I love endurance sports, and I work out incessantly. But I don’t watch sports or know much about them. Before hanging out with a group other men, I ask my wife to give me a summary of which local sports teams have recently won a match so I don’t embarrass myself. Results have been mixed. So forgive me if my football analogies are a little off here.

In football, wide receivers have little control over whether they’ll be thrown the ball on any given play. Though they might end up making a big play once the ball is thrown to them, they’re powerless without it in their hands. Even plays that are designed to get them the ball might be impacted by the defense, leaving them high and dry.

Unlike a wide receiver, a court-appointed receiver can exert control over the situation. A receiver is a court-appointed neutral steward of a business. They have independent authority to manage operations, make business decisions, and preserve (or strategically wind down) the business’s assets while litigation grinds forward. In some situations, they’re given limited marching orders from a court, and they must take action that’s within the confines of those orders.

But at other times, they have broad authority to call the shots, including whether to buy or sell company assets, and how to wind down a business.

A recent Pennsylvania Superior Court decision, Toth v. Toth, 324 A.3d 469, offers a detailed look at just how broad authority a receiver can have to protect the assets of a closely held business when feuding co-owners threaten to destroy it from the inside out.

Toth v. Toth: When a family business leads to a family war

Toth concerned a battle over Learning Sciences International, LLC (“LSI”), a company founded by Michael Toth in 2002. The company provides solutions for professional development and performance management in education. Over the years, Michael gave ownership interests in LSI to his brother Bryan, his father Eugene, and his mother Marie. Michael and Bryan each held 50% in voting rights and 25% in ownership rights, while Eugene and Marie held only 25% in ownership rights.

In late 2020, their relationships deteriorated dramatically. By January 2021, Bryan, Eugene, and Marie executed a series of documents that they believed amended LSI’s operating agreement to change the company’s headquarters to Florida, remove Michael as CEO, and strip him of his management role. They based this attempted coup on a technical reading of the voting provisions in the original operating agreement.

There was just one problem. They were wrong.

Michael and his wife Linawati sued them in December 2021 seeking a declaratory judgment and injunctive relief, among other claims. The trial court granted their motion for partial summary judgment, declaring that LSI’s 2012 operating agreement remained in full force and effect and that the 2021 agreement was void and without legal authority. Because only Michael and Bryan held voting interests, and Michael didn’t consent to the 2021 agreement and other related documents, Bryan, Eugene, and Marie’s 2021 documents were dead on arrival.

In April 2022, the trial court ordered dissolution of LSI based in part on the findings of fact and conclusions of law made by an interim custodian, John R. McGinley, Jr., concerning whether Michael, Bryan, Eugene, and Marie were deadlocked in managing LSI’s affairs “and/or whether it [was] reasonably practicable for [them] to carry on the business”—that is, whether the business should continue to function or whether it should be dissolved.

McGinley’s findings were damning: Michael and Bryan were deadlocked on fundamental business decisions, and mediation and settlement had failed. Employee turnover was accelerating. Key business relationships were fracturing. Without the court’s intervention, there would be no company left to litigate over.

The receiver takes the field

In July 2022, the trial court appointed James Chiafullo, a Pittsburgh-based attorney, as a receiver with broad authority to manage LSI’s day-to-day operations while overseeing its dissolution, including paying obligations as they came due, preserving dwindling assets, and operating the business pending further orders from the court. When Chiafullo recommended selling textbooks and contracts for conference rooms at Disneyland, and licensing certain LSI’s proprietary software, the trial court approved those transactions.

Bryan, Eugene, and Marie argued strenuously against Chiafullo’s appointment. They claimed it violated the Superior Court’s own earlier stay of the dissolution order and that there was no emergency justifying the appointment. They also argued that Chiafullo lacked the authority to approve asset sales, challenging the trial court’s conclusions on appeal.

The Superior Court saw it differently and agreed with the trial court that Chiafullo made calculated and prudent business decisions, and did so within the authority the trial court gave him to operate LSI. It also agreed with the trial court that there were several critical factors supporting Chiafullo’s appointment and scope of authority:

Dissension among members

The conflict between Michael and his family members was irreparable. The court noted that there was simply no way to reconcile their interests in preserving LSI while litigation proceeded. Michael, who controlled 50% of the voting power, would immediately resist any action taken by Bryan.

Risk of waste and asset dissipation

LSI was hemorrhaging value. Without neutral management, critical intellectual property was at risk. Key employees were leaving. Business contracts were evaporating. The company was drifting toward de facto dissolution even while the appeal stayed the formal dissolution order.

Competing visions of management

Michael had allegedly begun taking steps to form a competing company, making business decisions that benefited his new venture rather than LSI. Whether or not intentional, LSI was being starved of resources and attention. In the Superior Court’s view, a neutral party was essential to ensure the company’s assets were preserved—not liquidated to benefit one side or the other.

The court emphasized that allowing either Michael or Bryan to manage LSI during the appeal would only guarantee further divisiveness and conflict. Thus, appointing Chiafullo was the logical solution.

The court in Toth pushes the envelope on receivers’ powers and responsibilities

It’s not uncommon for a Pennsylvania court to appoint a receiver to manage a company’s affairs when a company and its assets are likely to be mismanaged or wasted, such as when there are significant allegations of fraud or other financial shenanigans, or disputes among owners.

But what’s notable about the Toth case is how the trial court used receivers. Appointing McGinley, Jr., to determine whether LSI could operate in a reasonably practical way for the purpose of determining whether it should be dissolved was unusual—frankly, I’ve never seen anything like that.

However, appointing Chiafullo and giving him approval to sell off or license LSI’s assets as it was being dissolved is even more unusual. I doubt most business owners and judges would agree that a receiver’s responsibility to “manage” a business includes the authority to sell or license significant assets while dissolving the business.

Given the responsibilities and duties the Toth court gave McGinley, Jr., and Chiafullo, Pennsylvania business owners should expect that if push came to shove in a dispute with a co-owner over their business, a Pennsylvania court could appoint a receiver and task them with doing one or more of the following.

Preserving asset value

As in Toth, receivers can assume operational control to prevent reputational harm, low employee morale, waste, dissipation, or strategic underperformance of company assets. This is particularly valuable in situations like in Toth where co-owners have competing incentives or where one owner might benefit from the company’s decline or demise.

Keeping options open

Rather than immediately liquidating a business, receivers can continue operating the business, maintaining customer relationships, meeting contractual obligations, and, overall, keeping the company viable. This preserves optionality so co-owners and courts can later decide whether to pursue a dissolution, sale, or restructuring from a position of strength rather than desperation.

Generating liquidity and revenue

In Toth, Chiafullo made the controversial but ultimately sound decision to license LSI’s proprietary software to Michael’s new company, generating revenue while the company remained largely inactive. This preserved capital for all stakeholders during the uncertain period during the appeal process.

Overseeing contested transactions

When co-owners disagree about major business decisions, such as whether to take on debt, pursue new contracts, or sell assets, a receiver can make these decisions neutrally with court oversight and approval, free from the bad blood or conflicts of interest that paralyze co-owner decision-making.

Facilitating buyouts and reorganizations

Receivers can manage the process of one co-owner buying out another, ensuring fair valuation, neutral transaction oversight, and compliance with court-ordered restructuring plans.

Managing financial misconduct and fraud prevention

When fraud or self-dealing allegations arise, a receiver can provide neutral oversight of the company’s finances, organize records, and investigate irregularities while preventing one potentially culpable co-owner from controlling bank accounts or destroying evidence.

Resolving creditor, customer, and third-party disputes

A receiver can resolve lawsuits or disputes the company faces with creditors, customers, or tenants—settling claims in the company’s best interest rather than leaving them contested while co-owners bicker about settlement strategy. This prevents additional liability from accumulating during litigation.

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In football, receivers react—they’re never in control. But the Pa. Superior Court in Toth has put business owners on notice that Pennsylvania courts may allow their receivers to run plays, including a “hail mary.”

When business owners are deadlocked with their co-owners, they shouldn’t be surprised when a court appoints a receiver to do more than simply keep the business operating. Courts may authorize a receiver to step into the shoes of the co-owners to make “bet the company” decisions that could increase the value of the business—or destroy it.

My sense is that it’s mostly other lawyers reading this blog – either to get some insight on one of their cases or to check me out when I’m one of their adversaries. But this post is for the non-lawyers out there who find themselves involved in complex business litigation.

We represent closely held businesses and business owners in high-stakes litigation. Many of our clients do not have a general counsel to help align litigation decisions with broader business goals. To fill the gap, we proactively advise clients on the risks, rewards, and costs of each various approaches in litigation.

We have watched hundreds of clients ingest this information, process it and make decisions based on it. Some clients thrive in the uncertainty associated with litigation; others struggle with it. The difference? It often comes down to how they make decisions. Here are three habits of the most effective decision-makers we’ve worked with.

  • Figure Out What a “Win” Looks Like, Do It Early and Do It with Both Feet on Planet Earth

The best litigation decision makers take time to articulate what success looks like. This may seem obvious but it is often overlooked. One of our first questions to a client involved in litigation is “what do you want to happen here?” Do you want money? Do you want a problem gone? Do you want to send a message to discourage similar future claims? Think about that goal in the context of your entire business and stay focused on that goal throughout the litigation. Get specific with your goal.

And then get realistic. Talk with counsel at the beginning and throughout the litigation about what is achievable and the odds of achieving a given result. In a perfect world, we would always be in a position to tell our clients we have great claims or strong defenses that can be litigated at minimal cost. The real world is less perfect. We often talk about good claims but with concerns about collecting a judgment from a defendant. There are many situations where we have strong defenses that will cost a significant amount to litigate. The reality is that in a large majority of business related litigation, you won’t be “made whole.” You usually have to cover your own legal fees, you can’t get compensation for your and you staff’s time in dealing with us and there is usually some point in the litigation where you will accept or you are willing to pay money to eliminate the ongoing risk of litigation. The best decision makers factor all that into their definition of a “win.”

Once a realistic goal is established, our best decision makers evaluate each decision based on whether it advances or distracts from the goal.

  • Think In Terms of Probabilities – Make “Investment” Decisions

Nothing is certain in life, and nothing is certain in litigation. There is no way around it – litigation can be risky. For that reason, the clients who display the best litigation decision making are those who think in terms of probabilities. They understand that no attorney that is being honest with them can tell them what is going to happen with certainly – there is no such thing in business litigation. The best decisionmakers find ways to get comfortable with uncertainty. They think in terms of the odds of success on a particular motion or a particular strategy.

Two clients in recent memory were particularly adept and managing litigation risk. One had a background in data analytics and the other was a bond trader. Every time we came to them with a decision to be made, they employed some version of the same approach. We would work with them to define the possible outcomes, determine the probably of each outcome and the cost of implementing a particular strategy. They viewed each decision like an investment decision – how much does it cost, what’s the potential upside and downside, and what are the odds of each?  If the odds of success and the magnitude of the outcome met their criteria, they went ahead; if they did not, we would try a different approach. We never saw them, but I am sure they had elaborate spreadsheets and decision trees.

You do not need spreadsheets or an actuary, but you do need to think in terms of odds, not certainties.

  • Listen to Your Lawyer and Then Challenge Their Approach

The best client decision makers we have seen listen to our advice and then push us on it. It may seem counterintuitive, but we welcome clients challenging our advice. When a client is questioning me on a strategy decision it is usually a good thing. I do not even mind clients using the wisdom of ChatGPT to test my analysis or approach.

On one of the first big cases I handled on my own, I was explaining to a client how the statute of limitations might apply to a portion of their claim and that laches might bar another. The issue was germane to settlement discussions. He was upset about the likely bar and the lower demand I was suggesting. We talked about the issue at length and, before long, we were talking about the difference between law and equity courts and their merger. We arrived at the decision to make a higher demand, somewhere between what I was suggesting and what he initially proposed. (If you are reading this unnamed client and now good friend, I am curious if you remember this discussion). This was a more involved discussion than I expected but I left the discussion knowing that the client had a good handle on what was going on, had fully considered the issues and made a fully informed decision. 

Ultimately, the client makes the big calls and has to live with the results. A client that is pushing us on strategy is one who is taking their vote and the consequences that can stem from it seriously. This is the kind of engaged client you want to be.

  • The Calm that Comes with Good Decision Making

Making good decisions leads to better outcomes for business owners involved in complex litigation. No surprise there, and that alone is why you should be using these strategies. But there is another benefit to a good decision making process – the calm that comes with knowing you made a good decision even if the outcome is suboptimal.

In litigation (and in business more generally), you never have complete information or complete certainly. Even well-considered decisions sometimes yield bad outcomes. This can be a difficult pill to swallow financially and emotionally. But our best decision makers consistently achieve more calm than our less-than-best decision makers.

The best decision makers employ the strategies here, make the best decision possible with the information available and move forward. If things don’t turn out as hoped, they don’t second guess the decision nor are they crushed. They are confident that their robust decision making process factored in a potentially bad outcome. They understand that a bad outcome does not mean they made a bad decision.

Some attorneys believe that a shareholder seeking books and records from the corporate entity they own shares of is an effective use of time and resources. I’m not one of them.

Traditionally in a books and records action, a shareholder will argue that they are entitled under the law of the state where a corporate entity was incorporated to access the entity’s books and records. (In Pennsylvania, that’d be 15 Pa.C.S. § 1508 for corporations and § 8850 for LLCs). Often, they’re making a request because they’re investigating a potential breach of fiduciary duty claim.

But rarely do entities respond to books and records requests. And even when they do—surprise!—their responses are usually woefully inaccurate.

Continue Reading CLOSE, BUT NO BOOKS, RECORDS, OR CIGAR: THE ROLE OF STATUS AND LOCATION WHEN SEEKING BOOKS AND RECORDS IN PA.

In Pennsylvania, Manufactured Deadlocks are Unlikely to Trigger Judicial Dissolution

In disputes among the owners of a closely held company, involuntary judicial dissolution is the nuclear option.

When a group of shareholders successfully petitions a court to dissolve and then liquidate their company because the owners reached an impasse they could not overcome, there will be no more company to speak of. While that might have been the intended outcome for the petitioning shareholders, the fire-sale price the company’s assets will probably fetch on the open market is an unpleasant accompanying pill they’ll have to swallow.

Despite the risk of a fire sale, in many shareholder disputes at least one party will threaten to seek judicial dissolution of their company. They argue that dissolution is required because of some irreconcilable difference that makes it impossible to continue operating the company.

Continue Reading AIN’T NOTHING LIKE THE REAL THING

When shareholders of a company believe the leaders of the company have breached their fiduciary duties to it, they can bring a lawsuit against those leaders in one of two ways. Shareholders can bring the suit in their own names (a direct suit), or they can bring it on behalf of the company if the company failed to bring claims against the leaders on its own (a derivative suit). If the injuries the shareholders are alleging were only suffered by the company, they cannot move forward with any direct claims.

When bringing a derivative claim in federal court, the plaintiffs must comply with Federal Rule of Civil Procedure 23.1. The rule, besides explaining what a derivative complaint must include, prevents a plaintiff from bringing a derivative lawsuit if the plaintiff “does not fairly and adequately represent the interests of shareholders or members who are similarly situated in enforcing the right of the corporation or association.”

Continue Reading PENNSYLVANIA’S ALTERNATIVE PATH FOR MINORITY SHAREHOLDERS WHO CAN’T PASS FEDERAL RULE OF CIVIL PROCEDURE 23.1’S “ADEQUATE REPRESENTATION” TEST FOR DERIVATIVE CLAIMS

There is perhaps no richer vein of literary gold than conflict between fathers and sons. Hamlet, Robinson Crusoe, multiple characters drawn by Charles Dickens, not to mention the mother of all family contretemps, Oedipus Rex, touch on this deeply human power struggle.

One such conflict was the backdrop for the Pennsylvania Superior Court’s recent decision in MBC Development, LP v. James W. Miller, 281 A.3d 332 (Pa. Super. Ct. 2022). The decision serves as an important reminder that courts overwhelmingly favor arbitration as a means of dispute resolution, and gives us an opportunity to think about the virtues of arbitration provisions in organizational documents like limited partnership and operating agreements.

Continue Reading A FATHER-SON FIGHT HELPS DEFINE THE SCOPE OF ARBITRATION PROVISIONS IN CLOSELY HELD COMPANY DISPUTES

Image a home buyer finally finds their dream house. There’s just one problem.

During their home inspection, they discover the foundation is cracked. But they buy the house anyway, fully aware of the issues with the foundation.

In the sale agreement, there’s a clause stating the house’s foundation is flawless.

Should the seller be liable to the buyer for breaching the sale agreement, even though the buyer knew the foundation was not flawless at the time they signed the agreement?

In other words, and to have some fun with legal terminology, should the buyer be able to “sandbag” the seller?

The unsatisfying answer is that it probably depends on if the sale agreement addresses sandbagging.

Continue Reading SELLERS BEWARE: SANDBAGGERS WELCOMED IN PENNSYLVANIA & DELAWARE

Over the past few years, the term “receipts” has entered the pop culture lexicon to mean something broader than its traditional definition of a document that acknowledges either the receiving of a product or service, or money in exchange for a product or service.

These days, if you hear “receipts” mentioned in a song, television show, or movie, or see it on social media, there’s a good chance it is being used to mean proof that something is how a speaker claims it to be. For example, someone might claim to have the “receipts” that another person cheated on their spouse—perhaps in the form of screenshots of now-deleted social media posts or direct messages.

Well, when it comes to proving ownership of a closely held business, receipts—in the trendiest sense of the word—are a good thing. In fact, receipts are required.

Continue Reading CLAIMING OWNERSHIP OF A COMPANY? YOU BETTER HAVE THE RECEIPTS.

Business partnerships are built on the trust and loyalty of their participants. Without mutual coordination and honesty among all involved, tensions will inevitably arise that could derail a partnership’s success. The resulting fallout could be costly in several ways, as lost profits, ruined business opportunities, protracted litigation, and busted personal relationships would surely follow.

Given the dark clouds that quickly form overhead as tensions increase among partners in a partnership, one would assume it would make good business sense, if not common sense, for those partners to look out for each other.

It certainly would make legal sense to do so because partners in a partnership, and, generally speaking, co-owners of all businesses, will typically be deemed to owe a fiduciary duty to each other. At its core, a fiduciary duty is the legal duty of a fiduciary (i.e., one business owner) to act at all times in the best interests of the beneficiary (i.e., the other owner(s) of a business). This requires partners in a partnership to act loyally toward each other, with care, with good faith and fair dealing, and to disclose material information to each other.

Continue Reading PA. SUPERIOR COURT CHANNELS SPIDER-MAN: RULES THAT IN BUSINESS PARTNERSHIPS, GREAT POWER COMES WITH GREAT RESPONSIBILITY (INCLUDING FIDUCIARY DUTIES TO OTHER PARTNERS)

For some owners of closely held companies, installing a board of directors may seem more painful than cutting off one of their pinkie fingers.

They’d have to give up control of their business.

They’d have to share confidential information.

They’d have to waste time on the formalities of having a board.

They’d have to waste money on compensating directors.

Putting aside for a moment whether these concerns are valid (they’re not), for many owners of closely held companies, installing a board could be one of the best things they do for their companies—and their sanity.

Continue Reading PREPARE TO BE BOARDED! YET ANOTHER REASON CLOSELY HELD COMPANIES SHOULD CONSIDER INSTALLING BOARDS OF DIRECTORS