Can I withdraw from a New York LLC? Clients are often confused when they see this provision in their operating agreement:

A Member may not withdraw from the LLC prior to the dissolution and winding up of the LLC.

Or this provision:

A Member may withdraw from the Company in accordance with the New York Limited Liability Company Law.

“Wait, I can never leave this LLC, even if I get sick, move on to something else or just change my mind?”,  they say.

Or, “so fellow Member X can blow this popsicle stand any time he wants and leave me with all the work?”

No, it’s not that simple, let me explain.

TL; DR version:

You cannot shed your membership status in a New York LLC unless the operating agreement specifically says so.  Section 606 NY LLC Law.  If the operating agreement does say so, it must come with provisions that provide for the consequences of the withdrawal.  Does the member get any payment for withdrawal or not? How much? When?

If the operating agreement only states “Members may withdraw….”, and nothing else, the default rule of the law applies and the member is entitled to receive, within a reasonable time after withdrawal, the fair value of his or her membership interest.  Section 509 NY LLC Law. This is often not the desired outcome.  The LLC may have no funds to pay the withdrawing member who leaves on a whim.  Thus, in drafting operating agreements, I am careful to consider all possible exits by members and plan for their occurrence.

Longer version:

Withdrawal as per New York Limited Liability Company Law

The term “withdraw” is mentioned several times in New York’s Limited Liability Company Law.  As you may know by now, the Limited Liability Company law applies when you do not have an operating agreement for your LLC or if your operating agreement remains silent on something that is otherwise mentioned in the law.  “Withdraw” is mentioned.  If you have no operating agreement, the law provides in Section 606:

Notwithstanding anything to the contrary under applicable law, unless an operating agreement provides otherwise, a member may not withdraw from a limited liability company prior to the dissolution and winding up of the limited liability company.

So the default rule is that a member cannot withdraw unless the operating agreement provides otherwise.

In 509 it provides,

upon withdrawal as a member of the limited liability company, …….., if not otherwise provided in the operating agreement, he or she is entitled to receive, within a reasonable time after withdrawal, the fair value of his or her membership interest in the limited liability company as of the date of withdrawal based upon his or her right to share in distributions from the limited liability company.

So if your operating agreement has the clause “may withdraw” and nothing else, the member who withdraws is immediately entitled to receive the fair value of his or her membership interest.  This can put the LLC in a precarious situation, since it may not have the resources to pay the withdrawing member.

Ways to deal with LLC Member Withdrawal in your New York Operating Agreement

To avoid any implication that a member may withdraw and this provision applies, I usually include the first provision that says that members may not withdraw.   Even though the law clearly says you cannot withdraw unless it is said so in the operating agreement, there may be ambiguities about what other scenarios could constitute a withdrawal.  And then, before you know it, someone may interpret it as if he or she is entitled to a fair value buyout on a whim when he or she decides to leave.

But I will also advise including real-world scenarios of a member leaving and the consequences of that.  There could be any combination of:

When a member gets sick or dies, what will happen to his membership interest?  Is anybody getting a payout?  If he is just sick, does he have to leave?

When a member just wants to leave for no reason, can he and does he have to give up his membership interest?  If he can leave and give up his membership, is he paid anything, or do we punish him for leaving us in the dust, and pay him nothing or close to nothing?

When a member does something really bad, do we want to have the ability to throw him out?

I will apply my lawyer brain to your situation and envision every “what could go wrong” situation and discuss it with you in drafting an optimal operating agreement for your New York LLC.

Call me up if you have any questions about this topic.

You may have signed a contract for your small business that you really shouldn’t have.  Or you are being asked to perform under an agreement and think that such demand is not what you agreed to or just grossly unfair.   So you ask yourself, “can I get out of that contract?”

What does your Contract say?

The other party to the agreement may demand all kinds of things, but before you get defeated, you’d better make sure that the contract actually obligates you to do what the other party demands.  Please read the agreement in its entirety.  What does it state concerning your particular problem?

Can you terminate the Contract?

Check if the language of the agreement itself offers a way out of the obligation by terminating the contract.  If so, follow that clause to the letter to terminate the contract.

What if the Contract has no Termination Clause?

Under New York law, if there is no termination clause or if the contract seems to go on indefinitely, you are allowed to terminate the contract on reasonable notice to the other party.  Obviously, that does not relieve you of your obligations if they occurred before your termination. If the service was provided, you have to pay, regardless of your termination after the service was provided.

Is the other Party in breach of the Contract?

If the other party is in breach of their obligations, you can terminate.  For example, you don’t have to pay if the party did not provide the agreed services.  Or sometimes, contractual obligations have conditions.  In other words, you don’t have to perform unless the other party has fulfilled the condition.

Is the Contract enforceable?

Next, lawyers would check if the contract you signed or the particular provision you don’t like is enforceable.  In other words, if the other party takes you to court for breach of contract, would you have a viable defense?  Would the court take that contract and enforce it against you?

Several possible scenarios come to mind that typically make an agreement or one or more of its provisions unenforceable.

Consideration

To be enforceable, a contract must be an agreement between at least two people exchanging something of value (consideration).  No consideration, no contract.  Also, if the language is so ambiguous that nobody can tell what it means and there is no indication outside of the written contract for the parties’ intention, there is no agreement to enforce.

Fraud

If you have been defrauded in the context of the contract, you may be able to avoid being obligated to perform.  The obvious example is when someone forged your signature on a contract.  Or if someone makes changes to the contract at the last minute and fails to notify you of such changes so that you literally get tricked into signing a contract that you did not approve.

Another example is when someone tricks you into signing a document by making false statements relating to the agreement.  Had you known the truth, you would have never signed the contract in the first place.

But these examples are rare and usually hard to prove.  You can protect yourself by always reading the contract before signing and making sure it states exactly what you think it should state.  You should also do your own investigations as to any representations made to you in connection with the contract.  Ideally, these representations should be repeated and explicitly being written into the contract.  Otherwise, it just may be tough to prove that you were told “such and such” before signing.

Also, watch out for a provision that states the opposite:  a disclaimer that you did not rely on any representations not specifically stated in the contract.  This puts an even greater responsibility on you to conduct appropriate due diligence before signing the contract.

Is the Contract Illegal or against Public Policy?

For obvious reasons, courts will not enforce illegal contracts; A contract to provide illegal services (think prostitution) is void.

Then some contracts or provisions are against New York public policy and therefore not enforceable.  You are more likely to encounter this scenario in day-to-day business dealings.  One example is a waiver of liability in a gym membership contract.  These are unenforceable under New York General Obligations Law Section 5-326.

The prime example of a contract provision that violates New York public policy is a provision for penalties.   New York courts will not enforce contractual penalties that have no relation to the loss suffered by the non-breaching party, and such loss would actually be possible to determine without undue difficulties.    “Public policy is firmly set against the imposition of penalties or forfeitures for which there is no statutory authority.”

Then some contracts could hurt competition.  Again, New York believes an undue restriction of competition in the marketplace is against its public policy.  Whenever a contract clause has the ability to restrict competition, enforceability depends on the reasonableness of such restriction. For example, it may be reasonable to restrict a seller of a business from opening the same business right next door, but it is probably unreasonable to forbid the same seller to engage in a similar business for all times and eternity.

Has the Purpose of the Contract been frustrated?

You may have heard about this excuse for getting out of a contract in the recent covid pandemic: Frustration of Purpose.  It is different from “force majeure,” which is a particular kind of provision written into a contract.  Frustration of purpose means that a basic understanding underlying the contract has gone away.  Both parties must have understood the purpose and without it, the contract makes no sense.  It is only applied in very limited circumstances.  For example, not paying rent for your gym because of the pandemic has already been found not to be “frustration of purpose.”

See also How to execute a Contract.

Call me if you have any questions about the topic!

I don’t need to tell you that New York lies at the center of the universe.  But did you know that you can be a part of it by choosing New York law to govern your business contracts and New York courts to decide upon any conflicts arising from your business contracts, even if the transaction, you, or the other party to the contract have no relation to New York?

Choosing New York law and New York courts may be desirable, because

  • you and the other contract party are from different states or countries and you wish to agree on a neutral law and a neutral place for dispute resolution; or
  • you wish to take advantage of New York law and New York courts which are known to address the most complex financial and commercial transactions.

Choosing New York Law

You can choose New York law to govern your contract – whether or not the contract has any relation to New York – if your contract provides for consideration of at least $250,000.  (General Obligations Law Section 5 1401).

How do you choose New York law to govern your contract?  You agree to it with your contract partner by including a provision in your contract similar to this one:

This Contract shall be governed by and construed in accordance with the laws of the State of New York.

Some lawyers add “without regard to New York’s choice of law statutes” or something similar, but I believe that is unnecessary.

Choosing New York courts

Now, in order to ensure that your choice of law provision will be enforced when you find yourself in court over the contract, you are well-advised to choose New York courts in addition to New York law.  If you have chosen New York law in your contract and your contract relates to an obligation of at least $1,000,000, you can have New York courts decide upon your contract disputes.  New York General Obligations Law Section 5 1402 provides that you can sue a foreign corporation or non-resident where the dispute arises out of a contract for which a choice of New York law has been made and which is a contract with consideration covering at least one million dollars.

How do you choose New York courts?  You agree to it with your contract partner by including a provision in your contract similar to this one:

Each of the parties to this Contract hereby irrevocably consents and agrees that any legal action, suit or proceeding with respect to this Contract may* be brought in a federal or state court located in [_______, New York], and each of them hereby irrevocably accepts and submits to the jurisdiction of such courts with respect to any such action, suit or proceeding.

*Note that this provision makes the selection of New York courts optional.  You could also agree that the selection of New York courts is mandatory.  In that case it would read “must be brought exclusively in a federal or state court located in…”.

Consider Consenting to Special Service

If both parties are not present in New York, it is advisable to agree in advance what constitutes service for the purpose of starting a lawsuit in New York courts.  For this reason, you could agree to a provision similar to this one:

Each of the parties to the Contract hereby irrevocably designates, appoints and empowers [insert name and address of an agent in New York], as its authorized agent to receive for and on its behalf service of summons or other legal process in any action, suit or proceeding in the State of New York.  Each of the parties to the Contract further irrevocably consents to the service of process out of any New York court by mailing copies thereof by registered United States air mail postage prepaid to each of the parties of the Contract at its address specified in this Contract.

Don’t hesitate to contact me if you have any questions about this topic.

Subscription agreement automatic renewal clauses seem to be all the rage because it ties your customer to your business and your services or goods.  Raise your hand if you have no more overview of who and what charges you automatically on a monthly basis.  Businesses have the chance for repeat income without much more input on their side.  A typical clause may look like this:

“We’ll automatically bill you from the date you convert to a Paid Account and on each periodic renewal until cancellation. If you’re on an annual plan, we’ll send you a notice email reminding you that your plan is about to renew within a reasonable period of time prior to the renewal date.”

I took this from Dropbox’s terms of service.

But is this practice legal in the great State of New York?  Yes, if you do it right.  (I’m giving no opinion on the above clause.)

What Law governs Automatic Renewal Clauses?

Enter § 527 (A) of the New York General Business Law.  This is a new law and it only became effective February 9, 2021.  Then there is an older law that is also still in effect, New York General Obligations Law § 5-903.

The following only applies to the new law.

When does the Automatic Renewal Clause law apply?

If you have an agreement with a consumer that contains an automatic renewal clause.  A consumer is any individual who seeks or acquires, by purchase or lease, any goods, services, money, or credit for personal, family, or household purposes.  So if your agreement is business to business, you do not fall under this new law.  An automatic renewal clause is an arrangement in which a paid subscription or purchasing agreement is automatically renewed at the end of a definite term for a subsequent term.

What does the Automatic Renewal Clause law require you to do?

Clear and conspicuous manner of pointing out the renewal

You have to present the automatic renewal terms in a clear and conspicuous manner and in visual proximity to the request for consent to the offer.  Clear and conspicuous means in larger type than the surrounding text, or in contrasting type, font or color o the surrounding text of the same size, or set off from the surrounding text of the same size by symbols or other marks, in a manner that clearly calls attention to the language.

Automatic renewal terms means:

that the subscription or purchasing agreement will continue until the consumer cancels;

description of the cancellation policy that applies to the subscription or purchasing agreement;

the recurring charges that will be charged to the consumer;

the length of the automatic renewal term ; and

the minimum purchase obligation, if any.

If the offer also includes a free gift or trial, the offer has to include a clear and conspicuous explanation of the price that will be charged after the agreement pricing will change upon conclusion of the trial.

Consumer’s consent

You have to get the consumer’s affirmative consent to the agreement containing the automatic renewal terms, including the terms of an automatic renewal; or you have to provide an acknowledgment that includes the automatic renewal terms, cancellation policy, and information regarding how to cancel in a manner that is capable of being retained by the consumer. If the offer includes a free gift or trial, the business shall also disclose in the acknowledgment how to cancel and allow the consumer to cancel before the consumer pays for the goods or services.

You have to provide a toll-free telephone number, email address, a postal address only when the seller directly bills the consumer or another cost-effective, timely, and easy-to-use mechanism for cancellation.

A consumer who accepts an automatic renewal must be allowed to terminate the automatic renewal exclusively online, which may include a termination email formatted and provided by you that a consumer can send to you without additional information.

What are the consequences if you fail to follow the Automatic Renewal Clause law?

If you send any goods, wares, merchandise, or products to a consumer, under an automatic renewal of a purchase, without first obtaining the consumer’s affirmative consent, the goods, wares, merchandise, or products are deemed an unconditional gift to the consumer.

The attorney general can enforce this law and issue penalties of $100 for a single violation and not more than $500 dollars for multiple violations resulting from a single act or incident. A knowing violation of this section is punishable by a civil penalty of not more than f$500 for a single violation and not more than $1000 for multiple violations resulting from a single act or incident.

You can defend yourself against violations by showing that the violation was not intentional and resulted from a bona fide error made notwithstanding the maintenance of procedures reasonably adopted to avoid such error.

There does not seem to be a private right of action as of now, but what this does is open the door for class actions by consumers.

Photo by @Maignat

I wrote before about getting access to the books and records of an LLC.  The same scenario can happen if you are a shareholder in a corporation.  The corporation cannot deny you access to its books and records.

Access to Corporation’s Books and Records

You ask the Corporation for financial information and other documents and get no response, or they tell you that you have no right to anything.  What do you do?

You have a right under Section 624 (b) of the New York Business Corporation Law to demand access to the shareholder minutes of the corporation and the name and other information about the other shareholders.

You further have a right under New York common law to ask for any other records of the corporation.

Exercising your Rights to Access to Books and Records

To exercise these rights, you have to have a valid purpose for such a request and make a written demand upon the corporation giving 5 days’ notice.

A valid purpose can be that you suspect that directors or officers are mismanaging the corporation’s affairs or any other good-faith need for you to see this information.

Written Demand

A written demand could be along the following lines:

“ Dear CEO/President/Director:

I am a 20% shareholder of Company, Inc.

I hereby demand that you give me access to the following information and documents:

[____fill in what you want to see______]

I demand this inspection pursuant to my rights under applicable common law and New York business corporation law § 624.  The purpose of the inspection is to review the above information to determine whether there has been wrongdoing by the management of Company Inc.

Unless I am granted meaningful access to the above-listed information and documents within ___ days after the date of this letter, I will pursue all legal remedies available to me.”

In response to such demand, corporations may ask you to visit their offices and inspect and copy any such books and records.  There is one exception, though.  If you are demanding annual balance sheets and profit and loss statements, the corporation has to give or mail them to you. Section 624(e).

Corporations may also ask you to sign a sworn statement that your inspection “is not desired for a purpose which is in the interest of a business or object other than the business of the corporation and that he has not within five years sold or offered for sale any list of shareholders of any corporation of any type or kind, whether or not formed under the laws of this state, or aided or abetted any person in procuring any such record of shareholders for any such purpose” (Section 624(c))

Going to Court to get Access to Books and Records

If you get no response to your demand, you can bring an action in court enforcing these rights.

Section 624 (d) states:

“Upon refusal by the corporation or by an officer or agent of the corporation to permit an inspection of the minutes of the proceedings of its shareholders or of the record of shareholders as herein provided, the person making the demand for inspection may apply to the supreme court in the judicial district where the office of the corporation is located, upon such notice as the court may direct, for an order directing the corporation, its officer or agent to show cause why an order should not be granted permitting such inspection by the applicant. Upon the return day of the order to show cause, the court shall hear the parties summarily, by affidavit or otherwise. If it appears that the applicant is qualified and entitled to such inspection, the court shall grant an order compelling such inspection and awarding such further relief as to the court may seem just and proper.”

This is a long way of saying that the law provides for an expedited proceeding to get you access to the books and records.  It could be a matter of weeks rather than many months or years for a court to act on your request.

Action for an Accounting

Similar to the action for accounting in an LLC, there is also a possible action for accounting against a corporation.  An action for accounting goes further than just the demand for access.  You claim that there was wrongdoing by the corporation or its directors and are thus entitled to get detailed explanations for all financial transactions.  This demand is usually combined with actual claims for wrongdoing against the wrongdoers in the corporation.

 

See also Access to LLC Books and Records

 

This may come as a surprise to many LLC members and managers:  Keeping records for your LLC is required under the New York LLC laws.  You have an obligation to keep proper records under §1102 of the New York Limited Liability Company Laws.

What Records must be kept in an LLC

Specifically, you must maintain the following records:

  • if your LLC has managers, a list of the full names of all managers and their mailing addresses;
  • a list of all members and their mailing addresses together with each member’s contribution to the LLC and his or her share of profits and losses;
  • a copy of the articles of organization and all amendments;
  • a copy of the operating agreement;
  • a copy of the LLC’s federal, state, and local income tax returns for the three most recent years;

If you are in charge of managing the LLC books, you are well-advised to adhere to these rules so that nobody can blame you for being negligent in the management of the LLC.

Where do I have to keep the records of the LLC?

The law does not specify where.  But the law does allow you to keep the records other than in paper form, which includes in electronic format, as long as you can produce everything in written form in a reasonable time (aka print it).  §1102(d).

Who can demand access to the Books and Records of the LLC?

Any member of the LLC.

Any member of the LLC has a right to demand access to such records and any financial statements maintained by the limited liability company for the three most recent fiscal years and any other information regarding the limited liability company’s affairs as is just and reasonable.  From that, it follows that you should also keep accurate records regarding the financials of the LLC and all resolutions or similar LLC documents relating to the LLC.

While I have you thinking about keeping records, it wouldn’t hurt to peruse this IRS publication:  Starting a Business and Keeping Records.

Call me if you have any questions about this topic.

Also, see “Access to LLC Books and Records.”

“Should I sue my business partner?” you are asking yourself. You are fuming right now about what your business partner is doing to you and/or the business, and you are wondering if you should sue your business partner. Before pulling the trigger, understand what lies ahead:

Is there a way to negotiate yourself out of this before suing your business partner?

Going to court should always be the last resort. Court actions are costly and time-consuming (years, not months) and can destroy what is left of your business and your sanity. While your attorneys will do most of the heavy lifting, you will have to spend a lot of time cooperating with them and gathering relevant evidence. So try your best to come to the table with your partners to negotiate a good outcome before going to court. Give a little, take a little.  And even if you are already well into a lawsuit, consider settling before trial.

What do the Agreements say?

Your decision to sue your business partner or settle begins with your business agreement. You, or preferably your attorney, should check whether you have a written agreement with your partners and what it might say about your dispute. If your business is a corporation, there may be bylaws, a certificate of incorporation, and a shareholder agreement. If it is a limited liability company, there may be an operating agreement. Each of these documents, and others, may have relevant provisions.

Even if you have no formal documents, other writings could act as agreements between you and your partners. Do you recall all the promises made in email correspondence or phone texts – or on cocktail napkins? Any document showing some sort of consent may be helpful.

If you do not have anything in writing (like many small businesses, unfortunately), you need to look to the New York laws dealing with your specific entity: for LLCs, the New York Limited Liability Company Law (NYLLC), and for corporations, the New York Business Corporation Law (BCL). These laws also apply if you have a written agreement that says nothing about the issues behind your dispute.

What are my Remedies if I sue my business partner?

Your next step is to consider what you might get in court or through negotiation. Obviously, the cure depends on the problem.  But certain remedies often come up in partnership disputes.

Access to Books and Records

You can demand to see the books and records of the business.  If needed, an expedited legal proceeding (meaning it takes months, not years) can enforce this right.  The governing law is set forth in BCL 624 and  NYLLC 1102.  Inspection rights of members and business owners are not absolute, but any legitimate purpose will likely satisfy the court.  In any event, a demand can signal to your partners that you mean business and may force them to choose good faith negotiation over digging in their heels.

Claim against Partners who damaged you or the Business

You may have a claim against fellow business owners for misbehaving toward you or the business.  Managers and managing members of New York LLCs owe fiduciary duties to the other members (while non-managing members of manager-managed LLCs do not).   Officers and directors of a corporation owe fiduciary duties to the corporation and the shareholders.  Shareholders do not owe fiduciary duties to each other – except in very small corporations or where the shareholders are essentially managing the corporation.

A fiduciary duty is an obligation to act in good faith, to treat co-owners fairly and in accordance with the deal struck, to act in the best interest of the business and its owners, and to refrain from fraud, taking assets for one’s own benefit, wasting assets, competing with the business or diverting clients away from it. If your partner violates this duty, you may be able to sue the partner directly or on behalf of the LLC or corporation.

If there is a breach of those duties, you may be able to sue the person committing the breach directly or, if the breach was more towards the business, you could sue on behalf of the LLC or corporation, a so-called “derivative” action.

Forced Break-Up of the Business

Under certain circumstances, you may be able to take your dysfunctional business family to court and have a judge dissolve the business and order it to liquidate its assets.  You will first need to ask yourself if this drastic step is really the best outcome. The value of a business lies in its operations and goodwill as a going concern. But sometimes, it can be a good idea to bring such a lawsuit anyway because it may force your partners to consider a buyout – and the court may even order one.

Forced Dissolution of a Corporation

If you (alone or together with other owners willing to go into battle with you) own 50% of the shares in a corporation, you can have a judge order dissolution by showing that management is hopelessly deadlocked (Section 1104 of the BCL).

If you own at least 20%, you can have a judge order dissolution by showing that management is guilty of illegal, fraudulent, or oppressive actions toward the complaining shareholders or that the corporation’s assets are being looted, wasted, or diverted for non-business purposes by the directors or officers or others in control.  In deciding over such a case, a judge has some options under the law and could conclude that liquidation of the corporation is too harsh a remedy and that there less painful means, such as a buyout, to give you what you are owed and protect your rights (Section 1104-a).

So a shareholder with 50% or more has two options, under 1104 and 1104-a.  But the choice needs to be carefully considered since 1104-a petitioners can be forced to accept a buyout. 1118 BCL gives your opponents the option to buy you out for the fair value of your ownership share. What is fair value? Unless you agree on an amount, a battle will commence between experts who follow complicated rules and methods established over time.

Forced Dissolution of a Limited Liability Company

Many LLC owners are surprised to learn that their break-up rights and remedies are much less defined than in a corporation.  Dissolution of an LLC is codified in Section 702 of the New York Limited Liability Law.   Under 702, you need to show that management is not willing or is unable to pursue the stated purpose of the LLC, or that continuing the entity is financially unfeasible.   Easy in theory but difficult in practice.  That management may be hopelessly deadlocked or guilty of misconduct is not always enough to justify a dissolution under Section 702.

Equitable Buyout

In connection with this proceeding or standing on its own, a court may decide to grant an “equitable buyout,” meaning it is not provided for in the written law, but the court thinks it is a good idea to protect the business owners.  An equitable buyout consists of one member being forced to sell his/her ownership interest to the other member.  But don’t rely on this since this equitable remedy is very new and the requirements a little murky.  It seems that a prerequisite for the equitable buyout is that you can show that you also have a good case for dissolution under Section 702 and that a buyout is really the “most equitable method of liquidation.”  So it all depends on the individual facts.

Do you need legal action immediately?

Many people are anxious to bring injunctive relief as soon as the dispute hits the fan.  Injunctive relief means that a court will relatively quickly stop the rogue business owner’s shenanigans without waiting for a trial, which can take years.  Injunctive relief requires that you can show a high likelihood that you would win after trial, and there would be irreparable injury without this expedited relief.  An example would be any action that significantly affects the control and management of the LLC or corporation.  Courts have held that such misconduct can have irreparable consequences.  Anything that can be fixed with money damages is less likely to be a candidate for injunctive relief.   However, bringing an action for injunctive relief rather than waiting for the wheels of justice to turn can make or break your litigation strategy.  Even if you have a good case, a lost injunctive relief petition may shift the balance in favor of your opponent.

Call me if you have any questions about the above topic.  And also see “Business Partnerships Gone Bad.”

Picture this: You’ve been happily doing business with your fellow LLC members for some time now.  But now, trouble is brewing on the horizon.  The other two members are ganging up on you and exclude you from any further business dealings.  When you ask to see the LLC’s books, records, bank accounts, tax returns, or other financial records, they tell you that you don’t have any right to see such documents.

The majority ousted LLC member often lacks access to information about what is going on in that LLC business.  While such a member often suspects wrongdoing, he cannot look at the LLC’s bank accounts, accounting, and other records, because the other members refuse to show it to him.  What is he or she supposed to do?

Access to LLC Books and Records

Luckily, the New York LLC law gives the ousted (or any) LLC member an explicit right to ask for the LLC’s books and records.  The law provides in Section of 1102 of the New York LLC law that:

“Any member may, subject to reasonable standards as may be set forth in, or pursuant to, the operating agreement, inspect and copy at his or her own expense, for any purpose reasonably related to the member’s interest as a member, the records referred to in subdivision (a) of this section, any financial statements maintained by the limited liability company for the three most recent fiscal years and other information regarding the affairs of the limited liability company as is just and reasonable.”

The records mentioned in subdivision (a) are:

“(1) if the limited liability company is managed by a manager or managers, a current list of the full name set forth in alphabetical order and last known mailing address of each such manager;

(2) a current list of the full name set forth in alphabetical order and last known mailing address of each member together with the contribution and the share of profits and losses of each member or information from which such share can be readily derived;

(3) a copy of the articles of organization and all amendments thereto or restatements thereof, together with executed copies of any powers of attorney pursuant to which any certificate or amendment has been executed;

(4) a copy of the operating agreement, any amendments thereto, and any amended and restated operating agreement; and

(5) a copy of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the three most recent fiscal years.”

Additional LLC Information

But the LLC member is not necessarily limited to asking only for these records.  The law also gives access to “other information regarding the affairs of the limited liability company as is just and reasonable.”  This can open the door to asking for more detailed records, such as proof of expenses, revenue, bank accounts, or other documents underlying the LLC’s business accounting.   The judge ultimately had discretion on how much access will be granted.

Claim for an Accounting

While it is not mentioned in the law, the courts have also given LLC members the right to ask for an accounting of the LLC business.   In other words, you may ask for a full picture and explanation of the LLCs financial affairs.  This is a different claim than the one for books and records since it asks for much more than just the opportunity to review financial information.  You may be entitled to ask for explanations underlying the financial information to get a full picture of what went on.  You cannot demand this on a whim or what your adversary would call a “fishing expedition.”  There have to be some allegations of concrete wrongdoing by the LLC members in charge.  The LLC members in charge cannot counter that they already gave you access to the books and records under 1102 because this is a much broader demand.

Majority Member Defenses

Is there something that the remaining members can do to prevent you from getting the desired access to the LLC’s books and records?

Yes, if the other members can plausibly show that any information sought is in the nature of trade secrets or their disclosure is not in the best interest of the LLC, they may be able to restrict such material.  But this is not easy to show and they have to have those rights under the operating agreement or show special circumstances in order to succeed.  Plus, you can offer to sign a confidentiality agreement to protect such information from third parties.

Pre Lawsuit Demand

In both claims described above, the claim for access to books and records and the claim for accounting, you have to make a formal written demand before bringing a lawsuit.  You can do it yourself or have your attorney do it so that the secretive LLC members get the message that you are serious.

Operating Agreement

Finally your operating agreement may contain special provisions about access to books and records.  So make sure to read the operating agreement to see whether it mentions any particular requirements to access the LLC’s books and records.

Easy Money or Debt Trap?

Merchant Cash Advances are often the small business owner’s last resort for cashflow. When an SBA loan or any other business loan is out of reach, Merchant Cash Advance businesses are eager to give the business owner money. It only takes a couple of days, minimal paperwork, and the money flows into the account. However, it is often a slippery slope into a debt spiral with no return.

Many articles have been written about how Merchant Cash Advances work, for example this one by nerdwallet.

But, as the nerdwallet article points out, the contracts underlying these transactions can be complicated and are certainly not standardized. The rules for default are all over the place and it really pays to know your rights under the Merchant Cash Advance agreement before you default and are faced with sometimes very aggressive debt collectors who will go after your business accounts, personal assets (if you gave a guaranty) and enter a judgment against you without you even knowing (if you signed a confession of judgment). The industry is not regulated and there are lenders out there who are engaged in what can only be described as predatory lending practices. New York has recently outlawed confessions of judgment against out of state borrowers.

Usurious Loan or Sale of Receivables?

When faced with out of control lenders trying to enforce under the Merchant Cash Advance, many borrowers have tried to characterize the merchant cash advance as a usurious loan. If you do the math, many of these transactions cost more than 100% interest. The nerd wallet article actually has a calculator how to really determine the cost of this kind of financing.

In New York, it is considered a criminally usurious loan if a lender charges more than 25% interest. If one succeeds on that argument, the entire agreement would be void and the borrower would not have to pay any interest or principal on the loan.

Unfortunately, many New York courts have now decided that a merchant cash advance is not a loan, but a sale of your future receivables. Therefore, the rules about usury do not apply and Merchant Cash Advance lenders can get away with highway robbery. How do you make the distinction between a loan and a sale of receivables?

Courts have explained that there are certain factors that a court should look for to see if repayment is absolute or contingent. Does the merchant lender have the risk of the merchant’s business going down, i.e. no receivables to collect? Or does the lender have a right to repayment no matter what?
Courts named three factors that should be present in any MCA agreement in order not to be a usurious loan: (1) a reconciliation provision that allows the merchant to adjust the fixed daily ACH payments to the amount of its actual daily receipts (answer should be yes); (2) an indefinite contract term, which is consistent with the contingent nature of each and every collection of future sales. . (answer should be yes).; and (3) whether the merchant financing company has recourse if the merchant declares bankruptcy (answer should be no).

Every Agreement must be Analyzed

Of course, every merchant lender out there, if smart enough, will now draft their agreements so that all these factors are present. But still, not everybody is skilled, and many of the other protections merchant lenders may want to put into their agreements to protect themselves may convince a court otherwise. Every agreement needs to be analyzed whether it is a usurious loan or a sale of receivables.

Every once in a while, a judge will still entertain the idea that such a transaction is a loan. In McNider Marine, LLC v. Yellowstone Capital, LLC, a judge ruled on a motion to dismiss by the lenders:

 “In determining whether a transaction is usurious, the law looks not to its form, but to its substance, or real character”

“After analyzing specific MCA agreements, many New York courts have found that they constitute legitimate purchases of accounts receivables instead of loans with usurious interest rates. Courts that found otherwise, that MCA agreements were usurious loans disguised as purchases of accounts receivable, typically found no provisions for forgiveness or modification of the loans, such as viable and enforceable reconciliation provisions, in the event that the funding companies could not collect the daily amounts required”

“Focusing on the reconciliation provision in a given merchant agreement is appropriate because it often determines the risk to the funding company. If the funding company truly is collecting a specified percentage of accounts receivable, then the funding company bears the risk of a downturn in the merchant’s business. The specified percentage typically is replaced by a fixed payment (as it was here), but if that payment is reconciled when accounts receivable drop below the merchant’s original estimation, then it may take the merchant far longer to repay the amount advanced than the funding company had anticipated.”

If, however, the merchant is unable to adjust fixed payments in the event of a reduction of its accounts receivable, and the funding company can collect the amount due and owing by way of a personal guarantee and confession of judgment, there is far less risk to the funding company. Therefore, whether the merchant may reconcile its fixed payment amount when there is a reduction of accounts receivable is often determinative of whether repayment is absolute or contingent. If repayment is absolute, then the arrangement must be considered a loan as opposed to a purchase of accounts receivable.
In this case, the court finds that plaintiffs have demonstrated that the reconciliation provisions contained in the addenda to the July and October agreements were illusory. First, the court cannot find from the language in the agreements that Yellowstone had any duty to reconcile. In fact, Yellowstone likely could refuse to even consider reconciliation if it contended that McNider Marine failed to sufficiently document a basis for it. Furthermore, even if Yellowstone was required to reconcile, there was no time to do so because McNider could request reconciliation only within five business days following the end of a calendar month. McNider Marine defaulted on December 16, 2016, so it could not request reconciliation until the first week of January 2017. Yellowstone filed for a judgment by confession on December 22, 2016 and obtained that judgment on December 28, 2016.”
The notion of reconciliation for McNider Marine appears particularly futile because the fixed daily payment in the October agreement was not a good faith estimate of 15% of its receivables to begin with inasmuch as there was no evidence that the receivables had increased over 40% from the July estimate. Without the right to effectively reconcile the fixed dollar amount, the agreement resulted in a loan payable over a fixed term with a criminally usurious interest rate in excess of 285%.”

Have your Situation checked by a Lawyer

So, many things can go wrong. Lenders may not draft their agreements properly and it could actually turn out to be a usurious loan. Lenders may try to enforce the agreements against the terms of the agreement and in the process freeze your entire business. Lenders may fail to properly enforce their rights against you. For example, many of the predatory lenders try to bully you and your third-party debtors into paying them directly, despite the fact that they have not properly entered the judgment in your home state and have no right to demand direct payment.

If you are under the squeeze of a merchant lender gone wild, it pays to run your contract and the events by a lawyer. The worst case scenario is that your lawyer can help you to savely negotiate a way out of debt.

Most litigations reach a point, sooner or later, when the parties discuss settlement.  When should you discuss settlement in your litigation?  There is no precise rule.  It could be right after you file the complaint or after the parties has the chance to look at each other’s evidence (discovery).  There are some other things to know re settlement in litigation:

Nothing Said can be Used as Evidence

New York’s civil procedure code (CPLR 4547) provides very useful protection for settlement talks: nothing said in them can be used as evidence against a party later; for example, you cannot tell a judge or jury that a defendant acknowledged liability by offering a settlement. It is a good practice to head emails or correspondence “Confidential–for settlement purposes only”, or similar wording.

There are three things an experienced attorney will take into account: when to initiate settlement discussions, what to say, and how much to ask for.

Timing of Settlement Discussions

As far as timing is concerned, usually, a plaintiff must put in a certain amount of work before the defendant is willing to have a serious discussion. Most cases don’t settle simply because the plaintiff sent a demand letter or even filed a complaint; the most common time for discussions to begin is after the discovery phase when the parties have a more comprehensive idea of what the evidence will show at trial and the strengths and weaknesses of their respective positions. Some cases do not settle until the eve of trial. When you are suing an entity that litigates frequently (or has an insurance company that does), you may be able to find out what their usual practice is. For example, the insurance company on a slip and fall case may settle early, while a medical malpractice insurer is likely to make you go to trial.

What to say in Settlement Discussions

A typical settlement conversation is conducted amicably, with a minimum of adversarial rhetoric. “You know your client has some exposure on this. If I win, damages are likely to be $xxxx. My client would be willing to take $xxx now”. Without the tone becoming negative, you can describe what you think are the highlights of your case: the defendant sent your client an ill-advised email acknowledging responsibility for a problem, or your client will be much more sympathetic to a Brooklyn jury than the defendant. Don’t be offended or shaken when opposing counsel replies similarly, that she thinks your case is a loser because your client behaved recklessly, made his own ill-considered statement about getting rich from the lawsuit, etc. She is doing her job. If you believe there are weaknesses in your case, part of the game may be sounding more confident in conversations than you feel. In other situations, a good tactic may be to acknowledge a weakness while explaining how you will work around it. You may be showing your tactical hand here, but sometimes what you are describing is an approach the other side has already predicted, so you are just illustrating your own expertise. Sometimes an exchange of evidence may take place during discussions, and, less often, an exchange of case law supporting your position. As a general rule, anything you can think of which will keep the conversation going and overcome obstacles, is worth considering.

How much to ask for

Settlement in your litigation usually begins with the plaintiff making a demand, based on your realistic view of the damages (which may be less than the sum you asked for in the complaint), discounted by some amount as a sign of good faith. A logical explanation for the discount is helpful but not required (“if we settle this week we will agree to forego the interest”). Since the defendant’s offer will be much lower, you want to discount your initial demand only by an amount which still gives you room to move.

There is a large client relations component involved. You should be patient with your own client and take the needed time. Clients tend to be angry at the other side, and can easily feel as if their own lawyer is overly eager for them to take a relatively modest amount to avoid doing more work on the case. If you don’t take the time to check in with the client frequently, to talk through all concerns, and to get the client’s repeated endorsement of the numbers under discussion, you may wind up getting a great deal for a client who thinks its a bad one.

Frequently, discussions with your own client are more time-consuming than negotiating with the other side. It may even feel like psychotherapy. Clients who insist on unrealistic numbers or say they would rather go to trial are not guaranteed calmly to accept the results if they lose (or win a smaller amount).

The math you must do with your client involves starting from the value of the realistic damage claim, which is then discounted, by the present-day value of money which might not be recovered for several years; by the strength or weakness of the case; and, of course, by the legal fees your client would have to pay you to see the case through trial.

It is a good idea to begin a settlement conversation with two numbers in mind: the demand you are making and the secret number which is the least your client would accept. In the ensuing negotiation, you should move downwards as slowly as possible, while trying to achieve a better result than your client’s bottom line number.

In some cases, a settlement for fifty percent of your demand is a good number; in a stronger case, you may achieve eighty percent of your demand. Every case is different. When you make a demand and the other side listens carefully and then comes back with an offer that bears a certain relationship to your demand (typically, a third or more of what you asked), you are probably in the end game and a settlement is possible.

When to end Settlement Discussions in your Litigation

There is also the art of knowing when to end discussions. While some relatively honest adversaries will just decline to discuss settlement, others will respond frivolously. Two very common examples are the offer of a nominal amount (you asked for $500,000 and the other side counters with $20,000), and the particularly notorious request that you negotiate against yourself (“That demand is too high. If you come back with a more realistic number, we will talk”). In these situations, continuing the conversation may make you appear weak, over-eager or inexperienced. It is sometimes best to end the conversation in the hope it can be restarted later. Often a good way to sign off is simply by not making the next phone call (nothing communicates confidence in your case more than simply letting a fruitless discussion drop and getting back to making motions or demanding discovery).

In our experience, three or four litigations eventually settle for every one which proceeds to trial. Timing varies. In the past few years, we settled one case for 80% of the demand, very soon after filing the complaint, and another one for about 40% on the eve of trial. Both were good settlements, and because we did the necessary hand-holding, both clients were satisfied.