Under their 2013 mediated divorce settlement agreement, these ex-spouses agreed to continue to jointly own and operate their distribution business. The agreement reported that their “solid working relationship with a high level of trust in one another’s skills” made “co-ownership a viable solution.” The ex-husband was to receive 30% of the joint business’s profit going forward, and the ex-wife would retain the remaining 70%.
Five years later, the ex-wife commenced this action alleging that after the divorce, the ex-husband began distributing rival products, poached a number of associates from the joint business, ceased recruiting new associates for the joint business, and assisted his new fiancée in establishing her own competing business — all to the detriment of the parties’ joint business. Based on these allegations, the ex-wife claimed that the joint business was no longer viable. She sought, in effect, to terminate the business and obtain such other relief to which she may be entitled.
Before serving his answer, the ex-husband moved to dismiss the ex-wife’s complaint. Richmond County Supreme Court Acting Justice Wayne M. Ozzi granted that motion on the ground that the complaint failed to state a cause of action. The ex-wife appealed.
In its June 10, 2020 decision in Kinnear v. Cefoli, the Second Department reversed. At this juncture, the lower court was required to accept the facts as alleged in the complaint as true, and accord the ex-wife the benefit of every possible favorable inference. The court’s role was to determine only whether the facts as alleged fit within any cognizable legal theory. The Second Department held that it did.
For me, the import of this decision was not the procedural matter. Rather, I was drawn to consider the mediated agreement in the first place. While I have seen jointly-owned businesses continue after the divorce, I cannot recall ever seeing one survive long term, especially after there is a new fiancée in the picture; nor one with unequal ownership or division of profits.
Consider what should be included in such an agreement; perhaps first and foremost a way out, perhaps on request of either party, specifying who gets what, restrictive covenants, etc. Breaches of duty and pre-conclusion diversion of business opportunities, then, can be left to claims only for monetary damages (with equitable relief securing the business-termination rights and obligations of the parties).
However, the idea of drafting the responsibilities and rewards of each of the parties in their continuing business is daunting. To a certain extent, such is nothing more than a “simple” partnership agreement, as well as employment agreements for both. Similarly challenging is the sharing the unequal sharing of “profits,” and defining how those will actually be determined. Can profits be reduced in order to fund new business opportunities, new equipment, etc.?
Drafting and planning for the post-divorce continuation of a marital business calls for each party to have two attorneys; the family law practitioner and the small business practitioner. Only then will the parties be able to be taken through the mountain of “what if” questions necessary to determine the wisdom of jointly continuing the business and to lay out the ground rules.
Adelola Sheralynn Dow, of Staten Island, represented the ex-wife. James R. Lambert, of Staten Island, represented the ex-husband.