It’s that time of year again, when languid summer days and vacation plans push aside all but the most serious work-related endeavors, and when I share with my readers a few short summaries of recent decisions of interest in business divorce cases.
First, we’ll look at a decision in an LLC dissolution case in which the court dismissed the petition brought by an excluded LLC member for failure to allege adequate grounds. Next up is a case in which the court denied a preliminary injunction to compel certain distributions pending the trial of a corporate dissolution and companion plenary action. In the third case highlighted below, the court summarily dismissed a complaint seeking to recover a share of company profits for the period preceding revocation of an LLC membership purchase agreement.
Minority Member’s Alleged Exclusion From LLC’s Business Operation Does Not Establish Grounds for Judicial Dissolution
Matter of Nunziata (Dinunzlu Group, LLC), Short Form Order, Index No. 4577/13 (Sup Ct Queens County July 25, 2013). The case involves a three-member LLC that owns real property leased to a funeral home operated by a separate corporation owned by the same three individuals. One of the members filed two separate proceedings for dissolution of the LLC and the corporation, alleging that the funeral home was not paying rent to the LLC; that he has been excluded from all aspects and control of the business, and that it is not reasonably practicable for the LLC to carry on its business if the court directs dissolution of the corporation in the other proceeding.
The respondent members moved to dismiss the LLC dissolution petition for failure to state a claim. Quoting from the seminal 1545 Ocean Avenue case, Queens County Commercial Division Justice Orin R. Kitzes observed in his decision that “[i]n determining an application for judicial dissolution of a limited liability company, the court must first look to such company’s operating agreement to determine ‘whether it is or is not reasonably practicable for the limited liability company to continue to carry on its business in conformity with the operating agreement.'” In Nunziata, the LLC agreement designated the two respondent members as the managing members, hence the allegations by a non-manager member, that he was systematically excluded from the business, were insufficient to meet the standard for judicial dissolution. Case dismissed.
Nunziata is of like kind with Doyle v. Icon, LLC, a case I wrote about earlier this year, in which the Appellate Division, First Department, squarely held that an LLC dissolution complaint will not survive a motion to dismiss if all it alleges is exclusion from the business of the LLC, i.e., without also alleging that the LLC is financially failing or that management is unable or unwilling to reasonably promote or permit the LLC’s stated purpose to be achieved.
Preliminary Injunction Denied to Dissolution Petitioner Receiving Millions in Distributions
Joseph v. Joseph, Short Form Order, Index No. 16982/09 (Sup Ct Nassau County July 16, 2013). The case involves a chain of retail shoe and clothing stores in the New York area operated by a corporation owned 2/3 by Joseph Joseph (“Joseph”) and 1/3 by his brother, Elazar Joseph (“Elazar”). The stores are leased from a series of LLCs also co-owned by the brothers. Elazar stopped working for the company in 2009 after which Joseph took control. Joseph thereafter sued Elazar for damages, accusing him of various fiduciary breaches, which prompted Elazar to sue for judicial dissolution of the corporation under the minority shareholder oppression statute.
Pending the trial, Elazar sought a preliminary injunction under §1115 of the Business Corporation Law, inter alia, directing Joseph to pay all back rent on the leases, and to resume making salary and other payments to Elazar and his children. In opposition, Joseph alleged that Elazar had received over $8.2 million from the business since the commencement of the litigation in 2009. Nassau County Commercial Division Justice Stephen A. Bucaria agreed with Joseph and denied the requested injunction, stating that “[i]n view of the unrebutted showing that Elazar is receiving substantial distributions from the family business, [Elazar has] failed to show that [he] will suffer irreparable injury if preliminary injunctive relief is not granted.”
Revocation of LLC Membership Interest Purchase Agreement Defeats Entitlement to Profit Share
Glick v. Sara’s New York Homestay, LLC, 2013 NY Slip Op 31719(U) (Sup Ct NY County July 25, 2013). In January 2011, the plaintiff acquired from the two existing members a one-third membership interest in an LLC pursuant to a written agreement with a provision giving any party the option to revoke the agreement by a specified date in September 2011. It also provided for the retention in escrow of the purchase monies during the revocation period, to be refunded in the event the option is exercised. The parties amended the agreement twice to extend the revocation period to January 2012. On December 30, 2011, the sellers exercised the option and returned the plaintiff’s purchase monies.
The plaintiff then brought suit against the LLC and its members for breach of contract and other claims, alleging that she was entitled to a percentage of the LLC’s earnings for the year 2011 while she was a member. On defendants’ motion for summary judgment, Manhattan Supreme Court Justice Ellen M. Coin agreed that, even though the agreement had a provision for payment of draws and division of earnings at year’s end, the rescission agreement “did not call for payment of such earnings, but only for refund to plaintiff of ‘all sums paid [toward the purchase price].'” Absent an express or implied reservation of rights to make further claims upon revocation, the plaintiff had no right or even standing to assert claims or seek any recovery other than the return of her purchase monies. “Having received the benefit of her bargain under the revocation section of the purchase agreement,” Justice Coin concluded, “she cannot maintain this action.”