Kim Kardashian’s marriage last summer to Kris Humphries famously lasted only 72 days. Their divorce proceeding even more famously is now in its seventh month. A less celebrated but similar fate may befall the short-lived business marriage of two partners in a Long Island restaurant/deli business, who are now embroiled in three lawsuits with one another including a proceeding to dissolve their limited liability company (LLC). Alas, a pair of rulings last month prefigures a divorce that likely will last longer and cost more than the marriage.
The S’s in S&S Eatery, LLC are Elaine Shure and Anthony Spota who in mid-2010 agreed to go into business together as 50/50 co-owners and operators of a new restaurant/deli on Rockaway Avenue in Valley Stream, New York. They decided to situate the restaurant in a vacant unit in a commercial building owned by a trust set up by Ms. Shure’s late husband, of which she was the trustee. In retrospect, the decision at the outset to invest in space indirectly owned and controlled by one of the members may have been the beginning of the end of the business relationship.
Spota and Shure agreed that he would manage the restaurant operations and she would oversee bookkeeping, other administrative responsibilities, and food pickup and delivery. In July 2010, Spota commenced renovation of the space after they agreed to invest equally in the construction expenses. In August 2010 they entered into a 10-year lease between the trust and S&S Eatery, and they also signed an operating agreement providing for management of the LLC by its members. In September 2010 they signed an amendment which included a provision requiring them to devote equal time to the business which opened in January 2011.
In the following months relations soured between Spota and Shure. Shure alleged that Spota disparaged her ability to operate the business and used profane language when speaking with her. She also claimed that Spota limited her management rights, denied her access to company records, and failed to collect sales tax or pay additional rent charges under the LLC’s lease. Spota charged that Shure became involved with another business, failed to make her agreed-to contributions to the start-up expenses, and failed to devote the required time to running the restaurant business necessitating the hiring of additional staff. He also alleged that Shure deterred customers from entering the restaurant in a deliberate attempt to induce a lease default.
In early January 2012, Shure brought a non-payment summary eviction proceeding in Nassau County District Court on the trust’s behalf against the LLC. Shortly afterward Spota filed in Nassau County Supreme Court a lawsuit in his own name against Shure personally for breach of their agreements, in which he applied for and obtained a temporary restraining order staying the eviction proceeding. In late January, Shure filed her own proceeding in Nassau County Supreme Court to dissolve the LLC and appoint a receiver.
The two Supreme Court cases landed before Nassau County Commercial Division Justice Timothy S. Driscoll who handed down two decisions early last month (a) denying Spota’s application to stay the eviction proceeding, (b) granting Shure’s application to dissolve the LLC, (c) ordering a hearing on Shure’s request to appoint a receiver and for injunctive relief, and (d) permitting the business to continue to operate until its “eventual dissolution.”
In his decision denying a stay of the eviction proceeding, in Spota v. Shure, 2012 NY Slip Op 31010(U) (Sup Ct Nassau County Apr. 5, 2012), Justice Driscoll noted Spota’s contention that, absent the stay, Shure “would then be able to exploit her dual roles as landlord and tenant and the instant action effectively will be rendered moot.” But, Justice Driscoll concluded, even assuming Spota can show a likelihood of prevailing on the merits of his contract breach claims, he cannot show the requisite irreparable harm, i.e., injury not compensable with money damages, nor can he show the equities weigh in his favor “as a delay of the District Court Action will potentially prejudice the Landlord [i.e., the Shure Trust] from enforcing its rights under the Lease.”
Justice Driscoll’s companion ruling in the dissolution case, Matter of Shure (S&S Eatery, LLC), 2012 NY Slip Op 50739(U) (Sup Ct Nassau County Apr. 9, 2012), includes a helpful summary of the standard and grounds for dissolution of an LLC under §702 of the LLC Law, which authorizes dissolution “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” Here’s Justice Driscoll’s summary:
Despite the standard for dissolution enunciated in LLCL § 702, there is no definition of”not reasonably practicable” in the context of the dissolution of an LLC. Matter of 1545 Ocean Avenue, LLC v. Ocean Suffolk Properties, LLC, 72 AD3d 121, 127 (2d Dept. 2010). Most New York decisions involving LLC dissolution issues have avoided discussion of this standard altogether. Id., citing, inter alia, Matter of Extreme Wireless, 299 AD2d 549, 550 (2d Dept. 2002). The standard is not to be confused with the standard for the dissolution of corporations pursuant to Business Corporation Law (“BCL”) §§ 1104 and 1104-a, or partnerships pursuant to Partnership Law § 62. Id. Unlike the judicial dissolution standards in the BCL and Partnership Law, the court must first examine the LLC’s operating agreement to determine, in light of the circumstances presented, whether it is or is not “reasonably practicable” for the LLC to continue to carry on its business in conformity with the operating agreement. Id. at 128. Thus, the dissolution of an LLC under LLCL § 702 is initially a contract-based analysis.
The Second Department, in Matter of 1545 Ocean Avenue, LLC, outlined relevant case law in New York and other jurisdictions, including Delaware, and concluded that, for dissolution of an LLC pursuant to LLCL § 702, 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. 72 AD3d at 131. The Court noted that dissolution is a drastic remedy, id., citing Matter of Arrow Inv. Advisors, LLC, 2009 Del Ch LEXIS 66, * 2 (2009), and that the appropriateness of an order for dissolution of the LLC is vested in the sound discretion of the court hearing the petition, id. at 133, quoting Matter of Extreme Wireless, 299 AD2d at 550.
As it turned out, the dispute in S&S Eatery was not whether dissolution should be ordered, but when and how dissolution should be effected. As Justice Driscoll noted, Spota “agrees that the eventual dissolution and winding up of the affairs of S&S is appropriate, but submits that the Court should not grant dissolution until the issues raised in [Spota’s related lawsuit against Shure] are addressed.” Otherwise, Spota argued, he would lose the time and money he invested in the business, as well as any potential resale value including good will. Spota also contended that immediate dissolution would unjustly enrich Shure (or more precisely, the Shure Trust as landlord) without compensating Spota for the improvements to the restaurant premises for which he paid.
Based on the parties’ dueling claims, that the other failed to fulfill his or her obligations under the operating agreement to contribute equally to the management of the LLC, as well as Spota’s agreement that “eventual dissolution” is appropriate, Justice Driscoll had little trouble concluding that “it is not reasonably practicable to carry on the business in conformity with the Operating Agreement.” Justice Driscoll did not order immediate dissolution, however, finding that a hearing is required to determine whether the grant of injunctive relief and appointment of a receiver is warranted “[i]n light of the issues raised by the parties . . . including [Spota’s] concerns . . . that Shure may be unjustly enriched if S&S is dissolved without compensating Spota for the improvements for which he paid . . ..” Meanwhile, Justice Driscoll ruled, “it is appropriate to permit the business to continue to operate until its eventual dissolution.”
Justice Driscoll’s ruling also reserved decision on Spota’s request to consolidate the two Supreme Court cases. Although the issues in both cases are similar, consolidation is “somewhat complicated by the fact that the instant dissolution proceeding is a matter to be tried before the Court but the plaintiff [Spota] in the Related Action may have a right to a jury trial.” Justice Driscoll suggested the parties may want to stipulate that the two cases will be tried before the court.
In any business partnership attention must be paid to the proper alignment of the partners’ interests and to putting in place contractual protections to counter the potentially toxic influences of non-aligned interests. From day one, the interests of Shure as landlord of the S&S Eatery clashed with Spota’s interest as an investor in the build-out of the vacant space. If the restaurant goes out of business, the landlord captures the residual value of the improvements. The lease between the Shure Trust and S&S Eatery included a long-term abatement of base rent for the cost of improvements, but perversely that only enhanced Shure’s incentive to enforce an early lease termination if she became dissatisfied with the return on her investment in S&S Eatery or with her relationship with Spota.