“The Company is formed for any valid business purpose”
Nine seemingly benign words in the garden-variety operating agreement of a realty holding LLC. Nine words that, as one judge opined under similar circumstances some years ago, are tantamount to “no stated purpose.” Yet, in a case decided earlier this month called Lazar v Attena LLC, 2020 NY Slip Op 33003(U) [Sup Ct NY County Sept. 9, 2020], those nine innocuous words produced a first-round knockout of a dissolution petition brought by members of three affiliated LLCs that had sold off their realty assets and essentially had already wound up their business. Let me explain.
Under section 702 of the New York LLC Law, as construed by the courts, an LLC member may apply for judicial dissolution if either (1) management is unable or unwilling to permit or promote the LLC’s “stated purpose” as expressed in the operating agreement or articles of organization, or (2) continuing the LLC is financially unfeasible. The vast majority of LLC dissolution cases fit within the first, failed-purpose category.
The failed-purpose test’s focus on the LLC’s “stated purpose” has generated controversy and litigation, especially in dissolution cases involving realty holding LLCs. For instance, in 2015, in the Ross case that I wrote about here, Justice Timothy Driscoll cited the operating agreement’s broad purpose clause (“any lawful act or activities for which limited liability companies may be formed under the [NY LLC Law]”) in dismissing a dissolution petition brought after the LLC’s sole realty asset was sold and the controlling members decided to reinvest the sale proceeds in a new property rather than distributing them. The court rejected the petitioner’s contention that the LLC’s no-longer-achievable, unwritten, sole purpose was to acquire and operate the original property. Continue Reading The Purposeless Purpose Clause Rides Again