The Farro Litigation: The Remainder of the Story | Farrell Fritz, PC

In last week’s New York Business Divorce, Peter Mahler wrote about an important new decision that will have far-reaching implications for the owners of New York LLC. In Farro versus Schochet, ___ AD3d___, 2021 NY Slip Op 00150 [2d Dept Jan 13. 2021]Peter and I persuaded a Brooklyn Court of Appeals to rule, based on Sections 1002 (f) and (g) of the Limited Liability Companies Act, that a member of a limited liability company has withdrawn from a business with a lawful payout a / k was forced / In the case of a “squeeze-out” or “freeze-out” merger, there is no statutory right (with limited exceptions) to attack the validity of the merger or to suspend or suspend it, also due to alleged reasons for “illegality” or ” Amounted to.”

The Farro Merger Holding clearly distinguishes LLC mergers from corporate mergers – and places them in a completely different category. The latter retains a right for dissenting shareholders after the merger under Section 623 (k) of the Corporate Act (the “BCL”) to maintain a “reasonable measure” (interpreted by the courts to mean “fair relief”) to contest a merger based on allegedly “unlawful” or “fraudulent” behavior.

According to Farro, it is clear that the BCL 623 (k) exception to the “illegality” of “fraud” from the retrospective merger, the sole remedy of a “fair value” assessment process, does not apply to LLC mergers and that a Fair Value Present The valuation process is the only remedy available to an LLC owner who is forced out of business in an LLC merger and otherwise complies with merger laws and operating agreement (if any).

Although last week’s article covered the Farro Court of Appeal’s merger holdings in detail, the article only tells part of the story. In fact, Farro’s decision was one of four related opinions the Court of Appeals issued that day. In this article, I’ll do my best to tell the rest of the story, focusing on two of these other decisions. In the first case, which I will refer to as a “counterclaim”, the appellate court upheld the lower court decision in its entirety, denying Farro’s motion to dismiss our clients’ counterclaims. In the second, which I will refer to as the “Direct Claims Appeal,” the appeals court fully upheld the lower court’s decision denying Farro’s motion to dismiss our clients’ claims in a separate lawsuit against Farro.

The counterclaim

After Farro sued LMEG and his former co-members Wilhelm and Schochet, they filed ten counterclaims against him on behalf of LMEG for breach of fiduciary duty / unfaithful servants, fraud, negligent misrepresentation, conversion, unjust enrichment. Assessment judgment and accounting as well as the remaining censuses made on behalf of Schochet for fraud, negligent misrepresentation and constructive fraudulent transmission under the Debtors and Creditors Act 273.

LMEG’s claims all stemmed from the alleged discovery by Wilhelm and Schochet, the merger’s expulsion of Farro, that Farro allegedly embezzled the company by causing the company to repay personal loans that Farro had his friends and family members as if they were debts of the company who allegedly pocket the loan proceeds and saddle the LLC with the debt. The claims Schochet made all stemmed from Farro’s alleged representations against Schochet in late 2011, as a key incentive for Schochet to join the LMEG, that the LLC’s net asset value exceeded $ 10 million, even though the net asset value was reportedly less than $ 2 million US dollars. All allegations were based on allegations of fraud, in particular that Farro had allegedly taken careful steps to conceal his credit embezzlement activities from LMEG, Wilhelm and Schochet by manipulating the company’s financial records, which he had exclusive control over at the time of the fraud Had control.

In the counterclaim, Farro v Schochet, ___ AD3d ___, 2021 NY Slip Op 00152 [2d Dept Jan. 13, 2021]the court ruled:

  • Farro could not rely on the doctrine of ratification in rejecting LMEG’s counterclaims based on the misappropriation of Farro credits, since an act of ratification can only be carried out with “a complete knowledge of the essential facts relating to the transaction”, which “ must and cannot be derived from dubious or ambiguous actions or language. “The Court found that the counter complaint had sufficiently concealed Farro’s conduct by forging LMEG’s financial records so that LMEG and its members raised at least one question of fact about their knowledge of Farro’s activities.
  • The counter-complaint was timely after the statute of limitations, “to the extent that the counterclaims claim damages for conduct after October 2010”, less than six years before Farro submitted his original complaint. The Court relied on statute of limitations CPLR 203 (d) of the statute of limitations, which provides that “a defense or counterclaim is not excluded if it was not statute-barred at the time the claims made in the appeal were filed”. The Court also ruled that all counterclaims, including the first counterclaim for breach of the Trustee, were subject to a six-year statute of limitations as they were fraught with “fraud allegations”.
  • In the counter-complaint, the claims for breach of fiduciary duty, fraud and misrepresentation were asserted with sufficient accuracy. The court ruled that the alleged facts “were sufficient to enable any reasonable inference to be drawn about the alleged conduct”, “in particular because they alleged that the operational facts of the party alleged to have committed the fraud are particularly well known”.

Appealing to direct claims

Weeks after Farro proposed the sale of LMEG to a private equity firm by filing his first lawsuit in which he first challenged its stake in Schochet, which was acquired in 2011, LMEG, Wilhelm and Schochet filed a separate Lawsuit against Farro. The lawsuit revolved around alleged violations by Farro on two separate occasions of verbal agreements and fiduciary duties to sell the business to private equity firms TZP Capital Partners and Ridgemont Equity Partners.

In the Direct Claims Appeal, LMEG Wireless, LLC v Farro, ___ AD3d ___, 2021 NY Slip Op 00164 [2d Dept Jan 13., 2021]the court ruled:

  • The claims of LMEG, Wilhelm and Schochet for violating verbal agreements to sell LMEG to private equity companies of third parties were not enforceable according to the so-called “doctrine of certainty”. “Contrary to [Farro’s] Claim, “the Court wrote,” an agreement to accept a fair offer is not necessarily unenforceable; Instead, a party can agree to be bound by a contract even if a significant deadline remains open. “and here:”[t]There were objective criteria here, e.g. For example, whether an offer has been compared to business value based on an analysis of its financial records to determine whether a particular offer was “appropriate”. “
  • The claims for breach of the fiduciary duty were timely after the limitation period. The Court ruled that while the fiduciary claims “do not plead fraud” and “seek monetary damages, no fair relief,” “still have a three-year statute of limitations,” “most of the actions plaintiffs complain about occurred between December 2014 and March 2016, and the complaint was filed in November 2016, [so] These causes are timely. “
  • The fiduciary breach claims adequately addressed the essential elements, including the fact that Farro “was the manager of LMEG Wireless until he was removed from that position in May 2016. [so] He owed the plaintiffs a fiduciary duty. “
  • The billing claim was sufficient to claim that LMEG, Wilhelm and Schochet “required billing from [Farro] what he did not provide “and that Farro” as the manager of LMEG Wireless “owed them a fiduciary duty during the period in question,” which resulted in legal accountability.

As a result of these holdings, Farro instantly went from plaintiff to defendant. His plea has been fully dismissed and has now been forced to defend itself on multiple fronts, including ten counterclaims in the Farro case, ten direct claims in the LMEG case, and an appraisal The Company recently initiated proceedings to determine the fair value of Farro’s previous stake to determine at the LLC.

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