Many business divorce practitioners are familiar with a phenomenon one might call “petitioner’s remorse” – an often abrupt abandonment of one’s desire to dissolve a closely-held business entity when the opposing party unexpectedly declines to oppose or consents to dissolution. The dissolution petitioner’s rationale in bringing the claim may have been an expectation that the opposing party would fear the prospect of dissolution, oppose it mightily on the merits, and ultimately be forced into some sort of negotiated or compelled buyout. In that case, when the response is lack of opposition or consent to dissolve, the in terrorem effect and leverage is lost.
A recent decision from a Rochester-based appeals courts, Yehle v Rich, ___ AD3d ___, 2020 NY Slip Op 06631 [4th Dept Nov. 13, 2020], involved an egregious case of petitioner’s remorse, one in which the petitioner sued for dissolution, stipulated with the respondent to much of the relief sought in the petition, and then litigated for years in an attempt to undo the stipulated order of dissolution.
Yehle and Rich formed Wellesley Island Storage LLC (the “Company”) as equal 50% members to construct and operate a storage unit facility in the Thousand Islands region of New York. Though hotly disputed in the litigation to come, the operating agreement recited that each member made a capital contribution of $35,000.
The Petition and Response
Disputes arose about the Company’s finances. Yehle filed a petition with claims for dissolution and an accounting, alleging that Rich’s financial mismanagement made it no longer “reasonably practicable to carry on the business of the Company” under the Articles of Organization and Operating Agreement. The petition’s demand for relief included dissolution, sale of the Company’s assets, an accounting of “contributions made by each of [the] members,” and distribution of sale proceeds to the members after payment of liabilities.
Rich filed a response to the petition admitting that the Company was no longer capable of carrying on business in accordance with the Articles of Organization and Operating Agreement. Rich stated that he “joins in the requested relief in the Wherefore clause seeking dissolution, direction to sell the assets in a commercially reasonable manner, directing an accounting of the contributions such members made, . . . and directing distribution of assets after payment of debts.”
The Stipulation to Dissolve While Pursuing Additional Discovery
Despite Rich’s consent to dissolve, the parties continued to litigate over their respective capital contributions until, before the completion of discovery, they entered into a Stipulated Order Granting Partial Summary Judgment. The parties agreed:
- “Wellesley Island Storage, LLC [shall] be and hereby is DISSOLVED, and the entity shall now enter the winding-up phase”;
- “[A]ll assets . . . [shall] be sold at auction at the earliest commercially reasonable date”;
- “[F]ollowing the sale . . . further proceedings and claims remain to determine each member’s contribution and membership interests”; and
- “[I]n light of the above-referenced additional proceedings, all funds from the sale . . . shall be held in escrow and release and distributed only pursuant to a settlement agreement executed by both parties . . .”
The Post-Stipulation Litigation
After signing the stipulation, Yehle refused to sign documents permitting the auctioneer to proceed with the asset sale, claiming that Rich’s refusal to respond to his demands for discovery concerning Rich’s capital contributions relieved Yehle of compliance with the stipulation. Rich countered by asking the court to appoint a receiver to carry out the sale.
Yehle cross-moved to vacate the stipulation, arguing that the stipulation was “procured by apparent material misrepresentation of fact.” Specifically, Yehle argued that Rich testified at his deposition more than a year before that he was “entitled to claim a personal contribution to the Company of over $310,000” from construction services Rich provided for the build-out of the storage facility. Yehle argued that after Rich executed the stipulation, he produced discovery responses admitting that he lacked documentation to corroborate his claimed capital contribution. Yehle concluded, “Now that Petitioner knows that Respondent’s numbers apparently cannot pass the scrutiny of an audit . . . it is clear that the stipulation calling for the sale . . . was inappropriate.”
Rich opposed the motion to vacate, arguing that a disputed factual issue over the parties’ capital contributions had no impact upon the agreement to sell the Company’s assets, nor upon the parties’ ability to bid on those assets, and in fact, the stipulation explicitly contemplated post-auction proceedings to litigate the parties’ respective contributions to the Company. Quoting Doe v Marzolf, 258 AD2d 970 [4th Dept 1999], Rich argued that a “subsequent change of heart provides an inadequate basis for vacating the stipulation.”
The Supreme Court Decision
The Supreme Court issued a Decision and Order denying Yehle’s motion to vacate the stipulation. The Court concluded that “there are no grounds to set aside the Stipulation and Order” because “[w]hen the Stipulated Order was entered into between the parties they anticipated the additional discovery Petitioner is now complaining he has not received,” yet the “stipulation does not indicate that sale would not occur until the discovery was complete.” The Court concluded, “Issues raised by Petitioner should be resolved in any post sale proceeding.”
The Appeal and its Outcome
Yehle appealed, arguing three legal grounds to vacate the stipulation: fraud, unilateral mistake, and unconscionability. Rich argued that Yehle failed to satisfy any of those legal grounds because he knowingly entered into a stipulation that provided for dissolution and sale of the Company’s assets at auction despite outstanding discovery of the parties’ capital contributions.
The appeals court, quoting McCoy v Feinman, 99 NY2d 295 , listed seven potential legal grounds to vacate a stipulation:
- public policy; and
The Court ruled:
Here, petitioner contends that the stipulated order should be vacated on grounds of fraud, unilateral mistake and unconscionability. We disagree. Contrary to petitioner’s contention, he failed to establish that any misrepresentation was made that would support claims of fraud or unilateral mistake. Rather, he alleged that respondent’s claims related to the amount respondent purportedly contributed to [the Company] could not be verified. Petitioner also failed to establish any justifiable reliance on respondent’s claims inasmuch as the stipulated order specifically provides that further discovery and proceedings were required to determine the parties’ contribution amounts (citations omitted)
The Court continued:
We reject petitioner’s further contention that it would be unjust or inequitable to enforce the stipulated order, i.e., that the order is unconscionable, inasmuch as petitioner failed to establish that the terms of the stipulated order were so unfair or one-sided as to shock the conscience and confound the judgment of any person of common sense (quotations omitted).
Pre-Litigation Reality Check
In the end, Yehle spent five-plus years litigating, and unsuccessfully opposing, a dissolution claim he himself brought. Yehle is a reminder to would-be petitioners to think hard about whether they truly want to dissolve the business before pulling the trigger on a dissolution claim. Once the momentum of dissolution litigation takes hold, it can be hard to arrest – particularly for corporations, where the petitioner’s ability to abandon a dissolution claim is circumscribed by Section 1116 of the Business Corporation Law prohibiting withdrawal of a dissolution petition except with the court’s permission upon a showing that “cause for dissolution did not exist or no longer exists.” Although there is no analogous provision under the Limited Liability Company Law, Yehle demonstrates that when one sues for dissolution, one should be prepared to see it through to the end, lest the respondent flip the script and obtain dissolution and liquidation over the petitioner’s objection.