On The Case

Cellino & Barnes’ nasty split sparks novel questions on derivative suits

(Reuters) - I think we all know why the personal injury firm of Cellino & Barnes will be remembered, regardless of the outcome of a nasty breakup proceeding between its two name partners. It’s that jingle, of course. Just try to get it out of your head. The earworm jingle – and the law firm’s ubiquitous advertising on television, radio and billboards in New York – helped make Cellino & Barnes into a juggernaut, generating more than $10 million in profits each year since 2015 for its only two shareholders, Ross Cellino and Stephen Barnes. Last year, even as the two fought over Cellino’s petition in New York State Supreme Court to dissolve the enterprise, Cellino and Barnes each took home nearly $16 million.

In the law books, however, Cellino & Barnes may live on as the caption in a derivative suit that has provoked apparently novel questions about the intersection of shareholder derivative litigation and the dissolution of a privately-held corporation.

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Even those esoteric legal issues stem from the success of Cellino & Barnes’ marketing, an effort that, according to Barnes, has cost the firm more than $150 million (!) over the past decade or so. In 2017, Ross Cellino sent an email to the 30 or so lawyers in the firm’s New York offices, announcing that because he and Barnes disagreed about the direction of the firm, he had just filed a petition to dissolve Cellino & Barnes – a personal corporation owned by him and Barnes as equal shareholders – in New York State Supreme Court in Buffalo. Cellino said he planned to establish a rival firm and would “tap into my personal cash and lines of credit to aggressively market the new firm on TV, radio, print and billboards.” The key to the new firm’s marketing effort, he said in the email, would be the Cellino name.

Barnes’ lawyers at Duke Holzman Photiadis & Gresens filed a motion for a summary judgment denying Cellino’s petition, arguing that dissolution was unwarranted under New York corporate law. Justice Deborah Chimes denied the motion in February 2018. Barnes appealed. Pending an appellate ruling on the dismissal, Justice Chimes has scheduled a January hearing on Cellino’s petition to dissolve Cellino & Barnes.

In the meantime, Cellino & Barnes is operating under orders from Justice Chimes that preclude both Ross Cellino and Stephen Barnes from upending the status quo. As I mentioned, the status quo orders have been sufficiently effective that the firm’s two shareholders made nearly $16 million apiece last year, according to Barnes. Cellino & Barnes is on track for more than $200 million in settlements in 2019, Barnes said in a court filing in June.

In April 2019, Ross Cellino’s wife, Anna Marie Cellino, and the couple’s two daughters established a personal injury law firm to be called Cellino & Cellino. The new firm planned advertising with the tagline, “Call Cellino,” and a phone number ending in 2020, like the Cellino & Barnes number from its celebrated jingle.

Barnes believed that Cellino & Cellino was infringing Cellino & Barnes trademarks and eroding the established firm’s all-important brand. At a hearing in May before Justice Chimes in the dissolution case, his lawyers said they intended to file a separate trademark and unfair business practices suit in federal court against Cellino & Cellino.

Here’s where things turned interesting from the perspective of legal procedure. In June, Barnes filed the federal-court complaint he had threatened. But he did not file it in his name. The complaint was styled as a derivative suit in which Barnes, as a shareholder of Cellino & Barnes, sued in the name of the corporation to enforce Cellino & Barnes trademarks. Barnes’ lawyers argued that it would have been futile to demand that Cellino & Barnes sue Cellino & Cellino because the corporation’s other shareholder, Ross Cellino, was conflicted. Ross Cellino expressly told Barnes in an email in May that he would not authorize any trademark action against his wife’s firm.

Barnes’ suit was an unusual and creative use of the derivative vehicle, which, as you know, is typically wielded by shareholders of public corporations in suits against board members. It’s rare to see derivative claims involving private corporations with two shareholders, not least because these sort of disputes often wind up in arbitration.

Ross Cellino’s lawyers at Hodgson Russ matched Barnes’ procedural ingenuity with an equally intriguing motion to dismiss the suit. The motion asserted that the suit was moot because Ann Marie Cellino and her daughters - who “have no interest in engaging in Mr. Barnes’s frivolous gamesmanship,” - decided to change their firm’s name to The Law Offices of Anna Marie Cellino and would change their phone number and marketing materials. But the Cellinos’ lawyers also asked U.S. District Judge Elizabeth Wolford of Rochester to toss Barnes’ derivative suit because he had failed to meet the pre-suit requirements for shareholders to file claims in the name of a corporation.

Specifically, the Cellinos’ lawyers argued that Barnes was obligated, under the status quo orders in the dissolution proceeding in New York state court, to seek permission from Justice Chimes to act on the corporation’s behalf. Barnes did ask Justice Chimes to enjoin Ross Cellino’s wife and daughters from practicing under the name Cellino & Cellino – a request the state judge denied – but did not request her permission to file a derivative suit in the name of Cellino & Barnes. That, according to the Cellinos’ lawyers, was a fatal oversight.

Barnes’ lawyers responded that the dissolution case was separate from the derivative suit. Justice Chimes’ status quo orders, they said, did not preclude the trademark suit, and they’d demonstrated the futility of demanding action from Ross Cellino.

The judge overseeing the derivative suit, Judge Wolford, agreed with the Cellinos. On Monday, she dismissed Barnes’ suit, ruling that under the unusual circumstances of this case, Barnes was required to seek permission from Justice Chimes, whose role is akin to that of a receiver appointed to oversee corporate affairs. “Barnes could have asked Justice Chimes to authorize the commencement of this litigation,” Judge Wolford wrote. “It is undisputed that he did not do so. Barnes also has not pled (and could not plausibly plead) that it would have been futile to make such a request, because neither Barnes nor this court has any basis to assume what the outcome of such a request would have been.”

The federal-court judge did, however, leave open the possibility that Barnes could revive his derivative claims on behalf of Cellino & Barnes if the state-court judge denied a request to authorize the suit. That prospect is really mind-bending – and apparently novel.

What if Justice Chimes enters an order barring Barnes from bringing trademark claims against Cellino’s wife and daughters? Would that order preclude a derivative suit in the corporation’s name? What if the state court ends up siding with Barnes and dismissing Cellino’s petition to dissolve the firm after the hearing slated to begin in January? Would Barnes still be barred from acting to block Cellino’s family from allegedly infringing Cellino & Barnes trademarks?

Barnes lawyer Christopher Berloth of Duke Holzman said his client isn’t dropping those allegations. “We are currently evaluating the next steps given Judge Wolford’s decision on the procedural status of the case,” he said in an email statement. “Given that the decision did not address the merits of the trademark infringement and unfair competition claims, we remain resolute that the defendant law firm continues to market itself in a blatant attempt to palm off Cellino & Barnes’ good will and unprecedented success.”

Cellino counsel Julia Hilliker of Hodgson Russ said in an email that Anna Marie Cellino and the Cellino daughters will continue to focus on their clients and to practice law under their own last names, as New York’s professional rules require. “We are pleased with Judge Wolford’s decision dismissing the case,” she said.