Court Reinforces the Fact that Judicial Dissolution of an LLC is Not Easy

• Posted on: Sep 10 2018

This Blog has written about judicial dissolution under Limited Liability Company Law (“LLCL”) § 702 many times over the past year or so. (E.g., here, here and here.) A common theme that runs through these posts (and the cases on which they are based) is the difficulties litigants encounter when seeking judicial dissolution.  Yu v. Guard Hill Estates, LLC, 2018 N.Y. Slip Op. 32008(U) (Sup. Ct., N.Y. County Aug. 15, 2018) (here), a recent decision issued by Justice Saliann Scarpulla of the Supreme Court, New York County, Commercial Division, is another a case that reinforces the high burden a plaintiff must overcome to dissolve an LLC.

A Brief Primer on Dissolution Under LLCL § 702  

Under LLCL § 702, a court may dissolve a limited liability company (“LLC”) “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” LLCL § 702.

To successfully petition for the dissolution 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 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.

Yu v. Guard Hill Estates, LLC

Plaintiff, Patrick K. Yu (“Patrick”), commenced the action against his siblings, Raymond Yu (“Raymond”) and Catherine Yu (“Catherine”), seeking judicial dissolution of Guard Hill Estates, LLC (“Guard Hill”) and 33 East 38th Street, LLC (“33 East”), two LLCs owned by the Yu family. Patrick owns 33 1/3% of Guard Hill, and Raymond and Catherine own the remaining 66 2/3%. Patrick owns 20% of 33 East, and Raymond and Catherine own the remaining 80%.

According to the complaint, Guard Hill and 33 East were formed to be holding companies, to create a transition of family property from the Yu parents to their children. Guard Hill was created to hold the remainder interest in the Yu family’s property in Bedford, New York, and 33 East was created to hold title to the Yu family’s apartment building in Manhattan. Prior to the events alleged in the complaint, there had been no changes to the LLC operating agreements.

In 2013, a dispute arose between Patrick and his parents, Bong and May Yu. Following the dispute, Patrick alleged that his parents and siblings engaged in conduct designed to oppress and “divest him of his ownership interest in the LLCs.”

Among the actions alleged to have been taken against Patrick are: 1) amendment of the operating agreements by Raymond and Catherine to remove Patrick as the managing member of both LLCs, without notice or explanation; 2) amendment of the operating agreements to add a provision stating that managers (i.e., Raymond and Catherine) could demand capital contributions from all members, including Patrick, if they determine that such contributions are required, and if such demand is not met, the members’ interest in the LLCs may be foreclosed; and 3) a capital call and demand for $590,887 with respect to Guard Hill, knowing that Patrick was financially unable and could not afford to make the payment. The capital call was purportedly exercised to reimburse Bong and May Yu for renovations made to the Guard Hill property, and to pay off the mortgage on the property. Patrick alleged that no explanation was given as to why that demand was made at that time, when no action had been taken for many years.

In October 2016, Patrick was notified by letter that he was in default on the capital call and that his siblings had submitted their portions of the capital call. About two months later, Patrick was notified by letter that his siblings had advanced his portion of the capital call to Guard Hill and had executed two promissory notes for the loans given to Patrick. Annexed to the letter were two pledge and security agreements, each pledging half of Patrick’s stake in Guard Hill as security for notes. Subsequently, Guard Hill paid off the mortgage owed on the property and reimbursed Bong and May for the cost of the renovations.

Regarding 33 East, Patrick claimed that between 2013-2015, the company recorded a number of expenses, as reflected in its tax returns, which were not consistent with its stated purpose.

Patrick alleged that, as a result of his siblings’ actions, the stated purpose of Guard Hill and 33 East was not being realized or achieved, and instead, they were using the LLCs as “weapons” to oppress him. He maintained that the LLCs were not carrying on their business in accordance with their operating agreements and the continued operation of the LLCs had become financially unfeasible.

Defendants moved to dismiss the complaint on the grounds that Patrick did not allege a sufficient factual basis to support dissolution of the LLCs. The Court agreed.

The Court’s Decision

The Court found that the language in the operating agreements was broad, thereby making it difficult for Patrick to demonstrate that the LLCs were not “operating in a manner within the contemplation of their purposes and objectives”:

Given the broad language in the operating agreements, Patrick has failed sufficiently to plead the requisite grounds for dissolution of the LLCs in his complaint. He does not adequately allege that the LLCs are not operating in a manner within the contemplation of their purposes and objectives as defined in their respective operating agreements, or that continuing their operation would be financially unfeasible. He provides no factual support or basis which would support an allegation that the individual defendants are unable or unwilling to promote the purpose of the LLCs or that it is not reasonably practicable to carry on the business of the LLCs in conformity with the operating agreements.

The Court also rejected the argument that the discord between Patrick and his siblings was severe enough to warrant dissolution:

While Patrick complains that his family members have been engaged in certain activities to further their personal “vendetta” against him, his unflattering characterization of his family’s actions is not sufficient to support a cause of action that his family has abandoned the purpose of the LLCs and/or rendered the operation of the LLCs financially unfeasible

Takeaway

Yu is instructive for three reasons. First, it highlights the importance of an operating agreement in the court’s analysis of whether dissolution under LLCL § 702 is appropriate. Second, it underscores the point that the discord necessary to dissolve an LLC must be extreme – that is, the discord must be such that it frustrates the economic viability of the LLC or the ability of the members to carry out the purpose of the entity. Finally, it exemplifies the high burden a plaintiff must overcome in obtaining judicial dissolution.

Tagged with: Business Litigation, Commercial Litigation, Judicial Dissolution, Limited Liability Company, LLC, LLCL § 702