Commercial Division Blog

Posted: April 30, 2014 / Categories Commercial, Business Divorce

LLC Judicially Dissolved Because it Could Not Pursue its Stated Purpose

On April 18, 2014, Justice Demarest of the Kings County Commercial Division issued a decision in Matter of Natanel v. Cohen, 2014 NY Slip Op. 50677(U), granting a petition to dissolve an LLC.

In Matter of Natanel, the petitioner sought to dissolve an LLC of which he was a 50% owner. Because there was no operating agreement, the court had to analyze the standard for dissolution under the LLC Law. The court explained the standard:

LLCL § 702 provides for judicial 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 Matter of 1545 Ocean Avenue, LLC (72 AD3d 121), the Court examined the proper interpretation to be accorded the statutory standard "not reasonably practicable". While cautioning that a limited liability company is to be distinguished from both a corporation and a partnership, the Court noted that the language is derived from Revised Partnership Law § 121-802 and Partnership Law § 63(1)(d). As no New York cases had interpreted the statutory standard, relying on the decision of the Delaware Chancery Court in Red Sail Easter Ltd. Partners, LP v. Radio City Music Hall Products, Inc, the Court noted that mere disagreements between partners regarding accounting are insufficient to warrant dissolution. Rejecting the applicability of the more flexible statutory standards for judicial dissolution of both corporations and partnerships, the Court cited Matter of Horning v Horning Construction, LLC (12 Misc 3d 402, 413 [Sup Ct, Monroe County 2006]), in which, in the absence of an operating agreement, the court dismissed the petition for dissolution brought primarily to provide an exit-strategy for the disenchanted member, holding that LLCL § 702 establishes a more stringent standard. Rejecting petitioner's claim that dissolution was warranted by the parties' deadlock, in 1545 Ocean, the Appellate Division, Second Department expressly held: for dissolution of a limited liability company pursuant to Limited Liability Company Law § 702, the petitioning member must establish, in the terms of the operating agreement or articles of incorporation, 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. Thus, a petitioner seeking dissolution must demonstrate that the limited liability company is unable to function as intended or that it is failing financially.

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

One important lesson in this decision is, as the court explained, "a member desirous of withdrawing from the LLC . . . may not do so just for the asking, especially if there is no operating agreement. Rather, the default provisions of LLCL § 701 require the continuation of the LLC upon the termination of any membership interest, leaving such member at the mercy of other members if the statutory standard of § 702 is not met." (Emphasis added). The other key lesson, of course, is to have a written operating agreement designed to avoid this situation.