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Current Developments in the Commercial Divisions of the
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Posted: January 4, 2018

Court Refuses to Dismiss Action for Dissolution of an LLC

On December 15, 2017, Justice Scarpulla of the New York County Commercial Division issued a decision in Advanced 23, LLC v. Chambers House Partners, LLC, 2017 NY Slip Op. 32663(U), refusing to dismiss an action for dissolution of an LLC, explaining:

A court may order the dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. In determining whether a limited liability company should be dissolved pursuant to LLCL § 702, the court must first examine the limited liability company’s operating agreement to determine, in light of the circumstances presented, whether it is or is not reasonably practicable for the limited liability company to continue to carry on its business in conformity with the operating agreement. The petitioner seeking judicial dissolution must either show that 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 that continuing the entity is financially unfeasible.

In their papers, Respondents argue that, because they have lived in the Building since the 1980’s and Herbert has successfully managed the Building for more than thirty two years, as a matter of fact the petitioners cannot demonstrate that it is not reasonably practicable to carry on the business in conformity with the operating agreement. However, whether a petitioner can ultimately establish its allegations is not part of the calculus in determining a motion to dismiss. While Respondents’ assertions may be relevant to the underlying issue of determining whether Petitioners are entitled to a judicial decree dissolving CHP, the petition’s essential facts have not been negated beyond substantial question by the evidence submitted by Respondents in support of their motion to dismiss so that it might be ruled that the petitioner does not have the cause of action.

. . .

CHP’s Operating Agreement requires that the Building be jointly managed by Shusterman and Herbert, and most, if not all, of the business decisions necessary to effectively manage and operate the Building require the unanimous consent and cooperation ·of Shusterman and Respondents. Despite this requirement, Petitioners allege numerous unilateral actions taken by Respondents, in direct violation of the Operating Agreement, which support Petitioners’ claim for judicial dissolution. The specific allegations of respondents’ unilateral action, which allegedly occurred without Shusterman’ s knowledge or permission, include Respondents giving permission to a CHP tenant to use part of her security for her rent and Respondents creating a new CHP bank account, the TD Bank Account, withdrawing $75,000 from the Capital One Account, and depositing that money in the TD Bank Account.

Petitioners have alleged additional, specific allegations showing that the parties’ relationship has become significantly strained such that the continued operation of CHP may not be feasible. These allegations include: Herbert felt compelled to hire an attorney to negotiate with Shusterman (rather than speak with him directly) regarding Petitioners’ obligations under the Operating Agreement; Anita harassed Shusterman’s girlfriend and entered Shusterman’s apartment without his permission; a physical altercation between Anita and Shusterman; and Shusterman and Respondents were not able to agree on refinancing CHP’s mortgage. For the foregoing reasons, petitioners have adequately pled a claim for judicial dissolution pursuant to Limited Liability Company Law § 702, sufficient to withstand respondents’ motion to dismiss for failure to state a cause of action.

(Internal quotations and citations omitted) (emphasis added).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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