Case Law Update

A summary of recent federal and state court cases involving final partner administrative adjustments, mergers, and matrimonial law

This month we highlight four cases.  The first is Rovakat, a federal appellate court decision where a claimed redemption was deemed a sale of stock. The In re MFW Shareholder Litigation case involves a motion for summary judgment where a majority of the minority shareholders approved a merger transaction; this was deemed a “cleansing device” that led to the dismissal of plaintiff’s leading claim, which involved an allegation of breach of fiduciary duty.   In Matter of Central N.Y. Oil & Gas, the key issue involved the admissibility of an expert’s report and his ability to comment on factors that could affect the damages calculation.  Finally, in Gupta v. Gupta, the key issue is whether husband committed financial misconduct and whether he should be liable for four years of back taxes on account of his misconduct and other equitable considerations.

Rovakat, LLC v. Commissioner
2013 U.S. App. LEXIS 12197
June 17, 2013
Judge Vanaskie
United States Court of Appeals for the Third Circuit 

Summary:

The United States Tax Court substantially upheld notices of final partnership administrative adjustments (FPAAs) issued by appellee Commissioner of the Internal Revenue Service (Commissioner).  Appellant partnership appealed.  The partnership challenged the disallowances for the losses it attributed to the Swiss francs transaction as well as the 40 percent accuracy-related penalties.  The appellate court found that the redemption of stock from a company for Swiss francs and $303,375 was a sale of common stock as opposed to a transfer of partnership interests as asserted by the partnership. Both of the other entities were corporations.  Because one corporation could not have transferred a partnership interest in exchange for dollars and Swiss francs, it could not carry over its basis in the other corporation class A stock to the Swiss francs that ultimately were transferred to the partnership.  The partnership asserted a basis in the Swiss francs that exceeded 400 percent of the correct amount, triggering a 40 percent penalty for a gross valuation misstatement.  The Tax Court did not err in finding that the partnership lacked reasonable cause and did not act in good faith, 26 U.S.C.S. § 6664(c)(1).  The partnership could not avoid the gross misstatement penalties.  The Tax Court’s ruling was affirmed. 

In re MFW Shareholders Litigation
2013 Del. Ch. LEXIS 135
May 29, 2013
Chancellor Strine
Court of Chancery of Delaware 

Summary:

Defendants, a holding company (HC), the HC’s equity owner, and directors of a corporation, filed a motion for summary judgment in an action by plaintiffs, stockholders (SHs) of the corporation, challenging the going private merger of the corporation with the HC. The SHs sought a post-closing damages remedy for breach of fiduciary duty, based on the claim that the merger was unfair.  The HC owned corporate shares. It offered to purchase the rest of the corporation’s equity in a going private merger. After a special committee was formed, negotiations eventually led to an approval of the merger by a majority of the minority SHs. Thereafter, certain SHs filed suit, alleging that the merger was unfair. Their initial request for injunctive relief in advance of the merger vote was dropped, and they sought damages instead. In resolving defendants’ summary judgment motion, the court found that the special committee was comprised of independent directors; it was able to, and did, employ advisors, and it had the power to negotiate the merger and say “no” to the transaction.  Accordingly, the committee fulfilled its duty of care. 

Further, a majority of the minority SHs supported the merger upon full disclosure and without coercion. The court further found the special committee and the majority-of-the-minority provision qualified as cleansing devices under Delaware’s approach to the business judgment rule.  Finding that no precedent controlled this type of situation, the court concluded that the business judgment rule, rather than the entire fairness standard, applied.  The court granted the motion for summary judgment.

Matter of Central N.Y. Oil & Gas
2013 N.Y. App. Div. LEXIS 4312
June 13, 2013
Judge Garry
Supreme Court of New York

Summary:

HOLDINGS: The case involves a condemnation proceeding in Upstate New York and the Marcellus and Utica shale formations (a fracking case where damages are claimed).  [1] Respondents argued that a witness was qualified to offer opinions as a geologist, and while the court recognized that experts who were not appraisers were not categorically excluded from offering valuation opinions, the court agreed that petitioner’s easement did not limit respondents’ rights to lease or otherwise develop gas in any formation other than one and thus the witness’s testimony was irrelevant; [2] As petitioner did not yet make a certain acquisition, the district court properly precluded respondents from presenting evidence on claims relative to certain development rights; [3] Other remaining arguments were not properly before the court.  The order of the lower court was affirmed. 

Gupta v. Gupta
2013 Ohio App. LEXIS 2114
May 30, 2013
Judge Blackmon
Court of Appeals of Ohio

Summary:

Appellant former husband sought review of the judgment of the Cuyahoga County Court of Common Pleas Domestic Relations Division (Ohio), which issued a final decree of divorce to appellee former wife, ordered the husband to pay spousal support, and divided the parties’ property.  The trial court did not err in finding that the husband committed financial misconduct and assessing as a separate debt all the tax liability for four years as the tax bill that resulted from the husband’s refusal to timely file four years of tax returns could not be said to have been incurred for a valid marital purpose. 

Moreover, the husband’s refusal to prepare the returns was unnecessary, because his then employer would have paid to have them prepared.  Further, the trial court did not err in its spousal support award as the trial court sufficiently addressed each of the factors in R.C. 3105.18 in relation to the evidence presented at trial, noting that the husband earned $1.8 million in the year prior to filing for divorce; that the husband could have continued his employment with his employer, but voluntarily left to pursue even more lucrative financial opportunities; that the wife lost income-production capacity that resulted from the fact that she stayed home to raise the parties’ children; that the parties had been married for 29 years; that they had enjoyed an affluent upper-class lifestyle; and that the wife contributed equally in attaining the marital assets.  The court affirmed the judgment of the trial court.

[author] [author_image timthumb=’on’]http://m.c.lnkd.licdn.com/mpr/mpr/shrink_200_200/p/8/000/282/157/0812af2.jpg[/author_image] [author_info]Peter Agrapides is shareholder of Western Valuation Advisors, a Salt Lake City-based valuation advisory firm.[/author_info] [/author]