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Breaking Up Is Hard To Do: Court Denies Motion To Dismiss Action For Dissolution Of An LLC

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  • Posted on: Jan 15 2018

Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court sitting in the judicial district in which the office of the company is located may dissolve the company “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702. (This Blog addressed Section 702 here and here.)

To successfully petition for the dissolution of a limited liability company under LLCL § 702, the petitioning member must demonstrate the following: 1) the management of the company is unable or unwilling to reasonably permit or promote the stated purpose of the company to be realized or achieved; or 2) continuing the company is financially unfeasible. Matter of 1545 Ocean Avenue, LLC v. Crown Royal Ventures, LLC, 72 A.D.3d 121 (2d Dept. 2010); Doyle v. Icon, LLC, 103 A.D.3d 440 (1st Dept. 2013). Therefore, where the purposes for which the LLC was formed are being achieved and its finances remain feasible, dissolution pursuant to LLCL § 702 will be denied. Matter of Eight of Swords, LLC, 96 A.D. 3d 839, 840 (2d Dept. 2012).

Disputes between members, by themselves, are generally insufficient to dissolve an LLC that operates in a manner within the contemplation of its purposes and objectives as defined in its articles of organization and/or operating agreement. See e.g., Matter of Natanel v. Cohen, 43 Misc.3d 1217(A) (Sup. Ct. Kings Co. 2014). It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution be considered an available remedy to the petitioner. Matter of 1545 Ocean, 72 A.D.3d at 130-132.

(Last year, this Blog wrote about Matter of 47th Rd. LLC, 54 Misc. 3d 1217[A], 2017 NY Slip Op. 50196(U) (Sup. Ct. Queens County Feb. 16, 2017), in which the discord between the partners was so severe, it became violent, thereby persuading the court that dissolution was appropriate [here]).

Today, this Blog revisits judicial dissolution under LLCL § 702 by discussing a decision coming out of the Supreme Court, New York County, wherein the Court held that questions of fact precluded the dismissal of an application to dissolve an LLC. Advanced 23, LLC v. Chambers House Partners, LLC, 2017 NY Slip Op. 32663(U) (Dec. 15, 2017) (here).

Advanced 23, LLC v. Chambers House Partners, LLC

Background

Respondent Herbert Margrill (“Herbert”) and Respondent Anita Margrill (“Anita”) (collectively, “Respondents”) and Ephraim Resnick and Hisako Resnick (collectively, the “Resnicks”) purchased land and a building in lower Manhattan in mid-January 1982 (the “Building”). The Building contained four residential units and one commercial unit. On the same day, the Respondents and the Resnicks conveyed the Building to Chambers House Partners, a general partnership. The Respondents each held a 25% membership share in the Building and the Resnicks collectively held 50% of the membership shares. In early November 2007, Chambers House Partners conveyed the Building to Chambers House Partners, LLC (“CHP”); the Respondents and the Resnicks each maintained their membership shares in the Building. About three months later, co-Petitioner Advanced 23, LLC (“Advanced”) purchased the Resnicks’ 50% membership share in CHP.

Shortly thereafter, co-Petitioner David Shusterman (“Shusterman”) and Herbert began to manage CHP as Co-Managers pursuant to an Amended and Restated Operating Agreement (“Operating Agreement”). As Co-Managers, Herbert and Shusterman were responsible for making CHP’s business decisions, most of which required members’ unanimous consent. Although management under the Operating Agreement was to occur “on an equal basis” Shusterman largely ran the LLC.

In accordance with the Operating Agreement, CHP established a bank account at Capital One Bank, N.A. (“Capital One Account”). Rent checks from the Building’s tenants were to be deposited into this account, and payments of expenses were to be withdrawn from it.

In July 2015, Anita allegedly began to harass Shusterman and his companion, and, on at least one occasion, entered Shusterman’s apartment without his permission. There was also an alleged physical altercation between Shusterman and Anita. Because of the unresolved tensions, Herbert appointed an attorney on September 17, 2015 to negotiate with Shusterman on his behalf regarding Shusterman’s obligations under the Operating Agreement.

In mid-November 2015, the Respondents created a separate bank account as trustees for CHP at TD Bank (“TD Bank Account”) and deposited the November rent checks from CHP, in violation of the Operating Agreement. Thereafter, Herbert wrote Shusterman, informing him that the account had been created “in order to ensure the timely and full payment of all [CHP] obligations” because Shusterman’s “conduct has seriously interfered with the operation of [CHP].”

On December 3, 2015, the Respondents transferred money from the Capital One Account into the TD Bank Account without Shusterman’s authorization. The Petitioners maintained that the Respondents either forged Shusterman’s name on the check, or they used one of the blank checks that Herbert had Shusterman sign, which was supposed to be used to pay CHP’s expenses.

Based upon these and other actions, the Petitioners filed an action seeking: (1) a judicial decree dissolving CHP pursuant to LLCL § 702, directing that its real property be sold, and that CHP be liquidated; (2) an accounting of all transactions from the TD Bank Account and any other transactions the Respondents unilaterally entered into with CHP funds without Shusterman’s authorization or consent; and (3) injunctive relief to maintain the status quo and to prevent irreparable harm to CHP’s business during the pendency of the proceeding.

The Respondents opposed the petition, arguing that if it was no longer reasonably practicable to carry on CHP’s business it was due to Shusterman’s conduct. They also argued that since Shusterman became Co-Manager, he failed to fulfill his managerial duties, and that Herbert had been the only one actively managing the Building. They contended that Shusterman’s sole role as Co-Manager was limited to negotiating a lease, proposing house rules, and co-signing checks. As such, they maintained that the creation of the TD Bank Account was not a breach of the Operating Agreement and their actions were necessary and justified because Shusterman improperly interfered with CHP’s operations.

The Court’s Ruling

The Court found that the “Petitioners have made a prima facie showing that it is no longer reasonably practicable for CHP to continue functioning in accordance with its Operating Agreement to achieve its stated business purpose.” In so ruling, the Court explained:

The Operating Agreement provides that virtually any material business decision requires the unanimous consent or the majority vote of either its Members or Co-Managers, however the relationship between the parties has degraded to such an extent that they are no longer on speaking terms (Respondents retained an attorney to deal with Shusterman directly) and they have been unable to cooperate to make business decisions regarding a tenant’s inability to pay rent or refinancing their mortgage.

The Court next addressed whether CHP could continue to operate notwithstanding the disagreements of the Co-Managers:

Here, there is evidence showing that CHP cannot continue to function because of the disagreements and inability of the parties to cooperate. Even though Operating Agreement ¶ 13.11 authorizes and requires that any dispute arising out of the Operating Agreement and exceeding $25,000 to be resolved through arbitration, neither party has availed themselves of this provision to resolve any of their disputes. Further, the Operating Agreement does not provide any means to resolve disputes that do not meet the amount in controversy requirement of the arbitration clause.

Notwithstanding the finding that CHP could not operate because of the disagreement, the Court nevertheless found issues of fact precluding dissolution of CHP:

However, Respondents have raised issues of fact to preclude a summary determination on the issue of judicial dissolution. Respondents allege that any ineffectiveness in CHP’s management and operation is due to the intentional acts of Shusterman in his attempt to force dissolution and gain control of the Building. Respondents argue that Shusterman breached his material obligation to manage CHP and that he was significantly interfering with CHP’s operation by either refusing or causing a significant delay signing the checks to pay for CHP’s expenses and operating costs and routinely ignoring Herbert’s requests for managerial meetings.

The Respondents’ allegations regarding Shusterman’s conduct raise triable issues of fact, and if the trier of fact credits Respondents’ allegations, judicial dissolution may not be warranted.

Based on the parties’ submissions, I find that a material issue of fact exists as to whether Shusterman breached his duties and obligations under the Operating Agreement to force dissolution.

Citation omitted.

Accordingly, the Court ordered an evidentiary hearing to resolve the issue of fact.

In a companion decision (here), the Court denied the Respondent’s motion to dismiss the petition, rejecting without discussion the Respondent’s argument that judicial dissolution under LLC Law § 702 was unavailable based on a provision in the Operating Agreement stating that the LLC would “be dissolved only upon the unanimous determination of the Members to dissolve.”

Takeaway

While deadlock between managers is not an independent basis for judicial dissolution under LLCL§702, it may be sufficient if the discord contravenes the terms of the operating agreement and impairs the continued ability of the company to function in that context. In re 1545 Ocean Ave., LLC, 72 A.D.3d at 129. In Advanced 23, though finding that there was discord between the Co-Managers, the Court could not make such a finding.

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