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NY Business Divorce Information on Dissolution and Other Disputes Among Owners of New York Corporations, LLCs and Partnerships

For Sale: Undocumented LLC Membership Interest. Cheap.

Posted in Dissolution Basics, LLCs, Standing

This is an unusual story about an ultimately unsuccessful effort to dissolve a limited liability company (LLC) by someone who claimed to have acquired through judgment enforcement proceedings a debtor’s undocumented membership interest in the LLC.

Ibrahim Saleh is a real estate entrepreneur who was responsible for, among other building projects, the development and construction of the Flatiron Hotel located at Broadway and 26th Street in Manhattan. The hotel project, which began amidst the onset of recession in 2007-08, encountered severe financial and construction problems that generated work stoppages, foreclosure and lien enforcement proceedings. According to published reports, Saleh subsequently was indicted on federal charges and remains a fugitive from justice.

The hotel project’s general contractor, a firm with the felicitous name Born to Build, LLC (“BTB”), won a ruling in May 2011 granting a default judgment against Saleh individually for $2.7 million plus interest (read here). The following month BTB enlisted the City Marshal to advertise and conduct an execution sale against Saleh’s supposed membership interest in the limited liability company that owned the fee title to the hotel property, known as 1141 Realty, LLC (“1141″). BTB was declared the high bidder and purchased the garnished interest for $100,000. Presumably it was a credit bid against the judgment amount.

One month later, in July 2011, BTB filed a petition in Manhattan Supreme Court pursuant to LLC Law § 702 seeking judicial dissolution of 1141 and the liquidation and distribution of its assets including the hotel property. BTB’s petition (read here) alleged, “upon information and belief,” that Saleh had owned an unspecified percentage membership interest in 1141 together with an individual named Kenny Li and possibly others whose identity was then unknown to BTB. BTB alleged that it acquired Saleh’s membership interest at the execution sale pursuant to the default judgment; that BTB “has no relationship with [Kenny] Li, and no basis for continuing the operation of 1141 Realty, and the hotel at the Premises, as a going concern”; and that BTB offered “to cooperate with [Kenny] Li with regard to the operation of 1141 Realty, and the hotel at the Premises, but that offer has been rejected.” The petition also alleged that BTB is unaware of the existence of any operating agreement for 1141.

1141 opposed the petition and moved to dismiss it on the ground, as evidenced by a written operating agreement that it produced, that Saleh was not and never had been a member of 1141. By unreported Decision and Order dated January 3, 2012 (read here), the trial judge denied 1141′s motion, finding that BTB had raised “controverting facts” including averments by BTB that Saleh “held himself out as [1141's] owner”; that Saleh “negotiated the sale of [1141's] property through April 2011″; and that Saleh had personally guaranteed mortgage debt on the property. The trial judge also found that the operating agreement, which identified Main Team Hotel, LLC as a controlling member, “does not show that Main Team Hotel in fact owned a 50% or greater interest” as of the date of the execution sale of Saleh’s interest.

1141 appealed to the Appellate Division, First Department, which earlier this month handed down its unanimous decision reversing the trial court’s order and dismissing the petition on the ground that BTB “failed to raise an issue of fact as to the authenticity of the operating agreement.”  The decision in Born to Build LLC v. 1141 Realty LLC, 2013 NY Slip Op 02193 (1st Dept Apr. 2, 2013), goes on to state:

The affidavits at issue here [submitted by BTB] do little more than assert that the affiants were told by Ibrahim Saleh, a former manager of 1141 Realty, that he was actually an owner, and the petition makes assertions premised only upon information and belief. Both the affidavits and the assertions are contradicted by the operating agreement (Gould v McBride, 36 AD2d 706, 706-707 [1st Dept 1971], affd 29 NY2d 768 [1971] ["Where, as here, the cause of action is based on documentary evidence, the authenticity of which is not disputed, a general denial, without more, will not suffice to raise an issue of fact"]; see also First Interstate Credit Alliance v Sokol, 179 AD2d 583, 584 [1st Dept 1992] [where there were "affidavits . . . from a corporate officer who averred to the genuineness and authenticity of the documentary evidence[, t]he unsubstantiated allegations and assertions raised by defendants were insufficient to withstand the motion”]).

The appellate panel then delivered the coup de grâce:

Moreover here, petitioner itself submitted evidence that there were no documents in Ibrahim’s name because he used other people’s names to conceal his holdings. This being an action for dissolution, and not one for fraud, these assertions are insufficient to raise questions of fact as to the authenticity of the operating agreement.

What should have been a predictable end to the dissolution foray raises a couple of interesting points. First, note that the appellate decision speaks in terms of BTB’s failure to raise an issue of fact challenging the operating agreement, which is the language used by courts to describe summary judgment based on a factual record, as opposed to the “mere” sufficiency of the pleadings in stating a cognizable claim as is the less onerous standard on a pre-answer motion to dismiss. I’ve written before (read here) about the necessity to bolster with evidentiary materials a petition for judicial dissolution brought as a special proceeding (as well as one’s opposition to such a petition), the same as if one were litigating a summary judgment motion in a plenary action. Since a dissolution lawsuit involving an LLC can be brought either by petition in a special proceeding or by complaint in a plenary action with the usual rights to discovery (read here), the decision to use one or the other should take into account the need to get disclosure in order to withstand anticipated challenges to the complainant’s standing as a member and other threshold issues.

Second, even assuming Saleh owned a membership interest in 1141, I’m awfully curious how BTB managed to get the City Marshal to conduct an execution sale and conveyance of the membership interest to BTB, and why none of the court decisions mentions New York’s charging order statute, LLC Law § 607.  Under the statute, a judgment creditor of a member of an LLC can execute against the LLC interest only to the extent of obtaining the rights of an assignee under LLC Law § 603 to be paid distributions and to receive profit and loss allocations. Under LLC Law § 604, the assignee becomes a member of the LLC only upon the consent of the other members. As a non-member assignee, therefore, BTB would have no standing to seek dissolution under LLC Law § 702 even assuming Saleh had been a member.