Closely held companies with multiple owners actively involved in the business sometimes use employment agreements between the company and the owners, separate and apart from the shareholders’ agreement (for corporations) or operating agreement (for LLCs). Such employment agreements are especially prevalent in medical practices where, among other reasons, restrictive covenants are routinely used to prevent departing doctors from establishing competing practices in the same locality.

Quite often the shareholders’ or operating agreement and the employment agreement will provide that, upon termination of employment, the shareholder or member is required to redeem his or her interest in the company on specified terms. Disputes and litigation, including proceedings for judicial dissolution of the business, may erupt when the outgoing owner perceives enough of a disparity between the specified compensation (or lack thereof) and the “real” value of his or her interest.

A decision last week by an intermediate appellate court in Rochester, involving a medical practice organized as an LLC, highlights the interplay between the interest redemption triggered by termination of employment and the threshold issue of standing to seek judicial dissolution of an LLC under Section 702 of the Limited Liability Company Law.  The statute confers standing to seek dissolution upon members only.

In Caplash v Rochester Oral & Maxillofacial Surgery Assoc., LLC, 48 AD3d 1139 (4th Dept 2008), the trial court summarily granted the plaintiff’s application to dissolve the practice. On appeal by defendant, the panel of five appellate judges unanimously reversed the lower court’s decision on the ground that defendant raised a genuine issue for trial whether, based on plaintiff’s apparent resignation, he was a member of the company within the meaning of the statute when he sought dissolution. Here’s what the court said:

Defendant submitted a letter from plaintiff to the company indicating that plaintiff was resigning as an employee of the company, and he also submitted a letter from an attorney who purported to accept plaintiff’s resignation on behalf of the company. The company operating agreement unequivocally provides for the termination of membership in the event of the termination of a member’s employment with the company, and plaintiff’s employment agreement specifies that “This Agreement shall terminate . . . at any time by mutual agreement in writing by Employer and Employee.” The record does not disclose the circumstances under which the attorney came to represent the company and whether such representation was authorized by the operating agreement. We thus conclude that there is an issue of fact whether plaintiff has standing to seek dissolution.

The appellate decision does not reveal any additional facts, such as the percentage membership interest of the plaintiff and whether, for instance, the issue concerning the attorney’s authority to act on behalf of the company arose because the plaintiff and defendants were 50/50 members. In any event, the decision is another reminder that, no matter how high temperatures rise when business partners are on the brink of breakup, careful reading of agreements and obtaining advise of counsel should precede any decisive steps.