The fascinating case of Caplash v. Rochester Oral & Maxillofacial Surgery Associates, LLC, involving a multi-faceted litigation between 50-50 members of a dental surgery practice, was fodder last year for several appellate and trial court decisions which in turn were fodder for several posts on this blog (see here, here and here). In what likely is the case’s last hurrah, the Appellate Division, Fourth Department, earlier this month affirmed a series of trial court rulings by Monroe County Commercial Division Justice Kenneth R. Fisher including orders upholding the plaintiff’s standing to seek dissolution and granting dissolution based on deadlock.
The threshold issue in the case was whether an attorney hired by the defendant 50% member, Dr. Mohammed Salahuddin, had authority under the operating agreement (a) to accept on the company’s behalf a letter of resignation from the plaintiff Dr. Jolly Caplash, and (b) to assert counterclaims in the LLC’s name against Dr. Caplash. If the attorney had authority to accept the resignation letter, which in turn depended on which of the two doctors held the office of President in the aftermath of a June 2007 member meeting, Dr. Caplash’s membership was terminated and he lacked standing to seek dissolution.
In February 2008, the Fourth Department ruled that the issue could not be resolved without a trial of disputed factual issues. In a May 2008 mid-trial decision, Justice Fisher dismissed the counterclaims brought against Dr. Caplash in the LLC’s name, concluding that even if Dr. Salahuddin was President of the LLC with general authority to hire company counsel, he had no authority to hire company counsel to prosecute an action against a co-equal 50% member. Justice Fisher’s June 2008 post-trial decision found that Dr. Caplash held the President’s office and, therefore, the attorney hired by Dr. Salahuddin had no authority to accept Dr. Caplash’s resignation letter on the company’s behalf which left intact the latter’s entitlement to judicial dissolution of the deadlocked company.
On June 12, 2009, the Fourth Department issued a memorandum decision and order reported at 2009 NY Slip Op 04810 batting down all of Dr. Salahuddin’s arguments on appeal. In upholding the dismissal of the counterclaims brought against Dr. Caplash in the LLC’s name, the court quoted case precedent involving closely held corporations as follows:
" [W]here there are only two stockholders each with a 50% share, an action [or counterclaim] cannot be maintained in the name of the corporation by one stockholder against another with an equal interest and degree of control over corporate affairs; the proper remedy is a stockholder’s derivative action’ " (Stone v Frederick, 245 AD2d 742, 744-745).
The Fourth Department also upheld Dr. Caplash’s standing as a member to seek judicial dissolution, although its analysis differed from Justice Fisher’s. Whereas Justice Fisher concluded that the operating agreement effectively created a manager-managed LLC, with management authority vested in the President subject to override by (unanimous) action of the members, the Fourth Department saw the company as member-managed and, therefore, the question was whether Dr. Salahuddin’s hiring of company counsel was within the agency authority of a member under Section 412 of the LLC Law. Here’s what the court said:
[W]e conclude that the court did not err in concluding that plaintiff has standing to seek dissolution pursuant to Limited Liability Company Law § 702 (see generally Matter of Roller [W.R.S.B. Dev. Co.], 259 AD2d 1012), despite his submission of a letter of resignation. In our view, the company was a "member-managed LLC," rather than a "manager-managed LLC" (see generally § 412 [a]). Our analysis thus turns on the issue whether Salahuddin was authorized to appoint as company counsel an attorney who accepted plaintiff’s resignation letter transmitted to him by plaintiff before plaintiff cross-moved for dissolution. "An act of a member . . . that is not apparently for the carrying on of the business of the limited liability company in the usual way does not bind the limited liability company unless authorized in fact by the limited liability company in the particular matter" (§ 412 [c]). Since the appointment of company counsel by Salahuddin was neither for carrying on the usual business of the company, i.e., dental surgery, nor, as required by the terms of the operating agreement, sanctioned by majority vote of the company’s members, the company counsel allegedly appointed by Salahuddin was not authorized to represent the company and thus could not have accepted plaintiff’s purported resignation letter.
Even assuming, arguendo, that the company counsel was properly appointed by Salahuddin, we conclude that he was neither retained to address general business matters on behalf of the company nor authorized by the operating agreement to act on behalf of that entity (see Limited Liability Company Law § 102 [c]). . . . Moreover, there is no indication that the attorney in question in fact accepted plaintiff’s purported resignation before plaintiff cross-moved for dissolution (see Siegel, NY Prac § 249 [4th ed]), or that the purported resignation letter concerned plaintiff’s membership in the company, as opposed to his employment with the company.
The different approaches of Justice Fisher and the Fourth Department raise interesting issues of statutory construction and interplay with the operating agreement’s management provisions. In this case they both lead to the same result, but I suspect there will be other cases where the analyses and results could diverge.