One of the joys of being a litigator is that we are constantly learning. The pleasure is multiplied as a law blogger, where the articles we write inspire litigation arguments, and the litigation we fight inspire articles. Recently, my blogging and litigation worlds have merged, inspiring each other in some interesting ways.
A client who came across one of my articles about her case retained our firm to represent her and her late husband’s estate when the outlook seemed dire.
Then an article earlier this year by my co-blogger, Peter Sluka, spawned a legal argument in the case challenging the applicability of a share transfer restriction in a shareholder agreement that our opponent argued caused a 50% equity interest worth millions of dollars was “lost” because the deceased shareholder attempted to bequeath the shares to his widow in violation of a transfer restriction that limits permissible bequests to his own “issue” only.
Coming full circle, as I’ve done more research on this niche area, the things I’ve learned for litigation are now the inspiration for this week’s article.
The case I’m referring to is Worbes Corp. v. Sebrowabout which we wrote earlier this year. A prior appeal decision in a related case, Sebrow vs. Sebrowus wrote about last year.
Two weeks ago, Bronx County Commercial Division Judge Fidel E. Gomez issued a Decision and Order in Worbes denying our opponent’s pre-discovery motion for summary judgment as “patently premature”, denied our clients’ counter-motion also on grounds of prematureness, and granted our clients permission to raise several new counter-claims, including challenging the enforceability of the Restriction of transfer of shares in public fundamentals of the policy. Our clients presented the amended plea In the past week.
Arguing public policy to challenge the enforceability of a stock transfer restriction may seem like a shaky proposition. But it turns out that there are several interrelated strands of New York case law that invalidate stock transfer restrictions and buy-sell agreements on public policy grounds when the effect of the agreement is to cause the “forfeiture” or “annihilation” of a valuable close value. -Had business interests for little or no consideration.
In the case of Peter Sluka wrote about earlier this year, Atlantis address. Group II LLC vs. Nabe (2022 NY Slip Op 30399[U] [Sup Ct, NY County 2022]), Manhattan Commercial Division Judge Jennifer G. Schecter ruled that a buy-sell provision in an LLC operating agreement triggered by a breach of “any provision” of the agreement, and compel the sale of one member’s interest to the other for $1 – a “dollar loss” – he is a “draconian”. ”, “extremely disproportionate, unreasonable and inapplicable penalty”. “By punishing any breach, however minor, with the loss of valuable interest for a mere dollar,” Judge Schecter ruled, “the intent of the provision is purely punitive” and unenforceable against public policy.
atlantis relied on case law outside the closed business context (see for example Truck Rent-A-Ctr., Inc. v. Puritan Farms 2nd, Inc.41 N.Y.2d 420  [liquidated damages provision in a truck lease agreement]; Beltway 7 & Props., Ltd. v. Blackrock Realty Advisers, Inc.167 AD3d 100 [1st Dept 2018] [loan agreement]). But there are several lines of jurisprudence similar to atlantis in the closed business context.
First, the Court of Appeals has held that a stock transfer restriction that absolutely prohibits the inheritance of shares from a decedent without regard to the estate of the deceased shareholder is void against public policy. In Quinn v. Stuart Lakes Club, Inc. (80 AD2d 350 [1st Dept 1981]), a corporation’s charter provided that when a shareholder died, his or her shares “shall be deemed void,” which the Court characterized as a “survival lottery” that prohibits the inheritance of a shareholder’s shares so that “the last survivor is the heir to the corporation. The Court ruled that such a restriction, which prohibits transfers by operation of law after death, “should have no effect.”
Affirming this decision, the Court of Appeals resolved: “We agree that article 9 of the bylaws of the corporation is null and void as an absolute restriction on the right to alienate in violation of public order in this State” (Quinn v. Stuart Lakes Club, Inc.57 NY2d 1003 ).
Secondunder New York law, a stock transfer restriction with terms so “onerous” that it would result in “annihilation of ownership” is unenforceable (lam vs li222 AD2d 290 [1st Dept 1995]; Rafe vs. Hindin29 d. C. 2d 481 [2d Dept 1968], afd 23 N.Y.2d 759 ).
In Justicethe Court explained: “In New York, stock certificates are considered personal property” and “the right of transfer is a property right”, so “if another has the arbitrary power to prohibit a transfer of property by the owner, which is equivalent to the annihilation of the property” (citations omitted). Justice ruled that the “onerous terms” of an option for one shareholder to purchase the shares of another for as little as $10 “effectively prevent the defendant from transferring the shares to anyone other than the claimant,” making the option “unreasonable ” and “inapplicable”.[le].”
In raphethe Court considered that “since the price at which the plaintiff must sell” to the defendant “is not established and the latter is obliged to pay the plaintiff for the plaintiff’s actions”, the contract “can be interpreted as granting the sale of the plaintiff’s shares are impossible for anyone except the individual defendant at the price he wishes to pay. raphe concluded: “The restriction is not only unreasonable, but it goes against public order and is therefore illegal.”
Thirdthe Appellate Division has held that construing a partnership agreement to “award windfall gains” to one business owner to the detriment of another violates the rule that a “contract shall not be construed to produce a result that is commercially or commercially absurd.” unreasonable or contrary to the reasonable expectations of the parties.In re Lipper Holdings, LLC1 AD3d 170 [1st Dept 2003]).
Under this principle, in Cole vs. Macklowe (99 AD 3d 595 [1st Dept 2012]), the Court reversed a decision holding that a partner was automatically “deprived” of his interest in the partnership by failing to exercise a buy-sell provision in the partnership agreement upon termination of employment, holding that “the fact that Cole did not sell his stake did not dispossess him”. interest automatically. “The agreement is not only devoid of any language that requires this result,” the Court held, “the interpretation of the agreement urged by the defendants, which allows them to acquire the interest of the company of the plaintiff” without “consideration”, “represents a profit unexpected to the defendants that it is absurd, commercially unreasonable and contrary to the . . . intention of the parties.
The words they use vary, but all of these cases essentially say the same thing: The equity in a limited liability partnership, corporation, or limited liability company is valuable personal property.
Under this principle, a transfer restriction or purchase-sale agreement that would impose a “forfeiture” (atlantis), make an ownership interest “null” (Quinn), result in the “annihilation of property” (Justice Y raphe), or “award a windfall” (lipper Y Cabbage), is vulnerable to attack as unenforceable under public policy.