Court Orders Dissolution of Unprofitable Real Estate LLC
Back in 2008, I wrote a couple of posts about the Youngwall case in which the court ordered involuntary dissolution of a commercial real estate limited liability company (LLC) owned 50/50 by two brothers who also were involved in a bitter dispute over their father's will, based on the personal animosity between the brothers and because the vacant building was losing money (read here and here).
Youngwall foreshadowed the landmark decision in 2010 by the Appellate Division, Second Department, in the 1545 Ocean Avenue case, which redefined the standard for judicial dissolution of LLCs under §702 of the LLC Law as requiring the petitioner to show "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."
I emphasize the disjunctive "or" in the quoted passage because the cases involving judicial dissolution petitions based solely on financially failing LLCs are few and far between, as opposed to the more common scenarios involving management and/or money disputes between members of otherwise profitable ventures. The explanation may well be that most business people don't like to pay lawyer's fees fighting over a corpse.
LLCs being the entity of choice for real estate holding companies, and the real estate market having remained in a slump the last four years, it was only a matter of time before another Youngwall case appeared. And so it has, in the form of Mizrahi v. Cohen, 2012 NY Slip Op 50030(U) (Sup Ct Kings County Jan. 12, 2012), decided last week by Brooklyn Commercial Division Justice Carolyn E. Demarest.
Mizrahi, like Youngwall, is a family feud between brothers-in-law -- one a dentist, the other an optometrist -- who in 1999 purchased a property in Brooklyn's Gravesend section and subsequently built a mixed-use building to house their own businesses and to rent to other tenants. They formed an LLC named 372-376 Avenue U Realty, LLC to own the property and entered into a written Operating Agreement as 50/50 managing members.
The LLC obtained mortgage financing, personally guaranteed by both members, for the purchase of the realty and construction of the four-story building which wasn't completed and occupied until 2006 when the original mortgage was refinanced in the sum of $4.7 million. The plaintiff dentist, Mizrahi, occupied a second floor office and the defendant optometrist, Cohen, occupied a smaller ground floor unit.
At the outset the two members contributed $100,000 each. The Operating Agreement required no additional capital contribution absent the members' unanimous consent. The Operating Agreement also generally provided for unanimous approval of "any matter coming before the Members."
Until 2003, the two members made additional capital contributions in equal shares to cover expenses. After 2003, Mizrahi made substantial, unmatched contributions and loans to the LLC. By the time of trial in 2011, Mizrahi's capital contributions totaled almost $1.2 million compared to about $300,000 for Cohen.
In 2010, Mizrahi filed a complaint seeking judicial dissolution of the LLC and asserting claims against Cohen for an accounting and damages for alleged embezzlement of LLC funds and failure to make his share of capital contributions.
Justice Demarest's analysis of the dissolution claim begins by citing 1545 Ocean Avenue and other cases for the proposition that "the court must look to the Operating Agreement to determine the rules applicable to the operation of a particular LLC" and that "[o]nly where the Operating Agreement is ambiguous, contrary to law or does not contain any provision for the particular matter at issue, do the statutory provisions of the [LLC Law] control."
Mizrahi centered his dissolution claim on Cohen's alleged failure to carry his "fair share" of the financial responsibility for the real estate business under the terms of the Operating Agreement. He also claimed, and Justice Demarest agreed, that Cohen breached fiduciary duty by withdrawing $230,000 that the LLC could ill afford as a loan to himself, after Mizrahi withheld his consent.
Cohen argued that the dissolution claim should be dismissed because the Operating Agreement limits the conditions under which the LLC can be dissolved to the members' unanimous consent or certain defined events of "involuntary withdrawal" by a member which were not present. Justice Demarest labeled the argument "specious," stating:
Such interpretation of the law would void the statutory provision for judicial dissolution pursuant to Section 702 of the LLCL in any situation in which an operating agreement provided for dissolution only on consent or at the end of a definite term of duration for the LLC, and would thus thwart the obvious legislative intent of LLCL §702, to provide a mechanism to equitably terminate a business relationship that is dysfunctional or abusive, without the consent of all of the members.
Justice Demarest instead posed the central question in the case as
whether plaintiff has borne his burden to demonstrate that it is impracticable to continue the operation of the LLC in light of Cohen's failure to provide needed financial support and his undermining of the LLC's financial integrity so as to warrant dissolution of the LLC.
The answer came largely from the LLC's accountant, who testified that the LLC consistently operated at annual losses totaling over $1.1 million in the years 2006 (when the building was first occupied) through the trial in 2011, which loss was covered by application of mortgage proceeds to the day-to-day operations of the LLC and by Mizrahi's capital contributions which prevented foreclosure on the property. Justice Demarest also credited the accountant's testimony that the monthly carrying charges for mortgage, taxes and building expenses totaling over $51,000 exceeded the rent roll by about $12,000 per month. Cohen's contention that the LLC "going forward" will show a profit, Justice Demarest commented, "appears to be based on speculation and wishful thinking."
Justice Demarest concluded that "given the significant losses sustained over the years, which were covered by plaintiff, it is not plausible that continuing the LLC, as presently constituted, is feasible." Under the Operating Agreement's terms, the plaintiff Mizrahi is under no obligation to continue making capital contributions to keep the LLC afloat. Justice Demarest's fuller explanation is worth reading:
In 1545 Ocean, the Appellate Court cautioned that "[d]issolution is a drastic remedy", not to be lightly ordered merely based upon disagreement, or even deadlock, among the members of the LLC, but that "where the economic purpose of the limited liability company is not met, dissolution is appropriate"(72 AD3d at 129-131). In the case here, the agreed purpose of the LLC is the development and management of a mixed-use building, presumably for the economic benefit of its members. That purpose was achieved by the construction and occupancy of the building, but the expected profit has not been realized and the building does not support the costs of its maintenance, including payment of the mortgage taken to finance the project. The deficit has consistently been financed unilaterally by plaintiff, who, under the terms of the Operating Agreement, cannot be liable for the debts of the LLC (Section 3.2). Defendant not only has failed to contribute equally in meeting the losses, but has affirmatively undermined the financial integrity of the LLC by withdrawing a substantial portion of his capital contributions, thus evidencing his inability or unwillingness to permit or promote the purpose of the LLC. Under these circumstances, it is only a matter of time, should plaintiff choose to exercise his right to refrain from making additional capital contributions or loans to the LLC, before the LLC will default upon its mortgage and the mortgage will be foreclosed, thus eliminating the sole purpose of the LLC. Accordingly, plaintiff has established that continuing the LLC is financially unfeasible and that the LLC should be dissolved. (See Mehraban v McIntosh, 2011 WL 486101, p.3 [Sup St, Nassau Co., 2011]).
The plaintiff also contended that, upon dissolution, he should be allocated a greater than 50% interest in the LLC proportional to his capital contributions and should be permitted to purchase Cohen's diminished interest. The plaintiff relied on Matter of Superior Vending, about which I wrote here, where the court ordered an equitable "liquidation" by means of requiring one member of the LLC to pay the other an amount equal to his investment in the LLC plus interest. Justice Demarest didn't buy it, distinguishing the two cases as follows:
Superior Vending involved a limited liability company formed to acquire and operate a vending machine company. The business had been originated by one of the members through his own corporation and was expanded to a second company through investments made by the other member three years later. No operating agreement was ever executed and the relationship of the LLC members terminated after two years, but the LLC continued to operate under the management of the original member. An initial effort to dissolve Superior Vending was abandoned by the departing member, but a new petition was brought three years later to recover his share of the assets and interim distributions. Unlike the case here, the members consented to dissolution and had severed their mutual operation of the business years prior to the litigation. Because one member had continued to operate, and had expanded, the business in the intervening years, the court found it appropriate, after determining the departing member's right to recovery on his investment, to permit the remaining member to purchase, or buy-out, the other member's interest for that sum, notwithstanding the absence of a provision for such relief in the LLCL. As is apparent from the stated facts of that case, the equities of the Superior Vending case differ from the circumstances at bar in which both members have remained active in the operation of the LLC and there has been no hiatus in their joint participation, other than that created by plaintiff's removal of the bank account from access by defendant.
The Mizrahi opinion, besides ordering dissolution and appointing the company accountant to perform an accounting, addresses a number of other interesting factual and legal issues, so do yourself a favor and read it in its entirety.
Further Thoughts on Youngwall and Judicial Dissolution of the Unprofitable LLC
Matter of Youngwall debuted on this blog last April (read here) when I wrote about a March 2008 decision (read here) by Nassau County Commercial Division Justice Stephen A. Bucaria, dissolving and appointing a receiver for a manager-managed LLC owned by two brothers. The court premised dissolution primarily on its finding that the LLC was not currently profitable.
Perry Youngwall, who opposed the dissolution petition brought by his brother, Nils, subsequently moved for reconsideration and to vacate the decision on various grounds. The headline grabber from Justice Bucaria's July 2008 decision denying the motion, which I wrote about last week (read here), was his ruling that the operating agreement's waiver of a member's right to seek judicial dissolution was unenforceable as against public policy.
This week, I want to re-examine the court's justification for dissolving the LLC, this time with the benefit of some additional facts brought out in the July 2008 decision.
By way of brief background, the LLC's sole asset is a commercial building profitably leased for many years by a company, Transaero, originally owned by the brothers' deceased father and currently controlled by Perry. Perry inherited all of his father's Transaero shares after the father disinherited Nils who is contesting the father's will in Surrogate Court. Transaero vacated the building on November 30, 2007, upon the expiration of its lease with the LLC. About two weeks later, Nils petitioned for dissolution of the LLC, contending that Perry rejected his requests to sell or re-let the building. Nils also claimed that the LLC's non-member manager, Thomas Megale, was allied with Perry and that deadlock existed because the approval of a lease requires both brothers' consent. Perry opposed dissolution on various grounds including the LLC's long track record of profitable leasing, the existence of a separate management agreement governing re-letting, and because the LLC continued to operate under the management of Megale who was pursuing the LLC's best interests.
In its initial decision, the court explained the factual basis for dissolving the LLC as follows:
Transaero was the only tenant, and there is no dispute that the LLC is not a profit-making entity at this time. Nor is there any admissible documentary proof that either the manager or the members are actively pursuing a future/current replacement for Transaero, notwithstanding the self-serving statements of the respondent [Perry] and the manager, whose motives are questionable, given the concurrent litigation in Surrogate Court and the latter's employment. The respondent's submission of an "agreement" purportedly dated October 8, 2001 does not qualify as documentary proof, inasmuch as there are numerous cross-outs and changes with no signature by either Nils Youngwall or Perry Youngwall.
In his subsequent motion to reconsider and vacate the court's decision, Perry claimed to have subsequently discovered a fully-executed copy of the October 2001 management agreement. He further asserted that in the prior proceedings Nils "defrauded the Court" by misrepresenting that he did not recall the document. Perry argued that the management agreement demonstrates that the LLC has procedures in place to go forward with re-letting the building. Perry also submitted an affidavit from a real estate broker showing that the LLC's building has substantial value as a rental property. Finally, Perry contended that retaining the property for rental will provide the LLC's members with a substantial annual profit.
In opposition, Nils denied any fraud or deception in regard to the October 2001 management agreement and pointed out that neither side had a signed copy on the original submission. Nils also contended that Perry and Megale had prior knowledge for over four months of Transaero's impending departure without taking any steps to market or rent the property and that there was no proof that anyone did so. He also argued that Perry's "belated" attempts to evaluate and propose to rent the property were irrelevant and improper on a motion for reconsideration.
Justice Bucaria's July 2008 decision rejected each of Perry's arguments. The October 2001 management agreement, which the court disregarded in its prior decision,
did not take the form of any contract with a real estate agent or broker to rent or lease the subject property. Taking note that the respondent [Perry] had given notice prior to September 2007 that Transaero would not be renewing the lease, the respondent and the manager [Megale] had not demonstrated any desire to rent or lease the subject premises for a period in excess of three months. That is the lack of demonstrable proof that formed the basis of this Court's ruling that the historical profit stream of the LLC was and had been effectively severed.
After noting that Perry did not proffer a reasonable excuse for his belated discovery of the executed management agreement, Justice Bucaria dismissed Perry's reliance on the agreement, writing:
[T]he management agreement does not prove that the LLC was an ongoing viable entity, only that the LLC was "prepared to deal with the re-letting of the [subject premises] . . .", not that it had done so. In fact, as provided in Section II, "The principal objective of the Managing Agent will be to operate the Property in such a manner as will maximize the financial return to the Company, with an emphasis on current income" (emphasis supplied). That mandate was not fulfilled. Nor is there any evidence that the manager had complied with Section IV of the management agreement, i.e., "Managing Agent shall advertise vacancies by all reasonable and proper means; provided, Managing Agent shall not incur expenses for advertising in excess of $500.00 during any calendar quarter without the prior written consent of the Company."
My first piece on the original Youngwall decision posed a series of questions roughly falling into two categories. First, is the decision consistent with the limited scope of Section 702 of New York's LLC Law, authorizing judicial dissolution "whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement"? Second, as a policy matter do we want courts to decide dissolution contests based on the complex set of factors and management prerogatives that influence a company's short and long term profitability?
I'll address those in reverse order. The facts brought out in the July decision paint a much clearer picture of a deliberate plan by Perry, with Megale's support, to let the LLC's building lie fallow indefinitely to exert financial pressure on Nils concurrent with the battle over the father's estate. Perry decided to relocate Transaero months before it happened, yet he and Megale took no steps whatsoever even to begin the process of re-letting. True, Nils filed for dissolution only two weeks after Transaero vacated the building at the end of November 2007. But even by the time the original court submissions were made in February 2008, there still was no sign of re-letting activity. That adds up to about 6 months of inactivity from the time Perry caused Transaero to give notice. The belated appearance of the signed management agreement, with its specific provisions for re-letting, only adds to the appearance of deliberate inaction. On these facts, it's hard to quarrel with the court's conclusion that Perry and Megale had no intention of re-letting the building, i.e., restoring the LLC to profitability.
The first question remains the harder one to answer. Nothing in the court's July decision augments the first decision's legal reasoning, namely, that because LLCs are formed to engage in business for pecuniary profit, an LLC whose operating agreement or articles of organization recite that is it formed for "any lawful business purpose" may be judicially dissolved on the ground that it is not making a profit. To be clear, the issue is not that an LLC's financial condition and prospects are immaterial to the overall propriety of dissolution in any specific case, it's whether the statute's core requirement, of the inability to carry on the LLC's business "in conformity with" the operating agreement or articles, should be predicated on frustration of an implied business purpose to make a profit.
If Youngwall involved a close corporation instead of an LLC, and the facts otherwise were the same, it would have the makings of a classic shareholder impasse and squeeze-out triggering a judicial dissolution remedy for deadlock and oppression under Section 1104 and 1104-a of the Business Corporation Law. I find Youngwall so fascinating precisely because it highlights Section 702's shortcomings as a judicial tool for resolving the most common varieties of LLC breakups which, contrary to assumptions seemingly underlying Delaware's "contractarian" school of LLC jurisprudence, do not involve LLCs with custom-tailored operating agreements carefully negotiated across the table with the assistance of highly sophisticated corporate counsel. More likely they involve an accountant's recommended use of an LLC for tax reasons with nary a thought given to governance issues, followed by the use of a recycled, non-negotiated form LLC agreement slapped together by the financial partner's lawyer without any other lawyer's participation.
Speaking of Delaware, Chancellor Chandler's R&R Capital opinion, discussed alongside Youngwall in last week's post on judicial dissolution waivers, posits Delaware's statutory covenant of good faith and fair dealing as a member's judicial backstop against abusive conduct by a controlling member when dissolution is not available. Does this suggest that Youngwall could be a case of a member seeking an inappropriate remedy based on the wrong claim? What about a derivative action for injunctive relief (to compel re-letting the building) and damages (for lost rental income) against the LLC's manager for breach of (1) New York's implied duty of good faith and fair dealing that attaches to the operating agreement, and (2) the manager's statutory duties of good faith and care under LLC Law Section 409? Section 1104-a(b)(1) of the BCL expressly requires the court to consider whether dissolution is the "only feasible means" for a shareholder to obtain a fair return on investment. Unfortunately, LLC Law Section 702 has no similar provision.
One final note. Justice Bucaria's July 2008 decision mentions that the court-appointed receiver listed the LLC's building with a broker for sale. Following the decision, Perry Youngwall filed a motion in the Appellate Division, Second Department, asking for a stay of sale pending his appeal from the March 2008 and July 2008 decisions. By order dated August 22, 2008, the appellate court denied the motion. In typical fashion the court's order offers no reasons, so it can't be read as an explicit approval of the underlying orders. I'm sure many lawyers nonetheless would opine that the denial of the stay motion, cognizant that an impending sale of the building likely will render moot Perry's appeal from the order of dissolution, implicitly takes a dim view of the merits of his appeal. I, for one, will be disappointed if the appellate court does not decide the case, but what do you expect from a blogger?
Update February 15, 2009: In a decision dated January 29, 2009, Justice Bucaria approved the sale of the LLC's building to an entity controlled by the respondent, Perry Youngwall, for $3.5 million, in preference to a proposed sale to an unrelated third-party buyer for $3.3 million.
Update July 14, 2010: The will contest between Nils and Perry has been decided. Nassau County Surrogate Riordan issued a ruling dated June 29, 2010, dismissing Nils' objections and admitting to probate the father's will which disinherited Nils.
Judicial Dissolution of the Unprofitable LLC
This is a tale of two cases, decided five years apart, involving my all-time favorite business divorce topic: judicial dissolution of the limited liability company (LLC). The cases raise the interesting question whether a member may seek dissolution on the ground that the LLC is not profitable.
First, a bit of background for the uninitiated. The LLC is an unincorporated business entity that combines the limited liability benefits of the corporation with the favorable pass-through tax treatment of partnerships. Compared to the highly structured, mandatory provisions of the business corporation laws, the LLC laws offer far more flexibility and freedom of contract among the LLC members to order their ownership, economic and managerial relations as they see fit. LLCs are fast on the way to becoming the preferred form of closely held business organization. Already, in a number of states including Delaware, new LLC filings outnumber new corporation filings.
The New York LLC Law's sparsely worded provision for judicial dissolution, codified in Section 702 of the LLC Law, borrowed its language from the limited partnership law. Section 702 provides in relevant part:
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 articles of organization generally parrot the minimal informational requirements set forth in LLC Law Section 203(e). Dissolution under Section 702 therefore is all about whether the member who seeks to dissolve the LLC can demonstrate that its business is not functioning as called for by the terms of the operating agreement. This is a narrower standard than that found in Sections 1104 and 1104-a of the Business Corporation Law governing closely held corporations. (For readers who'd like to learn more about the background of Section 702 and its treatment in the early case law, grab a hold of my June 2002 article published in the New York State Bar Association Journal, entitled "When Limited Liability Companies Seek Judicial Dissolution, Will the Statute Be Up to the Task?")
Now lets turn to the two cases, the first of which was decided in 2003 and is entitled Schindler v. Niche Media Holdings, LLC (read decision here). The case was brought by a one-third member of an LLC that owned and published magazines. The plaintiff, Schindler, accused the company's CEO, who held a 35.7% interest, of misappropriating company assets and wrongfully terminating Schindler's employment. The complaint included a claim to dissolve the LLC under Section 702 on the ground that liquidation was the only feasible means for the members to obtain a fair return on their investment.
Schindler moved to preliminarily enjoin the CEO from using LLC funds to pay his legal fees in defense of the action. New York County Supreme Court Justice Shirley Werner Kornreich denied the motion on the ground, among others, that Schindler had no likelihood of success on the merits of his underlying dissolution claim. Schindler, according to the judge, admitted the LLC's magazine business was flourishing and offered no evidence that the LLC was unable to carry on its business in accordance with the articles of organization or operating agreement. In so ruling, the judge construed Section 702 as follows:
While this standard has never been construed in the case law, the Court interprets it to mean that judicial dissolution will be ordered only where the complaining member can show that the business sought to be dissolved is unable to function as intended, or else that it is failing financially. [Italics added.]
I have no quarrel with the first part of the judge's statement, but the second part -- "or else that it is failing financially" -- struck me when I first read it as judicial fiat. There's nothing in Section 702 that even hints at financial failure as an independent basis for dissolution. The decision cites no case precedent for the proposition, which appears to be pure dicta in any event. Nor does the judge cite any statutory or case authority under the Business Corporation Law. On the contrary, BCL Section 1111(b)(3) says that dissolution should not be denied "merely because it is found that the corporate business has been or could be conducted at a profit." Profitability or the lack thereof, by itself, clearly is no basis to grant or deny dissolution, assuming the operating agreement itself does not set forth some measure of financial distress as ground for dissolution.
In subsequent years I have seen the Schindler formulation quoted on numerous occasions in published and unpublished decisions. In none of the cases, however, did the court grant or deny dissolution on the sole basis that the LLC was or wasn't operating profitably.
That is, none until last month, in a case called Matter of Youngwall (Youngwall Realty, LLC) decided by Nassau County Supreme Court Justice Stephen A. Bucaria (read decision here). The LLC involved in Youngwall had two members, brothers Nils (the one seeking dissolution) and Perry, and a non-member manager named Megale who allegedly was aligned with Perry. The decision does not specify the membership percentage interests held by the brothers. The LLC owned a commercial building profitably leased for many years to a company named Transaero Inc. that had been 80% owned by the members' father until his death in 2006. The father's bequest of all of his Transaero shares to Perry was being challenged by Nils in surrogate's court. Meanwhile, in September 2007 Transaero's lease expired and it vacated the property in November 2007. The next month Nils filed for dissolution, alleging that Perry rejected his requests to cause the LLC either to sell the now-vacant property or to find a new tenant, that without a rent-paying tenant the building had become a liability, and that the animosity between the two brothers made it impossible for them to confer or cooperate to carry on the LLC's business. Perry countered that there was no risk to the assets of the LLC which continued to operate under Megale's management who was pursuing its best interests.
Justice Bucaria begins his analysis by distinguishing the grounds for dissolution under LLC Law Section 702 from those governing closed corporations under BCL Sections 1104 and 1104-a. He aptly characterizes Section 702 as "more general, while being more specific" in its tie-in to the operating agreement. He then notes the provision in the parties' operating agreement stating that the LLC "is formed for any lawful business purpose," and observes that the term "business" is defined in LLC Law Section 102(e) as meaning "every trade, occupation, profession or commercial activity." He next refers to the Practice Commentary to the LLC Law in which the commentator states that "the drafters intended that LLCs form for pecuniary profit". He also cites the statement in Perry's affidavit that the LLC "can continue to operate and make further profit for its members," leading him to find that the "plain and ordinary content and intent of the parties and the Operating Agreement of the LLC was, and is, to make a profit for the members, Perry Youngwall and Nils Youngwall." Dissolution is warranted, Justice Bucaria concludes, because the LLC is no longer a profit-making entity. Here's the key passage from the decision:
The Court is cognizant of the past history of the LLC and its profit stream, and the uninterrupted income provided by the LLC . . . to the litigants/members herein. While instructive, it is not decisive of LLCL 702. The statute, as written, that a dissolution may be decreed when ". . . it is not reasonably practicable to carry on the [profitability] . . ." That language clearly contemplates the future of the LLC, i.e., after November 30, 2007 (when Transaero vacated the premises). Transaero was the only tenant, and there is no dispute that the LLC is not a profit-making entity at this time. Nor is there any admissible documentary proof that either the manager or the members are actively pursuing a future/current replacement for Transaero, notwithstanding the self-serving statements of the respondent and the manager, whose motives are questionable, given the concurrent litigation in Surrogate Court and the latter's employment. . . .
. . . Due to the intense personal animosity between the members, the lack of any proof of the current profitability of the LLC, the apparent inability ". . . to function as intended . . ." (Schindler v. Niche Media Holdings, LLC, 1 Misc3d 713, 772 NYS2d 781, 785, C.CT., NY County 2003), dissolution is appropriate. [Emphases in original.]
Note the citation to Schindler whose questionable dicta has now become the basis for dissolving the LLC in Youngwall, though in quoting from Schindler Justice Bucaria omits the phrase, "or else that it is failing financially."
I've got a bunch of questions, beginning with, what inconsistency is there between the express terms of the operating agreement in Youngwall and the fact that the building's current vacancy is causing a cash drain? If every LLC is formed for pecuniary profit (this seems self evident), is every LLC that fails to make a profit for any given period prone to judicial dissolution at any member's request? What motive would Perry have to keep vacant a valuable commercial property in which he has at least as much a beneficial interest as his brother? How much equity does the LLC have in the property? Is the property listed with brokers for sale or lease? Is it all that unusual for a one-tenant commercial property to experience vacancy for some months between tenants? Does the LLC have adequate cash reserves to weather a period of vacancy?
Also note the court's reliance on the brothers' personal animosity even though the operating agreement vests management of the LLC exclusively in Megale. Should it make a difference that Megale appears to be on Perry's side? Are Nils' grievances better suited for a derivative action asserting claims against Perry and Megale for breach of fiduciary duty for keeping the property off the market against the LLC's best interests?
Youngwall would be an easier, more compelling case for dissolution if it was a member-managed LLC with the two brothers in a 50-50 deadlock over the disposition of the property. I can only speculate that the deceased father foresaw fraternal strife and for that reason set up the LLC with a third-party manager.
The biggest question raised by Schindler and Youngwall is whether courts should ever consider dissolving an LLC solely on the ground of its unprofitability in the absence of some express provision in the operating agreement that creates the nonconformity required by Section 702. Here's how the argument against might go: Responsibility for LLC finances, business planning and profitability is vested in the managers of the LLC. Courts routinely defer to determinations by a corporation's board of directors on such matters under the business judgment rule. It should be no different for LLC managers. There are untold numbers of companies, public and private, that run in the red for periods of time before they either turn around or file for bankruptcy. Opening up LLCs for dissolution on the ground of unprofitability takes courts where they should not go and creates yet another, undesirable dissonance with the law governing dissolution of business corporations.
I suspect it will be far less than another five years before the next case raising this issue comes along. Stay tuned.
Update September 8, 2008: Read here my post of this date reporting on Justice Bucaria's July 2008 decision denying Nils' motion for reconsideration of the court's prior dissolution ruling.
Update February 15, 2009: In a decision dated January 29, 2009, Justice Bucaria approved the sale of the LLC's building to an entity controlled by the respondent, Perry Youngwall, for $3.5 million, in preference to a proposed sale to an unrelated third-party buyer for $3.3 million.
Update July 14, 2010: The will contest between Nils and Perry has been decided. Nassau County Surrogate Riordan issued a ruling dated June 29, 2010, dismissing Nils' objections and admitting to probate the father's will which disinherited Nils.
