Can we all agree that the unincorporated business entity known as the limited liability company (LLC), which made its debut in 1977 in Wyoming before spreading nationwide, and the traditional business corporation, which has been around in the U.S. since at least the 1800’s, are distinct forms of business entities; that LLCs have “members” whereas corporations have “shareholders”; and that the two types of entities are governed by separate statutory schemes with different rules governing their judicial dissolution?
I raise the question in light of a recent decision in Scibelli v. Beacon Building Group, LLC, 2014 NY Slip Op 24199 [Sup Ct Queens County June 20, 2014], in which the trial court inexplicably granted a petition seeking dissolution of an LLC under both LLC Law § 702 and BCL § 1104-a.
The recognition of LLCs and corporations as distinct forms, at least for dissolution purposes, got off to a rocky start in New York. In 2002, when New York’s LLC Law was only eight years old, I published an article (read here) in which I commented critically that, in the handful of reported decisions in LLC dissolution cases, “almost all of them either explicitly or implicitly treat LLCs as business corporations subject to the same dissolution standards and remedies available under Business Corporation Law Article 11, without any acknowledgment of the statutory differences and without offering any rationale for doing so.”
Fast forward another eight years, to 2010, to Associate Justice Leonard Austin’s opinion for the Appellate Division, Second Department, in Matter of 1545 Ocean Avenue, LLC, in which, before pronouncing what since has become the prevailing, contract-based analysis for dissolution of LLCs under LLC Law § 702, the court recognized that LLCs “fall within the ambit of neither the Business Corporation Law nor the Partnership Law,” and that “it would be inappropriate for this Court to import dissolution grounds from the Business Corporation Law or Partnership Law to the Limited Liability Company Law” (read more about the 1545 Ocean Avenue decision here).
In the four years since 1545 Ocean Avenue — that is, until Scibelli — courts have applied its two-pronged standard for LLC dissolution, focusing on whether, in the context of the operating agreement, the LLC has suffered a failure of purpose or is financially unfeasible, without resort to the contrasting standards for dissolution of corporations under BCL §§ 1104 and 1104-a.
One of the best examples is the Appellate Division, First Department’s 2013 decision in Doyle v Icon, LLC, in which, citing 1545 Ocean Avenue, the court dismissed without a hearing an LLC dissolution petition alleging that the majority members had systematically excluded the petitioner from the LLC’s business affairs and had failed to distribute to the petitioner his profit share — allegations that, were they brought in the context of a closely held corporation, would state classic grounds for dissolution at the behest of an oppressed minority shareholder under BCL § 1104-a (read more about Doyle v Icon here).
Scibelli involved a two-member LLC in the construction business. The petitioning 25% member alleged, and the respondent 75% member did not dispute, that the company was doing no new business; that the respondent cut off petitioner’s access to financial records and bank accounts; that respondent failed to pay the company’s credit card debt; and that respondent stopped paying the petitioner any salary or benefits while paying himself and family members.
According to the decision, the petitioner pleaded claims for dissolution both under LLC Law § 702 and BCL § 1104-a. The decision initially addressed dissolution under the former statute and, citing 1545 Ocean Avenue, readily found that the petitioner satisfied both prongs of the failed purpose and financially unfeasible standard, and therefore was entitled to dissolution under LLC Law § 702. Nothing unusual so far.
But then, surprisingly, the decision also analyzed and granted the petitioner’s claim for dissolution of the LLC under BCL § 1104-a. After summarizing the statutory grounds for relief and case law defining shareholder oppression, the court observed that the company’s operating agreement “does not provide for dissolution under [BCL] § 1104-a” but that the petitioner “can still dissolve [the LLC] pursuant to [BCL] § 1104-a because dissolution pursuant to that statute is a right that all owners of 20% or more of a corporation have.” The court then concluded that the petitioner was entitled to dissolution under two different prongs of § 1104-a, one for the majority’s oppressive conduct and the other for corporate waste.
Question: The LLC’s operating agreement doesn’t provide for dissolution under BCL § 1104-a? Why would it? It’s an LLC governed by the LLC Law.
Question: LLC members have statutory dissolution rights under the BCL as “owners . . . of a corporation”? Not the last time I read the statutes and 1545 Ocean Avenue.
I suppose one could view Scibelli‘s reliance on the BCL in granting dissolution of the LLC as harmless dicta in light of the court’s initial holding that dissolution was warranted under LLC Law § 702. Still, whatever one thinks about the wisdom of having different dissolution standards for different forms of closely held business entities, as long as those standards differ under the existing statutes, it’s the job of the bench, with help from the bar, to ensure consistency in their application and nomenclature.