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Court Holds That Disputes Between Members are Not Sufficient to Dissolve an LLC

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  • Posted on: Jul 6 2018

Family-run businesses are very common in the commercial world. In fact, according to recent studies, more than one-half of all U.S. companies are family operated.  Think of mom and pop stores and Walmart.

The stress of running a family business can ruin a relationship. One need only look at Nissim Kassab (“Nissim”) and Avraham Kasab (“Avraham” and together with Nissim the “Brothers”), brothers and owners of Mall 92-30 Associates LLC (“Mall”).

The Brothers have been in litigation over Mall and a related entity, Corner 160 Associates, Inc. (“Corner”), for a number of years in both the Supreme Court, Queens County and the Appellate Division, Second Department. The latest installment in their continuing litigation was filed in November 2017.

Background

Both Corner and Mall are real-estate holding companies. Together, the entities owned three adjacent, unimproved parcels of land in Jamaica, Queens. Corner owned Lots 79 and 130 of Block 10101, and Mall owned Lot 24 of the same block.

Corner was incorporated in 1992. The Brothers jointly incorporated Corner and purchased the first property lot in Corner’s name. The Brothers subsequently bought a second plot in Corner’s name. In 2002, pursuant to an option agreement, Avraham became a 75% shareholder in Corner.

Mall was formed in 2001. Mall purchased a lot adjacent to the two lots owned by Corner. Mall had an operating agreement, dated March 13, 2001, that each brother signed. The agreement lists the Brothers as the two members of Mall, along with their respective percentage of ownership (Avraham 75% and Nissim 25%). The operating agreement also provided that “the business and affairs of the Company [would] be managed by the Members.”

The Brothers operated a parking lot, as well as a flea market, on the three lots. Nissim took the primary role managing the properties on a day-to-day basis. The parking lot and the flea market are the only sources of income for Corner and Mall. The parking lot is a cash business. The parking lot is open five days a week, all year round except for snow days. The flea market operates on weekends during good weather, primarily during spring, summer and fall, and is also a cash business only. The property can accommodate 130 or 140 cars.

In early 2017, Nissim charged Avraham with under-reporting the number of vehicles utilizing the parking lot, and consequently, the amount of income the lot produced. A similar charge was made with regard to the income from the flea market.

In November 2017, Nissim filed a hybrid special proceeding and action seeking to, among other things, judicially dissolve Mall. Avraham moved to dismiss the petition. As to the cause of action seeking a judicial dissolution, the Court granted the motion. Matter of Kassab v. Kasab (2018 N.Y. Slip Op. 50934(U)) (here).

The Law

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, 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.

The Court’s Decision

In dismissing the claim for judicial dissolution, the court found that Nissim “failed to state a cause of action.…”

First, the Court found that Avraham’s management of the corporation did not thwart the purpose of Mall:

Mall’s Operating Agreement, dated March 13, 2001, and signed by both Nissim and Avraham, states that its purpose is “engaging in any lawful act or activity for which limited liabilities companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.” Nissim and Avraham did not execute a subsequent Operating Agreement.…

Mall continues to hold a license to operate a parking lot.… It is undisputed that Mall is a real estate holding company and that it owns a unimproved parcel of real property (Block 10101, Lot 24). Petitioner does not allege that Mall is unable to pay its expenses related to the ownership of its real property, and, therefore, it continues to be a viable real estate holding company. Petitioner’s allegations, thus, are insufficient to demonstrate that “the management of Mall is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved” or that “continuing the entity is financially unfeasible.” [Citations omitted.]

Second, the Court rejected Nissim’s “allegations of oppressive conduct and [Avraham’s] efforts to exclude [Nissim] from the management of the LLC,” as sufficient to support judicial dissolution. In doing so, the Court found that the discord between the Brothers was not an impediment to achieving the purpose of Mall:

The Court further finds that the petitioner’s allegations are insufficient to demonstrate that the discord and disputes between himself and Avraham are inimical to achieving Mall’s purpose. The fact that Avraham has excluded Nissim from participating in the operation of Mall, and that in the past they have had different views regarding business opportunities related to the real property owned by Corner and Mall, is insufficient to warrant a dissolution of the subject limited liability company. [Citations omitted.]

Accordingly, the Court granted Avraham’s motion to dismiss the petition as it pertained to the dissolution of Mall.

Takeaway

Breaking up is hard to do, especially for brothers who have been in litigation with each other for a number of years. Kassab is another example of the difficulties an LLC member faces in seeking judicial dissolution of the LLC.

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