There have been amazingly few New York appellate court rulings on LLC governance issues since the LLC Law’s enactment 14 years ago, and even fewer of any real significance.  That’s why I’m excited to write about a ruling last month by the Appellate Division, Second department in Manitaras v. Beusman, 56 AD3d 735 (2d Dept 2008), in which the court grappled with a disputed sale of an LLC’s sole asset in a fight between majority and minority members.  Lawyers who draft LLC operating agreements should pay close attention to the decision and its underlying issues concerning LLC control and the interplay between the operating agreement and statutory default rules.

Kisco Radio Circle Associates, LLC ("Kisco") was formed in 2001 to own and operate a single real property located in Mount Kisco, New York.  Anastasios Manitaras held either a 49.74% or 49.89% membership interest (the parties disagreed as to the precise figure) and a group of seven individuals collectively held the remaining majority interest.  Manitaras and three other members were the managing members.

In August 2007, counsel for the majority members notified Manitaras of an outside offer to purchase Kisco’s property for $5.8 million.  Under the operating agreement, the sale of the property was defined as an event triggering the LLC’s dissolution and winding up.  Manitaras opposed the sale and withheld his consent.  The majority members signed written consents authorizing the managing members to enter into a contract of sale.

Manitaras promptly filed a lawsuit seeking a declaration that, under their operating agreement, the consent of all members was required for the sale of Kisco’s sole asset.  The majority members contended that the sale was authorized by majority consent under LLC Law Section 402(d)(2) which states that,

Except as provided in the operating agreement . . . the vote of at least a majority in interest of the members entitled to vote thereon shall be required to . . . approve the sale, exchange lease mortgage, pledge or other transfer of all or substantially all of the assets of the limited liability company.

It’s not possible in this short treatment to capture the full scope and nuances of Manitara’s argument based on the various provisions of Kisco’s operating agreement, which is why I’ve provided links to the appellate briefs (see below).  The gist of it seems to be:

  1. The members have only those powers expressly given them by the operating agreement.
  2. The operating agreement does not expressly give the members the right to sell Kisco’s sole asset, or to authorize the managing members to do the same.
  3. The operating agreement limits the managing members’ actions to those in the ordinary course of business for the purpose of owning and operating the property.
  4. The operating agreement expressly mandates dissolution upon the sale of Kisco’s sole asset.
  5. The operating agreement expressly requires the consent of all members for dissolution.

In the lower court the two sides moved for summary judgment which was granted in favor of the majority members by Westchester County Commercial Division Justice Kenneth R. Rudolph.  Justice Rudolph’s decision dated November 26, 2007, agreed with the majority that its consent to the sale was effective under § 402(d)(2); that the managing members’ acceptance of the purchase offer as authorized by the majority was an "appropriate act in furtherance of the LLC’s purpose;" and that the "operating agreement does not mandate that the managing members’ actions be measured by a majority of the membership interest held by the managing members."

Manitaras appealed.  The Second Department’s short, unsigned decision does not delve into the many issues raised by the appeal.  In pertinent part, it notes that under the operating agreement,

[Kisco’s] management is vested in its managing members; only they may bind the company.  However, the defendants demonstrated that the operating agreement of Kisco Radio is silent on the issue of the sale of the company’s sole asset.  Therefore, the default provisions of the Limited Liability Company Law apply (see Overhoff v Scarp, Inc., 12 Misc 3d 350, 359; Matter of Spires v Lighthouse Solutions, LLC, 4 Misc 3d 428, 435; Rich, Practice Commentaries, McKinney’s Cons Laws of NY, Book 32A, 1[A], at 176).  In relevant part, Limited Liability Company Law § 402(d)(2) provides that the vote of at least the majority in interest of the members entitled to vote is required to approve the sale of all the assets of a limited liability company. That requirement was met here.

The Overhoff decision cited in the above passage is an interesting one.  The court there held that the default rule in LLC Law § 407(a), authorizing member action without a meeting by written consent of the minimum percentage of members required to take such action at a meeting, was not trumped by the operating agreement’s 100% quorum requirement for member meetings.  The Overhoff court refused, however, to enforce majority written consents as to certain actions, including the sale of company assets, as to which the operating agreement expressly required unanimous member approval.

The latter point parallels the opposing contentions in Manitaras.  The majority contended that the operating agreement was silent on the issue of an asset sale thereby defaulting to § 402(d)(2), whereas Manitaras relied on a pastiche of provisions, setting forth general limitations on the powers of the members and managers, to fill the silence and thereby avoid the default rule.  In siding with the majority, the Second Department seems to be saying that if a minority member wants to vary the default rule favoring the majority, it must obtain such protection in the operating agreement unequivocally with specific reference to the type of transaction at issue.

Another possible lesson concerns the effect of omnibus purpose clauses in operating agreements.  Kisco’s operating agreement defined Kisco’s purpose as "to own and operate the Property and to engage in any lawful act or activity for which limited liability companies may be formed under the Act, and to engage in any and all activities necessary, advisable or incidental thereto."  Manitaras relied on the first clause ("to own and operate the Property") as a limitation on the powers of the members and managers to sell the LLC’s realty, whereas the majority emphasized the omnibus purpose language that follows.  Justice Rudolph’s decision specifically noted that the managing members’ acceptance of the purchase offer was an "appropriate act in furtherance of the LLC’s purpose," which presumably is a reference to the omnibus purpose language.  In this respect Manitaras is of a kind with the Delaware Chancery Court’s Seneca decision about which I wrote last October (see here) in which the court rejected a minority LLC member’s dissolution petition — the company had ceased business operations and merely held investment securities — largely based upon the LLC’s omnibus purpose clause.

Two final observations:  First, in his reply brief Manitaras argues that the operating agreement’s standard merger or integration clause preempts application of the LLC Law’s default rules.  The Second Department’s decision does not comment on the argument, but this raises an interesting theoretical question, whether a provision in an operating agreement expressly barring application of some or all of the LLC’s default rules would be enforceable even if the operating agreement otherwise is silent on the issue in dispute.   Second, the dispute in Manitaras would not have arisen prior to 1999, when the legislature amended § 402(d) by lowering from two-thirds to a bare majority the member voting requirement for dissolution, sale of assets and merger.  

I am grateful to the attorneys in the Manitaras case, Leonard Benowich and Martin J. King, for sharing copies of their appellate briefs.  To read them, click on the below links.

Appellant’s Brief

Respondents’ Brief

Appellant’s Reply Brief