Issues Of Fact Preclude Dismissal Of Claim For Judicial Dissolution Of LLC

• Posted on: Sep 1 2017

Previously, this Blog considered the rules for judicial dissolution of a limited liability company (“LLC”). Here.

A brief reminder follows below.

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.

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.

(This Blog wrote about a case, In the Matter of The Dissolution of 47th Road LLC, a New York Limited Liability Company, 2017 NY Slip Op. 50196(U), (Sup. Ct. Queens Co. Feb. 16, 2016), 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, Appellate Division, Second Department, wherein the Court held that questions of fact precluded the dismissal of an application to dissolve an LLC. Mace v. Tunick, 2017 NY Slip Op. 06170 (Aug. 17, 2017).

Mace v. Tunick

Background

In July 2007, the plaintiff, David Mace (“Mace”), the defendant Nicholas Tunick (“Tunick”), and Tunick’s father, Peter Tunick (collectively” the “Owners”), formed Pedani Realty Services, LLC (“Pedani”). Mace and Tunick each owned 20% interests in the company, while Peter Tunick owned a 60% interest. In addition, each owned Ceres Chemical Co., Inc. (“Ceres”), in the same percentages as their ownership interests in Pedani.

According to Mace’s complaint, the Owners formed Pedani for the sole purpose of purchasing and holding real property in Pound Ridge, New York (the “Property”) to serve as the headquarters for Ceres. Pedani took title to the Property in September 2007. Each of the Owners funded the purchase of the Property in same percentages as their ownership interests in Ceres. With the exception of a small amount of cash, the Property was the sole asset of Pedani.

From approximately October 2007 through December 2013, Ceres occupied the Property under a lease with Pedani and paid monthly rent to Pedani.

In or about 2012, Peter Tunick retired from Ceres and transferred his remaining stock in Ceres to his son, Nicholas Tunick. Additionally, Peter Tunick assigned his ownership in Pedani to his son with the consent of all members of Pedani.

In October 2013, Mace retired from Ceres and sold his interest to Tunick, with the understanding that Ceres would remain at the Property and continue to pay rent to Pedani. However, subsequent to Mace’s retirement from (and sale of his interest in) Ceres, Tunick moved Ceres’ headquarters to South Carolina and vacated the Property.

In October 2015, Mace commenced the action, inter alia, for the judicial dissolution of Pedani. Mace claimed, among other things, that the relocation deprived Pedani of the monthly income generated from the lease with Ceres, and was inimical to the purpose for which Pedani was formed.

The defendants moved to dismiss, inter alia, the first cause of action, seeking judicial dissolution. The motion Court granted that portion of the motion. Mace then moved, inter alia, for leave to renew his opposition to the motion seeking dismissal of the first cause of action. That motion was also denied. Mace appealed.

The Court’s Ruling

The Second Department reversed. Applying the principles discussed above, the Court found that the operating agreement at issue did not did not set forth any particular purpose to warrant dismissal of the petition for dissolution:

Here, the plaintiff alleged in the complaint that Pedani was formed for the purpose of acquiring title to and managing property to serve as Ceres’ headquarters, and that it became impossible to fulfill that purpose once Ceres relocated to a different property, not owned by Pedani. Contrary to the defendants’ contention and the Supreme Court’s conclusion, the defendants did not show, through the operating agreement or any other evidence, that the material fact alleged by the plaintiff regarding Pedani’s purpose “is not a fact at all” and that “no significant dispute exists regarding it.” In this respect, the operating agreement did not set forth any particular purpose for Pedani. The court’s determination that Pedani’s purpose was simply to acquire and manage property constituted an impermissible factual finding.

Moreover, the defendants were not entitled to dismissal of the first cause of action under CPLR 3211(a)(1). Neither the operating agreement nor the leases of the property to Ceres and, upon Ceres’ relocation, a third party, utterly refuted the plaintiff’s allegation as to Pedani’s purpose so as to conclusively establish a defense as a matter of law to the plaintiff’s dissolution cause of action.

Citations omitted.

Takeaway

Mace is instructive for two reasons. First, it underscores the importance of negotiating and drafting an operating agreement that includes a provision governing how members can exit the LLC. While not every situation demands consideration of exit provisions at the outset of the company, the parties to the operating agreement should understand the consequences of that decision and the risk that they may not be able to agree on dissolution terms at a later date. Mace learned this lesson the hard way. Second, it underscores the importance of identifying with specificity the purpose of the LLC at the time of formation. While many states permit general-purpose clauses in the operating agreements, indicating that the LLC is formed to engage in “all lawful business,” other states require a more specific explanation of the products and/or services the LLC will provide. Maces shows that even where a general-purpose clause is all that is required, the better practice is to provide specificity in describing the business purpose of the company.

Tagged with: Business Law, Business Litigation, Limited Liability Company