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Court Finds that Allegedly Ousted Member of LLC Has Standing to Seek Dissolution

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  • Posted on: Aug 22 2018

Under Section 702 of New York’s Limited Liability Company Law (“LLCL”), a court may dissolve a 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, here and here.)

To successfully petition for the dissolution of a limited liability company (“LLC”) 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.

The foregoing principles are predicated upon a dispute between members of an LLC. What happens when the matter involves, among other things, a dispute over a litigant’s membership in the LLC? Does that party have standing to pursue the dissolution? Justice O. Peter Sherwood of the Supreme Court, New York County, Commercial Division, recently addressed this question in Matter of Goyal v. Vintage India NYC, LLC, 2018 N.Y. Slip Op. 31926(U) (Sup. Ct., N.Y. County Aug. 7, 2018) (here).

Matter of Goyal v. Vintage India NYC, LLC

Background

Like many business divorce cases, Goyal arose from the breakdown of the relationship between petitioner, Prashant Goyal (“Goyal”), a 50% member of Vintage India NYC, LLC (“Vintage India”), and respondent, Lynn Keller (“Keller”), the other 50% member of the company. Goyal sought dissolution of Vintage India pursuant to LLCL §§ 702-03.

Vintage India operated a clothing/accessories store with an Indian theme. In November 2014, Goyal and Keller decided to work together. Keller invested $200,000 in the company; Goyal contributed sweat equity and his knowledge and experience in the industry. In forming the company, the parties did not execute an operating agreement.

By February 2017, the relationship between Keller and Goyal deteriorated beyond repair, with Keller allegedly threatening physical harm to Goyal if he did “not give her [his] percentage of the business.” In March 2017, Goyal claimed to have found large withdrawals from the company’s account in Keller’s name, despite the company being in arrears to its landlord. Later that month, Keller purported to hold a members meeting in which she ousted Goyal as a member of Vintage India. Keller maintained that Goyal was removed for cause. Goyal claimed that Keller was looting the company.

Goyal filed suit seeking: 1) dissolution pursuant to LLCL § 702; 2) a temporary receivership to oversee the assets of Vintage India; 3) access to financial records; and 4) an injunction preventing Keller from transacting business for Vintage India.

Vintage India moved to dismiss the petition. Among other things, Vintage India argued that Goyal lacked standing to sue, arguing that since Goyal was removed from the company, he no longer had a membership interest in Vintage India, as his interest did not vest. As such, Goyal was barred from the relief he sought. The company also argued that dissolution was unnecessary, as Vintage India is a going concern, and a viable entity.

In response, Goyal noted that since the issue in dispute pertained to the validity of his ouster, it was premature to rule that he lacked standing to bring his petition. In particular, Goyal argued that the vote at the members meeting could not serve to take away his ownership share as it lacked a quorum and was procedurally flawed. At most, if done properly, a majority could have removed him from being a managing member, not from membership.

The Court’s Decision

The Court denied the motion. First, as to the purported expulsion of Goyal from the company, the Court noted that without an operating agreement, Keller had no statutory right to remove Goyal from Vintage India:

Vintage India argues the Petitioner has failed to state a claim because he is not a member of Vintage India NYC, LLC. Goyal was, according to respondent, “removed for cause” at the March 2017 meeting. Keller claims Goyal was removed as a member and expelled from the LLC, and that his interest in Vintage India, which was unvested at that time, was revoked at that meeting … The Annotations to the Limited Liability Company Law, however, state that “neither the LLC nor the other members have the statutory right to expel a member from the LLC…. The right to expel a member must be expressly set forth in the operating agreement.”

Citing Man Choi Chiu v. Chiu, 71 A.D.3d 646, 647 (2d Dept. 2010) (“Although Limited Liability Company Law § 701 mentions expulsion of members, there is no statutory provision authorizing the courts to impose such a remedy. Rather, the reference to expulsion of members contemplates the inclusion of such a provision in an operating agreement.”). (Other citations omitted.)

Second, the Court found that Keller could not remove Goyal as the managing member of the company because the LLCL required a majority vote, which Keller “lack[ed] as Goyal owns half of the interest in Vintage India (see LLCL § 414).”

Takeaway

Goyal highlights the importance of having an operating agreement. Not only is an operating agreement important for purposes of dissolution, it is important for purposes of member removal. As the parties in Goyal learned, without an operating agreement, the LLCL (at least according to the annotations to the law) does not permit the removal of a member, even if the removal is for cause.

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