State Case Law Summary Reviewed by Momizat on . Focus on shareholder disputes (slip opinions) Ruggiero v. Ruggiero is a New York Slip Opinion (cannot cite as authority) that is a classic battle of valuation e Focus on shareholder disputes (slip opinions) Ruggiero v. Ruggiero is a New York Slip Opinion (cannot cite as authority) that is a classic battle of valuation e Rating: 0
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State Case Law Summary

Focus on shareholder disputes (slip opinions)

Ruggiero v. Ruggiero is a New York Slip Opinion (cannot cite as authority) that is a classic battle of valuation experts.  The opinion  highlights how a New York State judge reached her decision and also provides an opportunity to deliberate and consider what can go wrong when a buy-sell agreement is either not in existence or is considered dated. Breidbart v. Wiesenthal, another New York State Slip Opinion (cannot cite as authority), addresses how a dissolved partnership interest in New York State is valued.  Although the decision is unique to New York State and the facts therein, it provides some “food for thought” for legal counsel and advisors regarding what has transpired in one jurisdiction.  

case law new york state

case law new york state

The case law review that follows is based on slip opinions and cannot yet be cited as authority.  A slip opinion is a judicial opinion issued in temporary form shortly after a decision is rendered.

Ruggiero v. Ruggiero, 2013 NY Slip Op 31955 (Suffolk County July 29, 2013). 

Facts:   Plaintiff was executrix of the estate of Anthony Ruggiero.  She commenced an action against her brother-in-law (Pasquale) and the 784 8th Street Corporation d/b/a Zan’s Kosher Deli (Zan’s).  Plaintiff alleged that Pasquale had sought to capitalize upon the death of her late husband, Anthony Ruggiero, in order to force her and her family out of a business, which the brothers had operated together for 25 years.  Plaintiff alleged that Pasquale had thereafter terminated her daughter’s employment, terminated her and her daughter’s health insurance, demanded that she contribute $4,000 per month towards a monthly rent obligation, and denied her access to Zan’s premises. Plaintiff sought the appointment of a temporary receiver and an accounting and asserted alleged causes of action for breach of contract and unjust enrichment.  Pasquale countered that his (deceased) brother had systematically stolen funds from the business and had left accounts receivables totaling just over $400,000, which he was trying to pay down.  Moreover, Pasquale asserted that rent and utilities were overdue.

“New York State’s Section 73 of the Partnership Law provides in relevant part that “[w]hen any party retires or dies, and the business is continued…he or his legal representative…shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest or at his option …”

The brothers were 50/50 shareholders in Zan’s, which was a successor to two other entities—an LLC and corporation.   The brothers had executed a shareholder agreement upon formation of the first entity. This agreement contained a broad arbitration clause, which provided that any claim arising or relating to the agreement would be resolved by arbitration in New York City.

Procedural History: The court signed an Order to Show Cause, on the plaintiff’s behalf, directing the defendant to restore health insurance coverage to plaintiff and her daughter.

Following a conference with the court, the court directed that defendant Pasquale continue to maintain health insurance for plaintiff and her daughter and that Pasquale pay plaintiff $1,500 per week.

An agreement was also reached to the effect that the parties would (1) retain expert “evaluators” and/or accountants to value Zan’s; (2) exchange expert reports; and (3) the court would conduct a hearing on the issue of valuation of the business.  At this hearing, it was further agreed that the court would determine which party would purchase the shares of the other party and, at a later date, determine whether either party was entitled to any credits for amounts due or owing other than their share of the business value.

The respective experts opined as follows:

 

 

Plaintiff’s Expert

 

Pasquale’s Expert’s

 

Firm/# of Experts/# Credentialed

(not in the slip opinion)

 

Firm:  Klein Liebman & Gresen LLC/3/All 3 are ABVs

 

Firm:  Gettry Marcus CPA, PC/1/individual has he following credentials: ABV/CVA/MCBA/ASA/ABAR

 

 

Value of the Business/Value of 50 percent interest

 

$709,000 (value of 100 percent of the business)/$354,000 (50 percent interest if valued as of August 8, 2012) and $1,002,000 (value of the business)/$501,000 (for 50 percent interest if valued as of April 30, 2013)

 

$240,328* (value of 100 percent of the business as of August 2013)/$120,200 (50 percent interest as of August 2013)

 

Approach Used

 

Market Approach

 

Income Approach

 

Basis for the Approach

 

Price/Revenue (metric)

 

*Arrived at $273,000, then subtracted $54,620 (DLOM) and added $21,848 as an estimated increase in value due to the pass-through tax status.

 

DLOM?

 

(Not addressed in the slip opinion)

 

Yes (method used not specified); roughly 20 percent DLOM

 

Court Opinion

 

“The Court does not find that there was sufficient explanation of [Plaintiff’s] choice of the 40% figure utilized in his Price to Revenue” and “most significantly, failed to include corporate loans and debts in his valuation, which he admitted affected corporate value.”

 

The Court removed the 20 percent DLOM (keeping the $273,000) and added the $21,848 value “due to preferred tax status) to arrive at a value of $294,848 (for the entity). The 50 percent share was $147,424

Held: Zan’s valued at $294,848 and defendant was ordered to buy out the plaintiff’s 50 percent interest.  At the close of the hearing, the court suggested that it would give the parties a period of time to calculate the amounts each believed are due and owing, including any debt to a shareholder, outstanding shareholders’ loans, and credits each is claiming so that it can arrive at a final figure for payment.

Breidbart v. Wiesenthal, 2013 NY Slip Op 05040 (2d Dept. July 3, 2013).

Facts: This was an action to compel partnership accountings and a distribution of partnership assets. The partnership owned commercial real estate.

Partnership Law §73 provides in relevant part:

[W]hen any party retires or dies, and the business is continued … he or his legal representative … shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or the option of the legal representative, in lieu of interest, the profits attributable to the use of his rights in the property of the dissolved partnership.

The partnership here was dissolved in April 2000.  The parcels of real estate owned by the partnerships were sold.

Procedural History: This is a case that has been extensively litigated.  In one of the earlier decisions (a reported case), Breidbart v. Wiesanthal, 44 AD3d 985 (2007), the court determined that the plaintiff would have until 30 days after the determination of value of their interests as the date of dissolution on April 12, 2000, to exercise their options pursuant to Partnership Law §73 to select interest or profits.

This slip opinion is an appeal from a more recent New York State Supreme Court (the lower court in NYS) decision.

Issue: Whether gain on the sale of real estate sold by the partnerships constitutes “profits” under [New York State’s] Partnership law §73?

Held: Trial court reversed.

In Harold J. Rosen Trust v. Rosen, 53 AD2d 342, aff’d 43 NY2d 693 (Ap. Div. 4th Dept. 1977), the court held that the plaintiff’s share of the fair market value of a parcel of real property was fixed as of the date the partnership dissolved, and thus determined that the profits the plaintiff was entitled to in that case did not include increases in the value of real property after the date of dissolution.  “Here, since the partnership dissolved on April 12, 2000, the plaintiffs were not entitled to a share in the appreciation of partnership assets after that date (see Tarantino v. Albert, 160 AD2d 310; see also Ronan v Valley Stream Realty Co., 249 AD2d 288), Accordingly, the Supreme Court erred in granting that branch of the plaintiffs’ motion which was for a determination that the gain on the sale of real property sold by the partnerships constitutes ‘profits’ under Partnership Law §73.”

 [author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/3/000/06d/3ed/2a369a3.jpg[/author_image] [author_info]Roberto Castro, Esq., MST, MBA, CVA, CPVA, is a managing member of Wasatch Business Valuation & Litigation Support Services, LLC and a Washington State attorney.  Wasatch Business Valuation provides business valuation, term sheet analysis and exit planning services, and litigation support/economic damages analysis.  His legal practice focuses on bankruptcy, estate and gift, succession planning, ERISA, healthcare, and M & A/transactional services. Roberto can be reached at RobertoC1@NACVA.com.[/author_info] [/author]

 

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