In a case underscoring an important distinction with regard to the rights of minority holders in New York limited liability companies as compared to minority shareholders of New York corporations, Pryor Cashman successfully won summary dismissal of two litigations commenced by Alf Naman Real Estate Advisors (“ANRE”) against Pryor Cashman clients Capsag Harbor Management LLC (“Capsag Harbor”) and Cape Sag Developers, LLC (“Cape Sag Developers”) in N.Y. State Supreme Court, New York County.

In its Petition in one action and Complaint in the other, ANRE sought to invalidate a merger effected by Capsag and its affiliated predecessor or, alternatively, to seek appraisal rights for ANRE’s minority membership interest resulting from the merger. Under N.Y. Limited Liability Company Law (“LLCL”), a minority member does not have the right to contest a so-called “freeze-out” merger based on self-dealing in the absence of express provisions in the Operating Agreement. This is to be contrasted with the New York Business Corporation Law (“BCL”) which provides statutory remedies beyond appraisal rights to minority shareholders with respect to such mergers. 

Both litigations arose out of the July 18, 2011 merger (“Merger”) of Capnam Sag Manage­ment, LLC (“Capnam Sag”) into its Affiliate, Capsag Harbor.  Prior to the Merger, ANRE and Cape Sag Developers were the only two members of Capnam Sag, with Cape Sag Developers being the Managing Member and the holder of the majority of voting interests. After the Merger, Capsag Harbor, which was the surviving company in the Merger, became the successor to all of the rights, assets and obligations of Capnam Sag.  

In effectuating the Merger, Capsag Harbor and Capnam Sag, guided by Pryor Cashman, followed all of the statutory formalities and procedural steps set forth in the LLCL and BCL. ANRE was provided with Notice of the Merger, following which:  (a) ANRE filed a Notice of Dissent and demanded payment of the fair market value of its member­ship interest in Capnam Sag; (b) Capsag Harbor timely offered to pay ANRE what it deemed in good faith to be the fair market value of ANRE’s membership interest; and (c) ANRE rejected that offer.  

Pursuant to LLCL §1005(b), the parties had until November 10, 2011, to agree upon the value of the membership interest, barring which the appraisal procedures set forth in BCL §623(h) would go into effect. When no agreement was reached by that date, Capnam Sag then had, pursuant to BCL §623(h)(1), until November 30, 2011 to institute a special proceeding to fix the value of ANRE’s shares. When Capnam Sag elected not to file such a proceeding, ANRE, pursuant to BCL §623(h)(2), then had until December 30, 2011 to institute such a proceeding, failing which “all dissenter’s rights shall be lost unless the supreme court, for good cause shown, shall otherwise direct.” When ANRE did not commence a special proceeding by December 30, 2011, its dissenter’s rights expired.  

On January 26, 2012, nearly one month later, ANRE com­menced a special proceed­ing to determine its dissenter’s rights and to fix the value of its membership interest in Capnam Sag pursuant to LLCL §1005(b).  Alf Naman Real Estate Advisors, LLC v. Capsag Harbor Management, LLC, Sup. Ct. N.Y. Co., Index No. 100868/12. Nowhere in ANRE’s Petition was any excuse provided or any showing made of good cause for ANRE’s failure to timely file its Petition.  

Pryor Cashman moved to dismiss ANRE’s Petition on the ground that ANRE’s claims were time-bar­red pursuant to BCL §623(h)(2). New York Supreme Court Justice Donna M. Mills agreed that the Petition was untimely and, ANRE having failed to show good cause for its late filing, she dismissed the Petition with prejudice.

On the same day that ARNE filed its special proceeding, it commenced a separate litigation in which sought to have the merger set aside. Alf Naman Real Estate Advisors, LLC v. Cape Sag Developers, LLC and Capsag Harbor Management, LLC, Sup. Ct. N.Y. Co., Index No. 100867/12. In that case, Pryor Cashman filed an Answer and then immediately moved for summary judgment dismissing ANRE’s complaint. Pryor Cashman demonstrated in its motion papers that:

• The Amended and Restated Limited Liability Company Agreement of Capnam Sag Management, LLC (“Amended LLC Agreement””) permitted Cap­nam Sag to enter into a merger “where the surviving entity in the case of either of the foregoing events is an Affiliate of the Company [Capnam Sag];”
• For the surviving entity to be an “Affiliate” of Capnam Sag, that entity and Capnam Sag had to be under common owner­ship or control by the same entity; 
• As Cape Sag Developers was both the (a) owner, Sole Member and Manager of Capsag Harbor and (b) owner and Managing Member of Capnam Sag, Capnam Sag and Capsag Harbor were under common ownership and control by the same entity, Cape Sag Developers, they were Affiliates.
• Capnam Sag merged into Capsag Harbor, with Capsag Harbor being the surviving entity. As Capsag Harbor was an Affiliate of Capnam Sag, the Merger was permitted by the express language of the Amended LLC Agreement.

Once again, the Court agreed with Pryor Cashman and granted its motion for summary judgment dismissing the Complaint with prejudice and in its entirety. 

To read the decision in which Justice Mills summarily disposed of both litigations, please click here.  

Pryor Cashman Litigation Partner Philip Hoffman represented Capsag Harbor and Cape Sag Developers in both litigations and argued the motions. On the transactional side, Real Estate Partner Thomas J. Malmud, together with Corporate Partner Richard Frazer and associate Durre Hanif, structured and advised Pryor Cashman’s clients on the implementing of the Merger and the subsequent actions mandated by the LLCL.

The significance of Pryor Cashman’s victory and the impact it has on “the nascent field of limited liability company mergers” was reported on the New York Business Divorce website in an article entitled “Too Late Gets Too Little:  LLC Minority Member Fails to Block Merger, Must Accept $465 Buy-Out.”  To read the article, please click here.