as the last several years when exemption amounts have changed dramatically. The new exemptions may result in overfunding or underfunding amount passing to or for the benefit of a surviving spouse, and may result in an unnecessary state estate tax.
Sunsetting and Potential Earlier Repeal. The increased estate, gift and GST exemptions, currently at $11.4 million per person, are temporary and set to expire automatically on December 31, 2025. Currently, available planning options may be lost if action is deferred until the eleventh hour. Moreover, in the present unsettled political climate, it is conceivable that the increased exemption amount could be lowered prior to 2025. A Presidential election will be held in 2020, and several potential Presidential candidates have voiced proposals to ratchet the exemptions back to $5 million and lower. For instance, Senators Cory Booker, Bernie Sanders and Elizabeth Warren have each floated separate proposals that would lower the exemption to the pre-2010 threshold of $3.5 million, coupled with higher maximum rates.
Gifting. Lifetime gifting, outright or in trust, can result in substantial transfer tax savings. Gifting provides the benefit of removing the post-transfer appreciation in the value of the assets from the donor’s estate. For New York domiciliaries, since a State estate tax is imposed but not a gift tax, gifts can result in a substantial reduction in State estate tax liability. Many gifting vehicles, moreover, offer discounting advantages that may be absent from or less effective than those associated with transfers at death. However, since the recipient of a gift receives the donor’s income tax basis in the gifted assets — as opposed to the recipient of a testamentary transfer receiving an income tax basis as of the date of death — any proposed gift must measure the potential capital gain consequences as against potential gift and estate tax savings.
Dynasty Trusts. For taxpayers who wish to establish a Dynasty Trust, substantial gifts of $10 million (indexed for inflation), after factoring in any prior taxable gifts, may be made to a Dynasty Trust to which GST exemption may be allocated, exempting the trust assets from further estate, gift and GST taxation. Creation of the trust in a jurisdiction that has repealed or liberalized its Rule Against Perpetuities can allow the trust assets to provide for future generations without being burdened by further estate, gift or GST taxes. For those who have previously established a Dynasty Trust, consideration should be given to making additional gifts to the Dynasty Trust to take advantage of the increased federal exemption and the inflation adjustment.
Qualified Personal Residence Trusts (QPRTs). QPRTs are a popular vehicle for making a gift transfer, in trust, at a reduced gift tax cost of a personal residence in exchange for its continued use rent-free for a term of years. At the expiration of the term, the residence passes to family members at no additional gift or estate tax cost. The effectiveness of a QPRT generally increases with higher interest rates.
Grantor Retained Annuity Trusts (GRATs). A GRAT is a trust to which a donor irrevocably gifts assets, and in return receives an annuity for a fixed term of years. The value of the gift is equal to the fair market value of the property transferred to the GRAT minus the value of the retained annuity, calculated using the monthly interest rate under Internal Revenue Code §7520 in effect at the GRAT’s inception. Where the present value of the annuity equals the original contribution (a “near zeroed-out GRAT”), the value of the taxable gift will be nominal. Upon expiration of the fixed term, provided the donor is living, any remaining assets in the GRAT pass to the beneficiaries free of gift tax. GRATs are interest rate sensitive (the January 2019 rate is 3.4%) and as rates rise, the ability to outperform the §7520 rate becomes increasingly difficult. Thus, a GRAT may be suitable only for gifts of high income and/or appreciating assets.
Intentionally Defective Grantor Trusts (IDGTs). Assets gifted to an IDGT are removed from the donor’s estate for gift and estate tax purposes, but the donor remains responsible for payment of income taxes, which payments are, in effect, additional non-gift taxable transfers to the IDGT. In addition, an IDGT provides a vehicle for selling assets of the donor to the IDGT, without incurring a capital gain, in exchange for a promissory note.
Current law provides tremendous opportunities to transfer wealth and should be taken as a call to action to review your existing estate plan and, where appropriate, to implement planning opportunities provided by the temporary increased Federal exemptions.
1The Tax Cuts and Jobs Act, which became effective on January 1, 2018, implemented sweeping changes to the Internal Revenue Code, including the doubling of the estate, gift and generation-skipping tax exemptions from $5 million to $10 million per person, indexed for inflation occurring after 2011. The inflation adjustment index was also changed. Prior law based the computation on the Consumer Price Index for all Urban Consumers (“CPI-U”). Under the Tax Cuts and Jobs Act, the inflation adjustment is based on Chained CPI-U (“C-CPI-U”), which generally produces a slower growing CPI calculation than the CPI-U calculation.
Maybe you have had the same experience. A new client comes to you with a story. She had significant disposable funds, so she did what everyone does—she invested in the “next big thing.” She was so excited that she did not even consult with a lawyer because she was afraid to lose this “once in a lifetime opportunity.” The client invested $500,000 for what she was told was initially a 20 percent interest in the venture, which would increase to 50 percent after two years pursuant to an oral agreement. She was also told she would begin making money immediately. Not surprisingly, two years come and go and she has not received a single distribution, and all of her requests for relevant information regarding the company’s finances have been ignored. When the venture began, optimism was through the roof and dreams of a pain-free retirement danced in her head. But, alas, things did not turn out to be what the client had hoped. So, you first determine what form the business was in, i.e., whether she invested in a business corporation or a Limited Liability Company. Then you look for the underlying agreements and you are told “I don’t have any” and off you go.
The fact is, minority shareholders/owners have very little (or potentially no) control over when and how much money they will receive in distributions based on their investment (if any). So, after gently admonishing your client that she should have come to you or your corporate group before she made such an investment, you ascertain what legally supportable angle may be available to get your client out.
You learn your client invested in a business corporation. Under the BCL, a minority shareholder’s rights are limited. You may start by demanding to inspect the books and records under BCL §624(a). Under that section, any person who is a shareholder of record of a corporation is entitled to examine the minutes of the proceedings. There probably are no minutes. Under BCL §624(e), you can request an annual balance sheet and profit and loss statement for the preceding fiscal year. You may also request an interim balance sheet or profit and loss statement that has been distributed to its shareholders or otherwise made available to the public. If any of this is available and, indeed, is given to you, it will not tell you much.
Dissolution is then discussed; however, initially, your client states she does not want to see the business liquidated as she still has great hopes for its future. As such, you inquire as to what she knows about how the business is being managed. Maybe she has information pertaining to her fellow shareholder’s misuse of corporate funds, potentially supporting a suit based on breach of fiduciary duty. But first, under BCL §626(c), your client must explain what efforts she made to inform the company’s board of what she knew and that she sought board action, which must be pled in the complaint “with particularity.” Her failure to do so is not per se fatal, as she can commence a suit and plead the reasons why such a request would be futile. Cement Masons Local 780 Pension Fund v. Schleifer, 56 Misc.3d 1204(A) (Sup. Ct., N.Y. Cty., 2017). To withstand a motion to dismiss based on failure to adequately plead futility, a complaint needs to allege “with particularity that (1) a majority of directors are interested in the transaction; or (2) the directors failed to inform themselves to a degree reasonably necessary about the transaction; or (3) the directors failed to exercise their business judgment in approving the transaction.” Id. at 4 quoting Marx v. Akers, 88 N.Y.2d 189, 198 (1996).
This will not be an easy road. First, your client must understand this will be a derivative suit, not on her own behalf but on behalf of the corporation. It is unlikely money will come to her directly. However, your client’s attorney fees may be recoverable. See McKinney’s BCL §626(e). Also, keep in mind that the allegations of breach of fiduciary duty must be pled with particularity as required by CPLR 3016(b). Next, there are numerous defenses to certain corporate actions. If she is claiming that her fellow shareholder took excessive compensation, there is a potential defense under BCL §713(e), which states that “[u]nless otherwise provided in the certificate of incorporation or the by-laws, the board shall have authority to fix the compensation of directors for services in any capacity.” Then you must contend with the business judgment rule which “bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes.” Auerbach v. Bennett, 47 N.Y.2d 619, 629, 631 (1979) (“[B]y definition the responsibility for business judgments must rest with the corporate directors … [and] absent evidence of bad faith or fraud … the courts must and properly should respect their determinations.”) It may be that you simply do not have the facts to pursue this relief. So what’s next?
You may simultaneously seek relief under BCL §1104-a, which provides that a shareholder, like your client, who owns at least 20 percent of the outstanding shares, may seek dissolution if: (1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; (2) The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation. You probably will start with asserting that your client has been subjected to oppressive actions and hopefully have some evidence that assets are being wasted. Oppression occurs “when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the [minority shareholder’s] decision to join the venture.” Matter of Kemp & Beatley (Gadstein), 64 N.Y.2d 63, 73 (1984); see also Matter of Charleston Square, 295 A.D.2d 425, 426 (2d Dep’t 2002). A bonus under this section is that, in addition to all other disclosure requirements set by the court, the company must make available for inspection and copying the corporate financial books and records for the three preceding years no later than 30 days after the filing of a petition. McKinney’s BCL §1104-a(c).
However, if you bring a BCL §1104-a proceeding, the other shareholder may elect to buy out your client under BCL §1118 and the valuation date, in that event, will be one day before the petition was filed. Any increase in value after that date will be simply out of reach for your client. A §1118 election is not available in a §1104 dissolution. Finally, you have additional arrows in your quiver if you seek dissolution under either §§1104 or 1104-a, such as seeking the appointment of a receiver, McKinney’s BCL §1113, the potential imposition of a constructive trust, see Cortes v. 3A North Park Ave Rest, 46 Misc.3d 670, 703-04 (Sup. Ct., Kings Cty., 2014), an injunction limiting the actions of the present board and officers of the company (McKinney’s BCL §1115) and requesting that the opposing party post a bond in the amount of the value of your client’s shareholder’s interest in a §1118 election (McKinney’s BCL §1118(c)(2)). However, the process will be long, no matter how you slice it.
Let’s say your client told you instead that she is a member of an LLC. What are her rights then? Without an operating agreement, your client’s claim will be governed by New York’s Limited Liability Company Law. Interestingly, the Court of Appeals held in 2008 that LLC members may bring derivative suits on the LLC’s behalf even though the State Legislature considered and rejected including such a right in the law. Tzolis v. Wolf, 10 N.Y.3d 100 (2008). However, the same rules apply to such an action here, to wit, that the allegations must be specific and the business judgment rule is always in play.
Next, can your client seek dissolution? A court may order the dissolution of a limited liability company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” N.Y. Limit. Liab. Co. Law §702. The statute does not define the term “reasonably practicable.” In determining whether a limited liability company should be dissolved, the court is determining whether it is or is not “reasonably practicable for the company to continue to carry on its business” and not whether it is impossible. Matter of 1545 Ocean Ave., LLC, 72 A.D.3d 121 (2d Dep’t 2010); see also Matter of Kassab v. Kasab, 137 A.D.3d 1135 (2d Dep’t 2016). While the court will look to the operating agreement initially to determine what the purpose of the LLC is, here, the court will have to examine extrinsic evidence to determine that purpose. “[T]he dissolution of a limited liability company under [LLC] §702 is initially a contract-based analysis.” 1545 Ocean, 72 A.D.3d at 128; Matter of Eight of Swords, LLC, 96 A.D.3d 839 (2d Dep’t 2012) (the court used extrinsic evidence to determine the LLC’s primary purpose).
The petitioner in an LLC dissolution proceeding must either show that “the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved or [that] continuing the entity is financially unfeasible” 1545 Ocean, 72 A.D.3d at 131. This is a very high burden. If the company is performing fine financially and doing what it set out to do, the fact your client has not received a distribution probably will not be enough to carry the day in a dissolution proceeding. Your client’s allegations of oppressive conduct or that she is being frozen out by her other member will not state cognizable grounds for dissolution. Belardi-Ostroy, Ltd. v. American List Counsel, Inc., 2016 WL 1558850 (Sup. Ct., N.Y. Cty, 2016).
Based on the law, your client is in for a fight if the other side has no interest in relenting. She also has one hand tied behind her back as a result of failing to insist on written agreements that clearly set forth her rights and her fellow shareholder’s obligations. You would be surprised how many people think, including those who you would consider to be “sophisticated,” that buying into a closely-held corporation is like buying shares in IBM. Therein lies the lesson—if your client thought she was saving money upfront by going ahead without legal advice, she will pay far more on the back end trying to salvage the investment of her hard-earned money.
Paul F. Millus is a shareholder of Meyer, Suozzi, English & Klein, P.C., and practices in the firm’s litigation and employment law departments.
In the midst of reports of widespread discrimination faced by pregnant workers and those returning to work following giving birth, the New York City Council passed a legislative package imposing new burdens on employers with respect to nursing employees. The newly passed legislation, which is awaiting Mayor DiBlasio’s signature, will require employers to provide lactation rooms and adopt lactation accommodation policies.
Currently, all employers in New York are required to provide employees with unpaid break time to express breast milk for up to three years after the birth of a child and a private location, other than a restroom, where they can express breast milk, unless it would be extremely difficult to do so. The room must contain a chair and a small table, or other flat surface. Under the new laws, employers in New York City will need to provide breastfeeding employees with an increased level of accommodation.
Under the new legislation, companies in New York City with more than 15 employees will be required to provide breastfeeding employees with a lactation room in reasonable proximity to the employee’s work area that, at a minimum, includes an electrical outlet, a chair, a surface to place a breast pump and other personal items upon, and nearby access to running water. The employer must also provide employees with a refrigerator in reasonable proximity to the employee’s work area for the purpose of storing breast milk. Moreover, if the designated lactation room is also used for another purpose, the primary purpose of the room must be for lactation and the employer must provide notice to all its employees that use of the space for lactation purposes takes precedence over all other purposes.
If providing such a space to an employee would impose an undue hardship on the employer due to the significant expense or operational difficulty, after an analysis of the employer’s circumstances, an employer may be exempt from the requirements imposed by the City law. However, the employer must engage in a cooperative dialogue with the employee to determine whether any other options are available to meet the employee’s needs.
d. that the employer will provide reasonable unpaid break time to express breast milk in compliance with New York Labor Law 206-c.
The policy should also include a procedure to follow when two or more individuals need to use the lactation room at the same time. The City will be issuing a model policy that employers can review and adapt to their needs.
Employers must retain copies of all written requests for a lactation space and records establishing how the employer resolved the request. Such records must be maintained for three years.
Although the Mayor has not signed the lactation legislation into law yet, he is expected to do so shortly. The laws will go into effect 120 days after the Mayor signs them into law. In anticipation of these new laws going into effect, New York City employers should survey their premises and determine where they can establish a compliant lactation room and begin preparing a compliant lactation policy.
When the U.S. Supreme Court issued its 2017 decision in Endrew F. ex rel. Joseph F. v. Douglas County School Dist., __ U.S.__, 137 S. Ct. 988 (2017), it was hailed as an important step forward for students receiving special education. In fact, however, at least in New York, Endrew F. appears to have had little effect on the courts’ analysis as to whether a school district has provided a special education student with a free, appropriate public education (known as “FAPE”), as required by the applicable federal statute, the Individuals with Disabilities Education Act (“IDEA”).
Before Endrew F., it was well established that a school district had to provide a special education student with an individualized educational program (“IEP”) that was “appropriate,” meaning that it was “reasonably calculated to enable the child to receive educational benefits.” Bd. of Educ. v. Rowley, 458 U.S. 176, 207, 102 S. Ct. 3034 (1982). In Endrew F., the U.S. Supreme Court purported to give some guidance on what that meant, holding that “[t]he adequacy of a given IEP turns on the unique circumstances of the child for whom it was created.” 137 S. Ct. at 1001. Rejecting the contention that an IEP was sufficient where the student had received an educational benefit that is “merely more than de minimis” (id. at 1001), the Court found that “it cannot be the case that the [IDEA] typically aims for grade-level advancement for children with disabilities who can be educated in the regular classroom, but is satisfied with barely more than de minimis progress for those who cannot.” Id. at 1000-1001. Rather, the Court held, “the IDEA demands more. It requires an educational program reasonably calculated to enable a child to make progress appropriate in light of the child’s circumstances.” Id. at 1001. Still, however, the IEP must only be “reasonable,” not “ideal.” Id. at 999. Further, an educational program need not include “grade level advancement” if such progress is not “a reasonable prospect” for the particular child. Id. at 1000. Moreover, in making the assessment as to whether an IEP passes muster, the U.S. Supreme Court reminded the lower courts that they are not permitted “to substitute their own notions of sound educational policy for those of the school authorities which they review.” Id. at 1001(citation omitted).
While the decision in Endrew F. was lauded as a watershed moment for special education students, in fact, that has not been the case in New York. To the contrary, the Second Circuit and the federal courts within this Circuit have repeatedly held, “[p]rior decisions of this Court are consistent with the Supreme Court’s decision in Endrew F.” See, e.g., F.L., individually and on behalf of R.C.L., 735 Fed. Appx. 38, 41, n.3 (Mem) (2d Cir. Aug. 24, 2018); Mr. P. v. West Hartford Bd. of Educ., 885 F.3d 735, 757 (2d Cir. 2018); E.E., individually and on behalf of G.E. v. New York City Dep’t of Educ., 2018 WL 4636984, at *7 (S.D.N.Y. Sept. 26, 2018). Thus, the courts have determined that Endrew F. imposed no higher standard than the federal courts in New York were already imposing upon school districts when crafting an IEP, and, therefore, did nothing to change the rules applicable to school districts.
As a practical matter, this means that the courts remain deferential to school districts’ Committee on Special Education (“CSE”), independent hearing officers (“IHOs”) and the New York State Commissioner of Education (sometimes referred to as the “State Review Officer” or “SRO”) despite the U.S. Supreme Court’s decision in Endrew F. Although parents have relied on Endrew F. to claim that IEPs designed for their special education children are not “appropriate” as their children have not made the necessary advancement, since Endrew F, the courts in the Second Circuit still remain reluctant to find IEPs deficient on that basis. See, e.g., J.R. v. New York City Dep’t of Educ., 2018 WL 4664086 (2d Cir. Sep’t 27, 2018) (summary order) (although parents claimed that IEP was not reasonably calculated to confer educational benefits, the Second Circuit rejected that contention, finding it owed the state deference in that regard and found student with speech and language impairments received FAPE); G.E., 2018 WL 4636983, at *4 (rejecting parent’s claims that school district denied student with autism FAPE by failing to conduct a functional behavioral analysis, implement a behavioral intervention plan, or identify temporary transitional support services to new classroom teacher, and allegedly predetermined what was in the IEP, developed an IEP that recommended an inappropriate program and goals, failed to provide a 1:1 aide, prescribe the appropriate teaching methodology, or adequately address the student’s sensory and management needs; impartial hearing officer and SRO applied the proper legal standard).
These and other cases decided after Endrew F. demonstrate that it remains an uphill battle for parents to demonstrate that a school district has denied a child FAPE. An IEP is likely to be deemed to provide FAPE as long as the school district can show that it was created after due consideration of all relevant evidence concerning the student’s functioning and needs. Furthermore, because IEPs continue to be judged prospectively, i.e., on the basis of what is known about the student at the time it is crafted, a parent may not challenge an IEP based upon speculation that, once implemented, an IEP may not, in fact, meet a student’s needs. Rather, it remains the case that an IEP may have to be implemented, and actually shown to be inappropriate (meaning that a child fails to progress, or even keep up with the curriculum), before a court is willing to find that an IEP deprived a student of FAPE. See, e.g., M.E. and T.E., individually and on behalf of K.E. v. New York City Dep’t of Educ., 2018 WL 582601 (S.D.N.Y. Jan. 26, 2018) (parents failed to demonstrate that the IEP developed by the CSE was inadequate and the district’s proposed placement was insufficient to meet their child’s sensory needs; SRO’s decision was thorough and well-reasoned); J.P., on behalf of their Son, J.P. v. City of New York Dep’t of Educ., 717 Fed. Appx. 30, 32 (2d Cir. 2017) (parents did not establish that IEP was procedurally or substantively inadequate; as the “SRO considered the record as a whole and explicitly referred to materials that J.P.’s parents now suggest were ignored,” and “the CSE heard [the parents’] objections, considered materials they submitted, and convened a second meeting to address their objections and explain its reasoning”).
Thus, while under Endrew F. more than de minimus progress must be the goal of an IEP, that case seems to have had no practical effect in New York. Accordingly, a parent who has concerns that the IEP developed for his child at the CSE meeting will not provide FAPE should ensure that a record is made at the CSE meeting regarding (a) what evaluations were performed, (b) whether the CSE has considered a student’s current level of functioning and needs, and (c) what evidence the CSE considered (or failed to consider) when developing the IEP. Only if the parent can demonstrate that the CSE, IHO and/or SRO was less than thorough in determining what is “appropriate” for the student is that parent likely to be successful in any court challenge to an IEP. See S.B. and S.B., Individually and on Behalf of C.B. v. New York City Dep’t of Educ., 2017 WL 4326502, at *15 (E.D.N.Y. Sept. 28, 2017) (parents demonstrated that school district failed to timely reevaluate student in her areas of need and failed to review her most recent evaluations during the IEP meeting; decisions of the CSE and SRO were belied by a preponderance of the objective evidence and neither reconciled inconsistencies nor acknowledged their existence, and, thus, “[t]he IEP was not designed to enable C.B. to make progress in light of her educational needs”).
On July 10, Ed LoBello authored the Local Bankruptcy Rules Toolkit (Eastern District of New York) published by Thomson Reuters’ Practical Law. The online publication compiles key resources for attorneys in the practice of bankruptcy law in the Eastern District of New York, including applicable statutes, rules, court procedures, and practice notes.

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