Two major themes are at work in a noteworthy decision last month by Manhattan Commercial Division Justice Charles E. Ramos in Goldstein v Pikus, 2015 NY Slip Op 31455(U) [Sup Ct NY County July 20, 2015], dismissing a petition for judicial dissolution of a New York limited liability company.
First, a petition asserting hostility-infused deadlock between co-managers of a New York LLC will be dismissed summarily absent allegations that the deadlock defeats the LLC’s purposes as defined in the operating agreement, or is causing the LLC to fail financially. Deadlock, per se, doesn’t cut it.
Second, single-asset real estate holding companies present a greater challenge for the dissolution petitioner alleging a dysfunctional relationship between co-managers. No matter the level of discord between co-managers, tenants must continue paying rent and the landlord must continue providing building services, maintenance and financial upkeep. In other words, compared to the operational mayhem and business impairment often caused by warring co-owners of a sales or service business, the realty firm’s purpose and finances tend to remain intact, making it harder to satisfy the dissolution standard for LLCs.
Goldstein stems from a fight for control of Ten Sheridan Associates, LLC, which was formed in 1996 to acquire a 14-story, mixed-use rental building with 73 residential apartments located in Manhattan’s West Village. All of the apartments are rent regulated.
Stuart Goldstein and Jeffrey Pikus each own 50% of the LLC’s Class A voting membership interests. Section 5.1(a) of the LLC’s Operating Agreement (read here) designates them the LLC’s sole managers and grants them authority to make all decisions “affecting the Company, its policy and management . . . including but not limited to, the purchase, sale, finance, mortgage, lease of any real estate or personal property of the Company . . ..”
However, Section 5.2 appoints as Managing Agent a company owned by Goldstein, known as SDG Management Corp., with authority to operate and manage the building including “the right to enter into, make and perform any and all contracts, leases and other agreements related to the management of the Premises, whether or not such agreements are with persons or entities affiliated with any Member.”
The LLC’s “business and purpose” is broadly defined in Section 2.3, to
acquire, own, hold, expand, renovate, lease, manage, sell, operate the real property located at 10 Sheridan Square, New York, New York (the “Premises”) and such other business activities and operations that are reasonably related thereto, subject to the conditions hereinafter contained.
At pages 10-16 of his decision, Justice Ramos describes various disputes that arose between Goldstein and Pikus beginning in 2012 over the management and control of the building, with each accusing the other of various wrongdoing. In a nutshell, Pikus charged Goldstein with freezing him out of the management of the property and of the company, and cutting off Pikus’s share of management fees. Pikus also accused Goldstein of renting apartments at the building to his two children through below market rate “sweetheart leases,” ultimately to enable them to purchase their apartments at insider prices if and/or when the building is converted into condominiums.
Goldstein accused Pikus of mismanaging vacancies and attempting to artificially inflate the company’s rent roll and stockpile vacant units, in order to increase the value of Pikus’s membership interest by forcing a premature sale or refinancing of the property. Goldstein also accused Pikus of interfering with SDG’s ability to manage the property.
These disputes notwithstanding, as Justice Ramos points out, from its inception the LLC was and remains profitable.
Goldstein Strikes First
In April 2014, Goldstein filed a complaint against Pikus (read here) primarily seeking a declaration that, under the Operating Agreement, Pikus’s authority as manager is limited to decisions concerning the sale and financing of the property, and that all other management authority was delegated to SDG.
Pikus contended that he and Goldstein were parties to an oral side agreement that effectively modified the Operating Agreement, and which allegedly had been honored since the LLC’s inception, conferring on Pikus authority over the building’s day-to-day operations and guaranteeing him certain management fees.
Pikus Files for Dissolution
At the initial appearance in June 2014 before Justice Ramos in Goldstein’s lawsuit, counsel for Pikus commented on the record that “[o]ne thing that we may have to do down the road, your Honor, is seek to dissolve the LLC,” to which Justice Ramos immediately responded, “I would recommend that by the way.”
Four months later, Pikus filed a petition to dissolve the LLC, the very first paragraph of which alleges, “The Court (Ramos, J.) recommended that Petitioner bring this special proceeding pursuant to [LLC Law] § 702 to affect the judicial dissolution of Ten Sheridan Associates, LLC.”
Pikus’s dissolution petition (read here) contends that Goldstein improperly rented building units to his children for below market rents, thereby lessening the property’s value and, in retaliation for Pikus’s objection to Goldstein’s self-dealing, that Goldstein froze Pikus out of the company. The petition further alleges that Goldstein’s prior-commenced lawsuit evidences “a conflict and disagreement among the Managing Members not only as to how the Property is to be managed, but also as to who is authorized to manage the Property.”
In his supporting and reply memoranda of law (read here and here), Pikus argued that Goldstein’s “hoarding” of apartments so that his family can profit at the company’s expense “contravenes the Company’s stated purpose of renting and selling the Property for the Company’s pecuniary benefit.” Pikus also argued that dissolution is warranted because he and Goldstein “are deadlocked, cannot resolve their differences, and blame each other for the Company’s problems.”
Goldstein and the Class B non-voting members opposed the petition and moved for its summary dismissal on the ground that it failed to allege adequate grounds for dissolution under LLC Law § 702 as that statute has been interpreted in the 1545 Ocean Avenue case and its progeny, that is, that Pikus’s petition failed to allege facts showing that the LLC was unable to achieve its purpose as stated in Section 2.3 of the Operating Agreement or that the LLC is failing financially. Goldstein and the Class B members argued that there existed no real deadlock and that, in any event, deadlock does not warrant dissolution unless the disagreements render the LLC unable to achieve its stated purpose or imperil its financial feasibility. (Read here and here Goldstein’s opening and reply briefs, and here and here the Class B members’ opening and reply briefs.)
Justice Ramos’s Decision
Justice Ramos’s 46-page decision addresses dueling summary judgment motions in Goldstein’s lawsuit as well as the dissolution claim in the later-commenced proceeding brought by Pikus. As to the former, at pages 18-26 of the decision Justice Ramos invokes the statute of frauds to invalidate Pikus’s alleged oral side agreement modifying the Operating Agreement, and declares that SDG has the authority to manage the property under the Operating Agreement. Also of interest is Justice Ramos’s ruling at pages 35-37, dismissing Pikus’s counterclaim seeking to remove Goldstein as manager, on the ground the Operating Agreement contains no provision authorizing such removal.
Justice Ramos’s discussion of Pikus’s dissolution petition begins at page 40. Here’s how Justice Ramos summarizes Pikus’s position:
Pikus contends that dissolution of the Company is warranted because Goldstein’s actions in renting apartments to family members at below market rates, providing long term rent protection to those members, and stockpiling apartments for purchase in the event of a condominium conversion, have prohibited the Company from realizing or achieving its purpose -“to generate as much revenue as possible from the leasing and sale of the Property” (Petitioners Memorandum of Law in Support of the Petition, at 2).
Pikus additionally contends that the conflict and disagreement between the Company’s two managers with respect to the management of the Property make it unfeasible to carry on its business. More specifically, Pikus contends that the Managers’ dispute, over whether or when to sell the Property, has “deadlocked” the Company’s operations: i.e., unanimity cannot be reached because one Manager wants to maximize the Company’s value by converting the Property to a condominium, or by refinancing and then converting the Property to a condominium, while the other ostensibly desires to maintain the Property as a rental property.
Justice Ramos then proceeds to explain in detail why Pikus’s contentions do not justify the “drastic” remedy of dissolution. Here are the highlights:
- Pikus’s allegations of overreaching and breach of fiduciary duty by Goldstein, even if sufficient to give rise to a derivative claim, do not allege that the LLC is unable to function in accordance with its purpose as stated in Section 2.3 of the Operating Agreement, or that it is failing financially.
- Quoting from Matter of Sieni v Jamsfab, LLC, 2013 NY Slip Op 31473(U) [Sup Ct Suffolk County 2013] — a case in which I represented an LLC member who successfully opposed dissolution — Justice Ramos observes that “[i]t is only where discord and disputes by and among the members are shown to be inimicable to achieving the purpose of the LLC will dissolution under the ‘not reasonably practicable’ standard imposed by LLCL § 702 be considered by the court to be an available remedy to the petitioner.”
- Despite the ongoing disputes between Goldstein and Pikus, Justice Ramos writes, “the Company is still able to operate and manage the Property, its sole asset and business, through its designated Managing Agent . . ..”
- The alleged deadlock between the co-managers regarding whether to sell or convert the building to condominiums, or keep it as a rental property, does not interfere with the LLC’s stated business and purpose as reflected in the Operating Agreement.
- Quoting from 1545 Ocean Avenue, Justice Ramos notes that deadlock is not an “independent ground for dissolution” under LLC Law § 702, and that the court “must consider the managers’ disagreement in light of the operating agreement and the continued ability of [the Company] to function in that context.”
- Even assuming ongoing disagreement and deadlock continues concerning the sale or conversion of the building, “the management and operation of the Property, the sole asset and business of the Company, can continue.”
- LLC dissolution cases involving disputes between 50/50 managing members are quite common. I expect to see Goldstein cited frequently by respondents opposing dissolution in such cases.
- The broadly stated purpose of the subject company in Section 2.3 of its Operating Agreement is typical of agreements used for real estate holding LLCs. As I noted at the top, so long as the building continues to operate and collect enough rent to cover expenses, the presence of such broad language poses a serious obstacle to dissolution under the prevailing standard formulated in the 1545 Ocean Avenue case.
- Practitioners will find highly useful the parties’ briefs filed in the Goldstein case, links to which are provided above, which collectively do a nice job of compiling the noteworthy appellate and trial court decisions in LLC dissolution cases, most of which also have been featured on this blog.
- The arguably higher bar to dissolution of single-asset real estate LLCs with co-equal managing members militates strongly in favor of including buy-sell provisions in the Operating Agreement.
- What the court giveth, the court can taketh away. Justice Ramos’s positive reaction at the initial hearing to Pikus’s counsel’s stated intent to file for dissolution, on which Pikus apparently placed much reliance given its prominent mention in his dissolution petition, was an off-the-cuff remark made without the benefit of the parties’ subsequent factual presentations and legal briefing.