Archive for the ‘Corporations’ Category

American Choppers: The Value of Craftsmanship

Friday, December 17th, 2010

The reality show American Choppers involves a custom motorcycle shop and the day-to-day tensions between the founder, and chief owner, and his employees, one of whom is his son.  As it turns out, the son is a 20% owner of the corporation that owns the shop.  After the father fired his son on the air, the network was upset.  To keep American Choppers on the air, father and son signed a letter agreement giving the father

an option to purchase all of [the son’s] shares in [the corporation] for fair market value as determined by a procedure to be agreed to by the parties as soon as practicable.

Within a few months, the father attempted to exercise the option.  In its recent opinion in  Teutul v. Teutul, 2010 NY Slip Op 09248 (2d Dept Dec. 14, 2010) (emphasis added), the court rejected the reasoning of the trial court that fair market value was sufficiently definite in the context of a closely held corporation, threw out the agreement as an agreement to agree.  Peter Mahler’s New York Business Divorce blog has excellent discussions of both the trial court and appellate opinions.

Given the timing of the letter agreement, you would think that they hired a lawyer to advise them. Perhaps a transactional lawyer.  Or even a lawyer who specialized in representing the owners of small businesses, and who presumably would be familiar with issues related to buy-sell agreements.  Perhaps they did all of that.  Perhaps the quoted language was as close as father and son could get to reaching an agreement, and they were told that they really did not have an agreement.  Perhaps not. 

In any event, the case illustrates that craftsmanship is as important in drafting agreements among owners of small businesses as it is in manufacturing custom motorcycles.

Gary Rosin

Goodwill as a Firm Asset. In Re Ravitz (NY App. Div. 2009)

Friday, September 18th, 2009

Earlier, I noted the decision in In re Ravitz v. Gerard Furst and Marjorie Ravitz, DPM, P.C., 2009 NY Slip Op 06437 (N.Y. App. Div. Sept. 8, 2009), in which one shareholder of a professional corporation sought to have the court determine the value of the corporation’s two offices, and to take that into account in distributing the assets of the corporation in the course of liquidation.   Part of the rationale for refusing the relief sought was the Court’s two-sentence conclusion that goodwill can only be an asset of the corporation when the shareholders so agree.  Slip Op., at 2.  The basis for that holding can only be gleaned from a four-case string cite.

The primary authority is Dawson v. White & Case,88 N.Y.2d 666, 672 N.E.2d 589 (1996), which does not stand for that propostion.  In Dawson v. White & Case, an expelled partner of a law partnership sought to have goodwill included in determining the value of his interest in the partnership.  The basis for the court’s holding was that the partners had, by express agreement, ande by prior practice, excluded goodwill as an asset of the partnership:

[N]ew White & Case partners never paid anything for goodwill; departing partners never received a payment for goodwill; and goodwill was not listed as an asset in the firm’s financial statements. * * * The White & Case partnership agreement contained the following provisions:

“It is expressly understood and agreed that no consideration has been or is to be paid for the Firm name or any good will of the partnership, as such items are deemed to be of no value” (art fourth [c]);


“The computation of the amount with which a Former Partner shall be charged or credited … shall exclude any value for the good will of the partnership or the Firm name, as such items are deemed to be of no value” (art sixth [d]).

 88 N.Y. 2d at 672.  The court expressly limited its holding:

We note that the holding in this case is based on the specific facts presented, and should not be construed as a prohibition against the valuation, in the appropriate case, of law firm goodwill. In addition, the existence of law firm goodwill has been recognized in conjunction with the recent promulgation of Code of Professional Responsibility DR 2-111 (A), which authorizes the sale of “a law practice, including good will,” by a “lawyer retiring from a private practice of law, [or] a law firm one or more members of which are retiring from the private practice of law with the firm.”

 To the extent that dictum in [an earlier case] stands for the proposition that a professional business, as a matter of law, cannot have any goodwill apart from the goodwill of its constituent members, we note that this rationale has been rejected by this Court in a different context (see, Spaulding v Benenati, 57 NY2d 418, 422-424, [enforcing sale of dentistry practice goodwill]…) and has been superseded by the economic realities of the contemporary practice of law, illustrated by attorney advertising, internationalization of law firms, and other professional developments. In short, the ethical constraints against the sale of a law practice’s goodwill by a practicing attorney no longer warrant a blanket prohibition against the valuation of law firm goodwill when those ethical concerns are absent.

Id. at 672-73 (citations omitted) (emphasis added).

In Kaplan v Shachter & Co., 261 A.D.2d 440, 690 N.Y.S.2d 91 (1999), the Court did begin by noting the lack of an express agreement to make goodwill a partnership assets, but also noted facts supporting the trial court’s determination that good will was not a partnership asset:

Here, the partnership agreement did not specify that goodwill was a firm asset.  Furthermore, insofar as no consideration was paid for goodwill on the admission of partners, no amounts had been paid or given on account of goodwill, and the firm’s financial statements did not reflect any goodwill, it is clear that the partners did not otherwise view goodwill as a firm asset.

261 A.D.2d at 440.  In Saltzstein v Payne, Wood & Littlejohn, 292 A.D.2d 585, 740 N.Y.S.2d 95 (2002), the Court perfunctorily parroted the language in Kaplan.  

The third Appellate Division case cited by the In re Ravitz Court, In re Leslie & Penny for Penny Preville, 303 A.D.2d 508, 757 N.Y.S.2d 302 (2003) stands for  the opposite proposition than the conclusion in In re Ravitz.  Penny Preville, Inc. engaged in the business of designing jewelry.  Its initial shareholders were Penny Siskin (formerly Penny Preville).  When a second shareholder was brought into the business, the parties entered into a Shareholder Agreement providing that, on dissolution of the corporation, the Siskins would have the exclusive right to the use of the trade name ‘Penny Preville.”  303 A.D.2d at 508-09.  The Court rejected the claim by the Siskins that the Shareholder Agreement excluded the good will of the corporation, especially that asscoiated with the trade name, from ownership by the corporation:

 We agree with the Supreme Court that this clause only gives the Siskins the exclusive right to use the trade name “Penny Preville” upon dissolution. The Agreement does not explicitly give the Siskins the right to the value of the Corporation’s goodwill associated with the trade name “Penny Preville,” nor does it except such goodwill or the trade name from the Corporation’s assets distributable upon dissolution. * * *

In adjudicating the rights of the parties under the Agreement, this Court may not read any additional provisions into that agreement. The Court, therefore, cannot accept the Siskins’ invitation to read into the Agreement an additional provision giving them continued ownership of the trade name or of its associated goodwill. Thus, the Siskins are entitled only to the exclusive rights of continued use of the name “Penny Preville” upon dissolution,but the value of the Corporation’s goodwill, including that associated with the trade name “Penny Preville,” … should be distributed along with its other assets upon dissolution.

Id. at 509 (emphasis added).  While the action for judicial dissolution in that case was under Section 1104-a of the NY GCL (oppression), rather than under Section 1104 (deadlock), Section 1117, which incorporates Section 1005 (relied on in In re Ravitz), applies to all judicial dissolutions.

As noted by Peter A. Mahler (New York Business Divorce blog), most written agreements among professionals engaged in a joint practice expressly address the treatment of professional goodwill.  Or at least, well-drafted agreements do.

Gary Rosin

Deadlock, Judicial Dissolution and Liquidation. In re Ravitz (N.Y. App. Div. 2009)

Friday, September 18th, 2009

What happens after after a judicial dissolution of a corporation on the grounds of deadlock?  What usually happens in a dissolution.  The corporation winds up its business, pays its creditors, and distributes assets to its shareholders.  But if there’s a deadlock, there’s a good chance that the directors (and shareholders) won’t be able to agree on those matters, either.  What happens then?  In re Ravitz v. Gerard Furst and Marjorie Ravitz, DPM, P.C., 2009 NY Slip Op 06437 (N.Y. App. Div. Sept. 8, 2009), tells us what does not happen, at least under New York law. 

The corporation in question was a podiatry practice with two equal shareholders, three offices.   The two agreed that one office should be closed.  They agreed that they would split the two remaining offices.  The problem was that one office was more  profitable than the other. The shareholder who would  take the less profitable  office proposed a valuation of the goodwill of each office, and a cash settlement to equalize the distribution of assets.  When the other did not agree, the first asked the court to supervise the liquidation for the purpose of valuing the practices.  Both the trial and appellate courts held that such a procedure was not permitted under the pertinent provisions of the New York Business Corporation Law.

Section 1008(a) of the New York General Corporation Law (NY GCL) authorizes a court to

continue the liquidation of the  corporation  under  the  supervision  of the court and may make all such orders as it  may deem proper in all matters in connection with the dissolution or the winding up of the affairs of the corporation

The Court held that Section 1008(a) did not authorize the appointment of a referee.  Under Section 1005(a)(2), assets can only be sold at “public or private sale.”  In re Ravitz, Slip Op. at 1-2.  If the parties cannot agree on a private sale, the only recourse is a public sale.  Id.

The appointment of a referee (special master) to mediate a possible sale, and to value the businesses, should be within the power of the court.  If one of the parties is intransigent, and refuses to pay full value, should the only recourse seems to be a referee to conduct the public sale?

The Court also held that, in the absence of an agreement, goodwill was not a distributable asset.  More on that later.

Hat tip to Peter A. Mahler (New Business Divorce blog), who represented the prevailing party.

Gary Rosin