In a post last year entitled “Squabbling Partners with Piecemeal Adjudications Need Not Apply,” I wrote about Nassau County Commercial Division Justice Stephen A. Bucaria‘s creative adaptation of the ancient common-law principle of partnership law, forbidding actions at law between partners prior to dissolution and a final accounting, to cases involving close corporations and LLCs.
Essentially, in a series of cases involving claims among co-owners of close corporations and LLCs for breach of fiduciary duty and the like, Justice Bucaria likened these cases to partnership disputes and either conditioned relief on one side bringing a dissolution claim or dismissed the complaint with leave to replead including a claim for dissolution or buy-out.
The squabbling-partners rule applicable to corporations and LLCs now has a corollary, also courtesy of Justice Bucaria: if you do bring a claim for dissolution, don’t expect you’ll be able to withdraw it later for the purpose of gaining interim injunctive relief against your adversary.
The corollary appears in a recent decision by the judge in PFT Technology LLC v Wieser, Short Form Order, Index No. 8679/12 [Sup Ct Nassau County Apr. 13, 2015]. The case, commenced in 2012, involves a four-member LLC in which the three majority members brought suit in the LLC’s name against the fourth seeking judicial dissolution of the LLC and also asserting claims for breach of fiduciary duty. The defendant member opposed dissolution, demanded a fair-value buy-out of his membership interest, and counterclaimed against the three majority members for breach of fiduciary duty.
The Prior Rulings
Justice Bucaria issued several interesting decisions along the way:
- In July 2013, he denied the defendant’s request for summary judgment on his counterclaim for contractual indemnification and advancement of his legal expenses (read here).
- That ruling was superseded by a February 2014 decision, which I wrote about here, in which Justice Bucaria granted the defendant’s renewed request for advancement to “level the playing field” with the advancements taken by the majority members.
- In a May 2014 decision (read here), Justice Bucaria fixed a valuation date of July 9, 2012 (the day before the filing of the dissolution action) for purposes of a fair-value appraisal of the defendant’s membership interest. He also granted the defendant’s request for post-valuation date discovery.
- In a November 2014 decision (read here), Justice Bucaria denied both sides’ motions to reconsider his prior rulings on the valuation date and discovery of financial records subsequent to the valuation date.
The case subsequently went in a new direction when the majority members objected to the defendant’s business activities allegedly competitive with the LLC, contending that he was in violation of a provision in the LLC’s operating agreement prohibiting a member from engaging in competitive activities “[u]ntil the time that the Company is terminated and dissolved pursuant to the terms of this agreement.”
Justice Bucaria denied the LLC’s application for a preliminary injunction in a February 2015 ruling (read here) on the grounds that, absent a buy-out, dissolution likely would be granted due to the “ongoing, acrimonious dispute” and that, since “dissolution is imminent, the operating agreement does not prohibit the members from engaging in other business activity.”
The LLC’s Subsequent “Withdrawal” of its Dissolution Claim
Consistent with the apparent motto of this case — if you don’t succeed at first, try, try again — the LLC moved to reargue its unsuccessful motion for a preliminary injunction, primarily on the ground that it was “no longer seeking dissolution of the company.”
The LLC’s precipitous reversal of its basic stance on dissolution, over two and a half years after filing the action, did not impress Justice Bucaria who denied the motion.
First, he noted that there had been no formal discontinuance of the complaint’s dissolution claim.
Second, even assuming such discontinuance, the squabbling-partner rule would come into play, thereby raising the prospect of dismissal of the LLC’s entire complaint. Here’s what Justice Bucaria wrote:
Moreover, “courts are generally loath to intercede in squabbles between partners that result in piece-meal adjudications, preferring that partners either settle their own differences amicably or dissolve and finally conclude their affairs by a full accounting” (Gramercy Equities Corp. v Dumont, 72 NY2d 560, 564-65 [1988l). The same reluctance to intervene without dissolution and a full accounting applies to disputes between members of a limited liability company. while the Limited Liability Law does not expressly authorize a buyout in a dissolution proceeding, it is an appropriate equitable remedy in such a proceeding (Mizrahi v Cohen, 104 AD3d 917, 920 [2d Dept 2013]). In the present case, the court is reluctant to adjust the parties’ breach of fiduciary duty claims, absent dissolution or buyout of [defendant’s] interest.
Third, Justice Bucaria interpreted the operating agreement’s non-compete provision in light of the members’ “fiduciary duty of good faith” codified in LLC Law § 409(a), as
prohibiting a departing minority member from competing with the company, only so long as the majority members proceed in good faith with the dissolution of the company. PFT has not established a likelihood of success on the merits that it is proceeding in good faith with dissolution of the company.
In other words, where an LLC agreement ties the termination of a member’s non-compete obligation to the company’s dissolution, the majority members who are behind the company’s request for dissolution cannot undo or stall the request for the purpose of keeping the non-compete alive and enforceable against the departed minority member.
As the PFT Technology case approaches its third anniversary with no resolution, it serves as yet another illustration of the high cost of omitting an effective buy-sell provision from the LLC’s operating agreement.
Update February 7, 2016: In a decision dated January 21, 2016 (read here), amongst a series of other rulings on various motions by the parties, Justice Bucaria ordered the LLC’s dissolution, finding that “[i]n view of the ongoing dispute among the parties, the majority members . . . are unable to carry on business with Wieser.” The decision also orders the plaintiff majority members to provide an accounting to be conducted in conjunction with a valuation hearing (read here my post on Justice Bucaria’s May 2014 decision setting a valuation date).