It’s been a year since the Appellate Division, Second Department, altered the LLC dissolution landscape in New York with its decision in the 1545 Ocean Avenue case. Justice Leonard Austin’s scholarly opinion for the court in that case articulates, for the first time since New York adopted the LLC form in 1994, a cogent standard for involuntary dissolution of LLCs under section 702 of the LLC Law (LLCL) whereby courts must assess the company’s financial feasibility, and its ability to fulfill its stated purpose, “in the context of the terms of the operating agreement or articles of organization.” Equally important, the court’s contract-based analysis carefully distinguishes itself from, and instructs courts in LLC cases not to mimic, the more nebulous, equity-infused standards applied by courts under Article 11 of the Business Corporation Law in dissolution cases involving close corporations. (For a more detailed examination of 1545 Ocean, read here my February 2010 post.)
Over the last year I’ve been waiting to see how the lower courts apply the new standard. My patience was rewarded with a trio of unpublished decisions issued last month by three different judges in three different counties within the Second Department. The scorecard is an interesting one: dissolution granted in one, denied in another, and a hearing ordered in the third. While none of the three puts 1545 Ocean to a hard test, it seems clear that the appellate decision is already making a difference. Let’s take a look at the three decisions:
The case involves a convoluted real estate venture gone sour. The two defendants jointly owned real estate where they operated a nursery school. To save the property from foreclosure, they entered into a written joint venture agreement (JVA) with the plaintiff under which the deed was transferred to a new LLC owned 25% by each of the defendants and 50% by plaintiff, with the latter serving as manager. The overall plan was to subdivide and develop the parcels, after which the portion with the school would be re-conveyed to defendants in exchange for their assignment of their LLC membership interest to plaintiff. The JVA obligated the three members individually to fund the mortgage redemption along with the expenses of the subdivision, development and maintenance.
The mortgage was redeemed but the venture later stalled amid cross-accusations between the two factions of failing to pay expenses as required by the JVA. Due to its growing debts and liens, the LLC could not obtain a certificate of occupancy for the school, which in turn prevented it from getting approval for the subdivision.
Noting that the defendants did not “directly” contest the plaintiff’s request for dissolution under LLCL 702, the decision by Nassau County Commercial Division Justice Ira B. Warshawsky discusses the dissolution standard under 1545 Ocean and accordingly begins its analysis by looking at the LLC’s articles of organization and operating agreement, both of which contain the same, broad purpose clause “to engage in any lawful act or activity.” Justice Warshawsky then focuses on another provision in the operating agreement stating that the “prime intent of the members, initially, is to implement the Joint Venture Agreement.” Given the LLC’s growing debt, its lack of an income stream, and its doubtful ability to obtain subdivision approval — the latter being critical to achievement of the JVA’s ultimate goal of separating ownership of the subdivided parcels — Justice Warshawsky granted dissolution, concluding that, “in the context of the terms of the operating agreement and articles of [organization], that continuing the entity is financially unfeasible.”
The case involves a dispute between minority and majority members of an LLC in the business of document process outsourcing. The minority petitioners sought dissolution under LLCL 702 based on various claims of malfeasance by the majority including improper decision making, improper loans and check signing, and co-mingling of funds.
The decision by Queens County Supreme Court Justice Sidney F. Strauss denies dissolution based on the petitioners’ failure to satisfy the standard for dissolution set forth in1545 Ocean. Specifically, Justice Strauss finds that the petitioners fail to make any showing that the LLC “can no longer meet its business purpose regarding the intake of consumer database,” and also fail to make any “showing that the company is financially unfeasible.” A petitioner “must plead facts reflecting the inability of the entity to carry on its business in accordance with the articles of organization” and may not merely “parrot” the language of LLCL 702. The “palpable” animosity between the parties, Justice Strauss adds, “alone will not support a petition for dissolution.”
The third case bears a very close likeness to the above-discussed Mehraban case. It, too, is a real estate development venture using an LLC owned 50% by one member and 25% each by the two opposing members. It, too, ended up in foreclosure and experienced problems obtaining site plan approval from local authorities, forcing it to change its original development plans. The petitioning members sought dissolution based on the inability to implement the original plan; because the respondent member “mismanaged” the property “resulting in a drastically reduced value”; and because of the pending foreclosure. The respondent member countered that the petitioners were aware of, and approved, the modified site plans; that the petitioners failed to respond to cash calls forcing respondent to make up the shortfall; and that the operating agreement’s broad purpose clause (“to engage in any lawful act or activity”) “is being achieved and that the development plan for the LLC’s property is extremely close to approval and fruition.”
The decision by Suffolk County Commercial Division Justice Emily Pines offers the following quote from 1545 Ocean Avenue before ruling that the petition raises factual issues requiring discovery and trial:
The court will not dissolve an LLC merely because the LLC has not experienced a smooth glide to profitability or because events have not turned out exactly as the LLC’s owners originally envisioned.
(Actually, the quoted passage belongs to the Delaware Chancery Court’s decision in Matter of Arrow Investment Advisors, LLC, 2009 WL 1101682 (Del Ch Apr. 23, 2009), which is quoted in 1545 Ocean Avenue.) Justice Pines explains further:
The records both in support and in opposition to the dissolution present numerous issues of fact as to the operations and purpose of The LLC as well as whether or not, it is reasonably practicable to carry on The LLC. In addition, attached to the opposition papers, the Respondent has provided copies of letters from 3rd parties, expressing interest in the Subject Property, which may weigh in on the issue of financial feasibility.
Therefore, the Court cannot determine as a matter of law, that it is no longer reasonably practicable to carry out the purpose of The LLC and judicial dissolution at this time, is not warranted.
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It’s hard to say whether the result in any of these three cases would have been different in the free-wheeling, pre-1545 Ocean era. But it does seem clear that the courts are approaching the issue in a uniform fashion guided by the appellate decision’s contract-based analysis.