Commercial Division Blog
Posted: February 26, 2017 / Categories Commercial, Business Divorce
Discord Between LLC Members so Severe That it Justified LLC's Dissolution
On February 16, 2017, Justice Dufficy of the Queens County Commercial Division issued a decision in Matter of 47th Rd. LLC, 2017 NY Slip Op. 50196(U), holding that the discord between an LLC's members was so severe that it justified the LLC's dissolution, explaining:
In determining applications for a judicial dissolution of a limited liability company, the court must first look to such company's operating agreement to determine 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. Considered a statutory default provision for judicial dissolution, LLCL § 702 is available whenever the court finds that it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. Appellate case authorities have instructed that the court's initial analysis is one that is contract-based because the statute mandates an examination of the articles and operating agreement to determine the reasonable practicability of carrying on the business in conformity with these governing documents.
Here, the general nature of the stated purpose in the Operating Agreement is vague; hence, it does not assist in determining the reasonable practicability of continuing the business. Normally, the LLCL would operate to fill in the voids. However, the evidence adduced at the hearing makes it clear that the purpose of the company is to operate an eight-unit residential apartment building in an up and coming area of Queens County.
To successfully petition for the dissolution of a limited liability company under the not reasonably practicable standard imposed by LLCL § 702, the petitioning member must demonstrate, in the context of the terms of the articles of incorporation of the operating agreement, the following: 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. Disputes between members are alone not sufficient to warrant the exercise of judicial discretion to dissolve an LLC that is operates in a manner within the contemplation of it purposes and objectives as defined in its articles of organization and/or operating agreement. 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 under the not reasonably practicable standard imposed by LLCL § 702 be considered by the court to be an available remedy to the petitioner.
In the case at bar, the dissension among the parties has driven the company's only asset into foreclosure. There are numerous outstanding violations on the property, and the respondent has collected the rents without making repairs, paying the violations, or the mortgage. There are other lawsuits in this and other states between the protagonists. Due to the violent relationship between the two managers, the company will be unable to achieve its purpose of operating an apartment building. The parties seem willing to permit the building to be foreclosed rather than cooperate with each other in the decision-making process. In short, the Court finds that it is not reasonably practicable to carry on the business.
(Internal quotations and citations omitted) (emphasis added).