        SUPREME COURT OF THE STATE OF NEW YORK
           Appellate Division, Fourth Judicial Department

471
CA 15-01160
PRESENT: PERADOTTO, J.P., CARNI, LINDLEY, CURRAN, AND TROUTMAN, JJ.


EMPIRE MEDICAL SYSTEMS, LLC, PLAINTIFF-APPELLANT,

                    V                               MEMORANDUM AND ORDER

JERAMY BERNARDONI, DEFENDANT-RESPONDENT.
-------------------------------------------------
JERAMY BERNARDONI, THIRD-PARTY
PLAINTIFF-RESPONDENT,

                    V

JASON GOTHAM AND BLAKE BEDNARZ, THIRD-PARTY
DEFENDANTS-APPELLANTS.


WOODS OVIATT GILMAN LLP, ROCHESTER (WARREN B. ROSENBAUM OF COUNSEL),
FOR PLAINTIFF-APPELLANT AND THIRD-PARTY DEFENDANTS-APPELLANTS.

PHILLIPS LYTLE LLP, BUFFALO (ALAN J. BOZER OF COUNSEL), FOR
DEFENDANT-RESPONDENT AND THIRD-PARTY PLAINTIFF-RESPONDENT.


     Appeal from a judgment (denominated order) of the Supreme Court,
Ontario County (Matthew A. Rosenbaum, J.), entered December 18, 2014.
The judgment, insofar as appealed from, provided that the parties may
raise the issue of certain distributions with the appraiser.

     It is hereby ORDERED that the judgment insofar as appealed from
is unanimously reversed on the law without costs, and the following
language in the fifth decretal paragraph is vacated: “and as the
Operating Agreement contains certain provisions relating to
distributions, the parties may raise the issue of any such
distributions as provided in the Operating Agreement with such
appraiser.”

     Memorandum: Defendant-third-party plaintiff (defendant), a one-
third owner and member of plaintiff, Empire Medical Systems, LLC, had
his membership interest terminated by consent of third-party
defendants, the remaining two members and owners of the company.
Defendant disputed the termination. Plaintiff commenced this action
seeking a declaration that the termination was proper and that
defendant was compelled to sell his membership interest to the
remaining members pursuant to plaintiff’s operating agreement.
Plaintiff further requested that, as provided by that agreement, the
matter be submitted to an appraiser to calculate plaintiff’s fair
market value and the value of defendant’s membership interest therein.
                                 -2-                           471
                                                         CA 15-01160

Defendant interposed a counterclaim seeking a declaration that the
termination violated the operating agreement. Thereafter, plaintiff
filed a motion for summary judgment seeking the relief set forth in
its complaint, and defendant filed a cross motion for summary judgment
both dismissing the complaint and granting his counterclaim.

     Supreme Court issued a decision in which it determined that the
termination of defendant’s membership interest was proper, that
defendant was obligated to sell his membership interest pursuant to
the operating agreement, and that an appraiser should be selected in
order to calculate the fair market value of defendant’s membership
interest. As the prevailing party, plaintiff submitted a “proposed
order.” Thereafter, defendant, for the first time, alleged that
plaintiff owed him various distributions of company assets, and
responded with a “proposed counter-order” directing the parties to
discuss the issue of distribution payments with the appraiser. Over
plaintiff’s objection, the court’s judgment permitted the parties to
“raise the issue of any such distributions as provided by the
[o]perating [a]greement with such appraiser.”

      Initially, we agree with plaintiff that the issue whether
plaintiff owed defendant for unpaid distributions was not raised by
defendant in his pleadings or during motion practice, and that
plaintiff had no opportunity to be heard on the issue. We therefore
conclude that the court erred in considering defendant’s claim when
formulating its judgment (see generally Datwani v Datwani, 102 AD3d
616, 616; Quizhpe v Luvin Constr., 70 AD3d 912, 914; Destiny USA
Holdings, LLC v Citigroup Global Mkts. Realty Corp., 69 AD3d 212, 223-
224).

     Additionally, we note that, although the appraiser may consider
plaintiff’s debts when determining its fair market value, the
operating agreement does not empower the appraiser to decide the
threshold validity of defendant’s claim, i.e., whether he is in fact
owed for unpaid distributions. “Although there is no question that it
is the appraiser who must determine which of the myriad factors are
relevant to a particular valuation,” it is for the court to decide the
“threshold legal interpretation of the scope of the very subject of
the appraisal” (New York Overnight Partners v Gordon, 88 NY2d 716,
721). Further, “precedents firmly establish that[,] in addition to
construing disputed terms [of an agreement] in advance of an appraisal
proceeding, it is also within the province of the court to identify
those factors the [agreement] expressly designates or excludes in the
valuation process” (id.; see Goldstein v 12 Broadway Realty LLC, 89
AD3d 590, 591). Having failed to decide the legitimacy of defendant’s
claim for distributions, largely owing to defendant’s own failure to
raise the contention prior to the court’s decision and, in the absence
of a provision in the operating agreement permitting the appraiser to
decide such a dispute, the court erred in permitting the appraiser to
consider the unestablished allegation that plaintiff owes defendant
for unpaid distributions.
Entered: July 1, 2016                           Frances E. Cafarell
                                                Clerk of the Court
