Commercial Division Blog
Posted: September 27, 2020 / Categories Commercial, Business Divorce
Court Dismisses Petition to Dissolve LLC Because LLC Was Able to Conduct Business
On September 9, 2020, Justice Masley of the New York County Commercial Division issued a decision in Lazar v. Attena LLC, 2020 NY Slip Op. 33003(U), dismissing a petition to dissolve an LLC because the LLC was able to conduct business, explaining:
Respondents argue that petitioners have failed to establish a prima facie case for dissolution under LLC Law § 702 which provides that on application by or for a member, the supreme court in the judicial district in which the office of the limited liability company is located may decree 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. The key determination for a court is whether it is reasonably practicable to carry on the business of the limited liability company. The petitioning member must establish, in the context of 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. Here, to maintain this special proceeding, petitioners must establish whether continuing the LLCs is financially unfeasible or management is unable or unwilling to reasonably permit or promote the stated purpose of the LLCs.
The purpose of the LLCs here is "any lawful business purpose" Nowhere in the operating agreements does it state, as petitioners allege, that the sole purpose of the LLCs was to acquire, own and operate five separate multifamily properties located in Manhattan. Nowhere do petitioners claim respondents have failed to promote or permit the LLCs' stated purposes.
Petitioners' legal support is not otherwise. In Matter of Fassa Corp. (31 Misc 3d 782, 785 [Sup Ct, Nassau Cty, 2011]), the court granted a dissolution petition because the operating agreement provided for written notice to other members to dissolve the company which was unquestionably triggered dissolution and the company's purpose was to acquire real property and resell the property. Here, the operating agreements have no such trigger and do not limit the purpose of the LLCs to acquiring and selling properties. In Matter of 47th Rd. LLC (54 Misc 3d 1217[A] [Sup Ct, Queens Cty 2017]), the court held that if the general nature of the business purpose is ultimately "vague," the evidence must make it clear that the purpose of the company is no longer being fulfilled to necessitate dissolution. Petitioners here offer no evidence to support the claim that the generally stated purpose of the LLCs to engage in any lawful activity is no longer being fulfilled.
Moreover, courts have dismissed dissolution petitions containing the same broadly stated purpose provision found in the LLC operating agreements. For example, in Yu v Guard Hill Estates, LLC, (2018 WL 3953795, at *2-3 [Sup Ct, NY Cty 2018]), the court dismissed a dissolution petition based on operating agreements that provided that the purpose of the companies was to acquire certain real property and engage in any other lawful act or activity for which limited liability companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.
Similarly, petitioners fail to show respondents are unable or unwilling to promote or achieve the generally stated purpose of the LLCs.
Petitioners also fail to satisfy the second alternative. There is no evidence that the LLCs are in financial turmoil, insolvent or otherwise cannot meet their debts and obligations. Petitioners also do not allege that continuing the LLCs is financially unfeasible. (Doyle v Icon, 103 AD3d 440, 440 [1st Dept 2013]; see also Barone v. Sowers, 128 AD3d 484, 485 [1st Dept 2015]).
Petitioners' reliance on Natanel v Cohen, 43 Misc 3d 1217[A], 2014 NY Slip Op 50677[U] [Sup Ct, Kings Cty 2014]) for the proposition that the court may look beyond whether the company is able to function is misplaced. Natanel is distinguishable. The parties in Natanel did not have an operating agreement compelling the court to evaluate the purpose of the business.
Accordingly, petitioners' allegations of improper actions - Respondents' alleged nonpayment of shareholder loans and alleged failure to provide access to the LLCs' books and records - even if true, are insufficient to satisfy the standard for dissolution under LLC Law § 702. Oppressive conduct is not sufficient. Therefore, this action is dismissed.
(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). Contact Schlam Stone & Dolan partner John Lundin at email@example.com if you or a client have questions regarding a business divorce.