Last week, in a decision of apparent first impression, the Albany-based Appellate Division, Third Department, upheld the dismissal of a proceeding under LLC Law Section 702 for judicial dissolution of a limited liability company owned by husband and wife on the ground that the wife’s prior-filed action against her husband for a divorce involved the same issues. Rossignol v. Rossignol, 82 AD3d 1335, 2011 NY Slip Op 01560 (3d Dept Mar. 3, 2011).
After 24 years of marriage, in 2007 Dolores Rossignol filed a divorce action against her husband, Daniel. Two years earlier, Dolores and Daniel formed dr2 & Company, LLC to operate a McDonald’s franchise. During the course of the divorce action, the judge entered an order restraining Daniel from accessing any funds in the marital or business banking accounts. The order also fixed the date of commencement of the action as the valuation date of the LLC and denied the husband’s request to liquidate and sell the LLC.
Daniel responded by commencing a separate proceeding for involuntary dissolution of the LLC under LLC Law Section 702. On the consent of the parties, the judge in the matrimonial action ordered the two cases to be consolidated for trial. Dolores then moved under Section 3211(a)(4) of the Civil Practice Law and Rules to dismiss the LLC dissolution case on the ground that the matrimonial case constitutes, in the words of the statute, “another action pending between the same parties for the same cause of action.” The judge granted the motion without prejudice to recommencement if any issues remained beyond the reach of the divorce action.
Daniel’s appeal presented a two-fold argument. First, he contended that the prior order consolidating the two cases precluded the subsequent order of dismissal. The Third Department disagreed, stating that a “true, organic consolidation did not occur here.” Instead, the lower court had merely “joined the actions for trial, keeping the individual actions intact and subject to separate resolution.”
Daniel’s second and more interesting argument was that the dissolution case “does not seek substantially the same relief as the divorce action.” The appellate panel again disagreed, writing as follows:
Pursuant to Domestic Relations Law § 234, Supreme Court is empowered to determine all issues with respect to the property owned by the parties (see Ripp v Ripp, 38 AD2d 65, 67 , affd for reasons stated below 32 NY2d 755 ). Indeed, “[t]he courts and the parties should ordinarily be able to plan for the resolution of all issues relating to the marriage relationship in the single [matrimonial] action” (Boronow v Boronow, 71 NY2d 284, 290 ). Inasmuch as the husband and wife are the only owners of the LLC, and both are parties to the divorce action, we see no reason why any issues should be left for resolution after equitable distribution of the parties’ property. Given the availability of complete relief pursuant to Domestic Relations Law § 234 and our public policy of resolving equitable distribution within the context of a divorce action (see O’Connell v Corcoran, 1 NY3d 179, 185 ; St. John v St. John, 201 AD2d 552, 552-553 ; Karasik v Karasik, 172 AD2d 294, 294 ), we conclude that dismissal of the second action was within Supreme Court’s broad discretion pursuant to CPLR 3211 (a) (4).
There are intriguing issues here that unfortunately are not addressed by the court’s decision either because they were not raised by Daniel in his appeal or because the court chose to ignore them. For starters, dismissal under the prior-action-pending rule of CPLR Section 3211(a)(4) requires an identity of the parties in the two actions. Yet the Rossignol decision effectively disregards the LLC entity which necessarily was named as a party in the dissolution case.
Why does it matter? Under LLC Law Section 601, members of the LLC have no direct ownership interest in the property of the LLC. Section 234 of the Domestic Relations Law, which seems to be the main pillar of the Rossignol decision, authorizes the court in a matrimonial case to determine “any question as to the title to property arising between the parties” and to “make such direction, between the parties, concerning possession of the property, as in the court’s discretion justice requires.” If the Rossignols have no direct ownership interest in the LLC’s property, and if the LLC is not before the court as a party, how does Section 234 authorize the court to dissolve the LLC and liquidate its property?
A second issue lurking in Rossignol‘s shadows is the question of dissolution itself. With the Section 702 dissolution proceeding gone, under what authority and on what grounds does the lower court decide whether the company should be dissolved? As best as I can tell from the decision, the wife in Rossignol opposes dissolution of the LLC. Will the court decide the issue using the Section 702 standard, i.e., whether it’s reasonably practicable to carry on the business in conformity with the provisions of the operating agreement? Or will the court use its broad, discretionary powers under the Domestic Relations Law to reach an “equitable” result?
My normal prescription for uncertainties like this is to advise LLC owners to deal with it expressly in the operating agreement. But let’s be realistic: how many married couples out there, going into business together, will say to one another when putting together an operating agreement, “Honey, is it okay if I put in a Section 10.2 providing that I get to buy out your interest for book value if we get divorced”?
Update March 8, 2011: Professor Gary Rosin, writing at the Unincorporated Business Entities Law blog, draws an interesting comparison between Rossignol and the highly controversial Olmstead decision last year in which the Florida Supreme Court ruled that the statutory charging order is not the exclusive remedy for a creditor seeking to enforce a judgment against the membership interest of a personal debtor who owns a single member LLC.