Judicial Dissolution Denied Due to Waiver of Such Relief in Governing Operating Agreement

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Posted on: Feb 10 2025

An operating agreement is the primary document that establishes the rights, powers, duties, liabilities, and obligations of the members of a limited liability company (“LLC”) between themselves and with respect to the company. The purpose of the document is to govern the internal operations of an LLC in a way that addresses the needs of the company’s owners (also known as “members”).

Notwithstanding its importance, not every state requires an LLC to have an operating agreement. In New York, the members of an LLC are required to adopt a written operating agreement.[1] The operating agreement may be entered into before, at the time of, or within 90 days after the filing of the articles of organization. The operating agreement is not filed with the New York Department of State.

The LLCL is silent on the consequences of not adopting an operating agreement. When the parties fail to adopt an operating agreement, the State’s default rules governing LLCs apply. In New York, the rules governing LLCs are in the LLCL.

Article 7 of the LLCL governs the dissolution of an LLC. Under Section 701(a), an LLC will be dissolved and its affairs wound up upon the first of the following: a) the latest date provided in the articles of organization or the operating agreement; if no date is specified, then the existence of the LLC is perpetual; b) the happening of events specified in the operating agreement; c) the vote or written consent of at least a majority in interest of the members (subject to the provisions in the operating agreement); d) at any time there are no members in the LLC, unless a legal representative of the last remaining member agrees in writing within 180 days to continue the LLC and to the admission of the legal representative as a member; and e) the entry of a decree of judicial dissolution pursuant to LLCL § 702. Section 702 applies only when the articles of incorporation and/or the operating agreement do not provide the circumstances under which the LLC will be dissolved.

Section 702 of the LLCL empowers a court to dissolve an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” The LLCL does not define the term “not reasonably practicable.”

In considering dissolution, LLCL § 702 requires the court to first examine the company’s operating agreement to determine whether it is not “reasonably practicable” for the company to continue to carry on its business in conformity with the operating agreement.[2] Where the operating agreement does not address the issue of member withdrawal or dissolution, the petitioning member is bound by the requirements set forth in the LLCL § 702.[3]

To satisfy the “not reasonably practicable” standard of Section 702, New York courts require the member seeking dissolution to establish that: (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.[4] Mere “[d]isagreement in the operation of the LLC does not necessarily entail a finding that it is not reasonably practicable to carry on the business.”[5]

[Eds. Note: This Blog examined judicial dissolution under LLCL § 702, here, here here, and here.[6]]

In TZ Vista, LLC v. Helmer, 2025 N.Y. Slip Op 00694 (2d Dept. Feb. 5, 2025) (here), the Appellate Division, Second Department affirmed the denial of a motion for summary judgment to dissolve the subject LLC. As discussed below, the company’s operating agreement governed the dispute and, pursuant to that agreement, the parties had agreed to waive their right to dissolve the company. But even if the members of the LLC could seek dissolution, the Court held that the requirements for such relief were not satisfied.

TZ Vista concerned disputes over certain provisions in the operating Agreement of TZ Vista LLC, in particular an option to purchase real property from defendant Foot of Main, LLC.

On or about January 13, 2015, plaintiffs, Drazen Cackovic and Julia Khomut, and defendant, William Helmer, executed an operating agreement in which they became members of plaintiff TZ Vista (“the Operating Agreement”). Cackovic and Helmer are the company’s managing members, while Khomut is a member.

The parties formed TZ Vista to purchase, develop, manage, sell, lease, and mortgage certain real properties located along the Hudson River in Nyack, New York (“Properties”). In the operating agreement, the members agreed that Helmer’s construction company, Helmer Cronin Construction, Inc., would provide construction management services for the TZ Vista Project. The parties also agreed that DCAK-MSA Architecture & Engineering, PC (“DCAK-MSA”), a company owned by Cackovic and Khomut, would provide the architectural and engineering services for the Properties.

According to the complaint, Cackovic and Khomut performed all their duties required under the operating Agreement. DCAK-MSA allegedly performed its architectural and engineering services for TZ Vista. Plaintiffs maintained that Helmer failed to perform his obligations under the operating Agreement. Plaintiffs alleged that Helmer’s failure to diligently perform his obligations caused delays in the completion of the Properties, including delays in securing the government approvals needed to complete the work on the Properties.

The operating agreement contained an option to purchase in favor of Cackovic, which gave Cackovic the irrevocable right to require TZ Vista to purchase a parcel of real property from Foot of Main, LLC, on or before January 13, 2020 (“Parcel 7”). Helmer is the sole member and manager of Foot of Main, LLC. The operating agreement contained details of the calculation and schedule of payments for Parcel 7. It also stated that, “transfer of ownership [would] occur at such time as [Cackovic] determine[d] that it [was] advisable for [TZ Vista] to become the owner of [the Parcel] in furtherance of [TZ Vista] advancing the development of any portion of the Properties ….”[7] After Cackovic exercised his option to purchase Parcel 7, Helmer allegedly refused to transfer Parcel 7 to TZ Vista in accordance with the terms of the operating agreement.

In January 2020, plaintiffs commenced the action to, inter alia, recover damages for breach of contract and for specific performance, directing Foot of Main and Helmer to convey Parcel 7 to TZ Vista pursuant to the operating agreement. In their answer, defendants asserted, among other things, a counterclaim for the judicial dissolution of TZ Vista on the basis of frustration of purpose. Thereafter, defendants moved for, inter alia, summary judgment on that counterclaim. Plaintiffs opposed the motion and cross-moved for summary judgment on the cause of action for specific performance by “directing Foot of Main to transfer [Parcel 7] to TZ Vista in accordance with the terms of the Operating Agreement.” By order dated January 3, 2022, Supreme Court, among other things, denied that branch of defendants’ motion and granted plaintiffs’ cross-motion. Defendants appealed. The Second Department affirmed.

The Court found that the parties specifically agreed in the operating agreement that they could not seek judicial dissolution of TZ Vista. As the Court put it, “pursuant to paragraph 3.5(d) of the operating agreement, the members of TZ Vista waived their right to seek judicial dissolution of TZ Vista.”[8] “Specifically,” said the Court, “they waived their right to ‘file a complaint, or to institute any proceeding at law or in equity, to cause the termination, dissolution, or liquidation of [TZ Vista].’”[9]

“[E]ven if the members of TZ Vista had not waived their right to seek judicial dissolution of TZ Vista,” the Court held that “defendants failed to demonstrate, prima facie, that the purpose of TZ Vista had been frustrated or that continuing TZ Vista had become financially unfeasible.”[10] The Court found that the disputes upon which defendant relied were nothing more than mere disagreements in the operation of TZ Vista, which were not sufficient to support judicial dissolution.[11]

Further, said the Court, “to the extent that the defendants assert that there was disagreement and deadlock between the parties,” the operating agreement provided for certain procedures to be followed, which defendant failed to do.[12] In that regard, “paragraph 8.5 of the operating agreement specifically provide[d] that, in the event of disagreement as to ‘any course of action relating to the management, conduct or operation of the Company business, either Managing Member … may offer in writing to sell his Membership Interest to the other Managing Member, setting forth a demanded purchase price.’”[13] The Court found that “defendants’ submissions reflect[ed] that Helmer failed to properly follow the procedures contained in [that] paragraph.”[14]

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] See Section 417 of the Limited Liability Company Law (“LLCL”).

[2] In The Matter of Dissolution of 1545 Ocean Ave., LLC, 72 A.D.3d 121, 128 (2d Dept. 2010).

[3] Id.

[4] E.g., 1545 Ocean Ave., LLC, 72 A.D.3d at 131.

[5] Matter of Andris v. 1376 Forest Realty, LLC, 213 A.D.3d 923, 924 (2d Dept. 2023); see also Matter of 1545 Ocean Ave., LLC, 72 A.D.3d at 131.

[6] To find additional articles related to the judicial dissolution of an LLC, visit the “Blog” tile on our website and enter “judicial dissolution LLC,” or any other related search term in the “search” box.

[7] Operating Agreement § 9.2.

[8] Slip Op. at *2.

[9] Id.

[10] Id.

[11] Id. (citing Matter of Andris, 213 A.D.3d at 924; Matter of 1545 Ocean Ave., 72 A.D.3d at 131).

[12] Id.

[13] Id.

[14] Id.