Oh, the things that can happen when the LLC members identified in the company’s operating agreement differ from those identified in official documents submitted to government agencies.
Recently, this blog reported on one case in which the court found in favor of two individuals on their claimed LLC membership interests as evidenced by an application for a food service permit filed by the LLC with the New York City Health Department naming them and the defendant as members, notwithstanding an operating agreement that identified the defendant as the LLC’s sole member. That case involved ownership of a hot dog franchise.
From hot dogs we move to martinis. On an interesting set of facts, Brooklyn Commercial Division Justice Lawrence S. Knipel recently ruled the other way. In the whimsically captioned Cupcake & Boomboom, LLC v Aslani, 2016 NY Slip Op 32310(U) [Sup Ct Kings County Nov. 22, 2016], the outcome was anything but whimsical for the defendant. Justice Knipel discredited documents the LLC submitted to the New York State Liquor Authority (“SLA”) as part of an application to obtain a liquor license, including an operating agreement intentionally misidentifying the members. Instead, the court credited an earlier, inconsistent operating agreement as determinative of the members’ ownership status, thereby reducing the defendant’s claimed interest from 50% to 10%.
The plaintiff, Julian Vigouroux, formed Cupcake & Boomboom, LLC (“CCBB”) to open and operate a concert venue and bar in Bushwick, Brooklyn. CCBB applied to the SLA for a liquor license. While the application was pending, CCBB hosted “Bring Your Own Beer” parties at the venue until an SLA investigator visited the club and observed bottles of hard liquor available for sale. As a result of CCBB’s alleged unlicensed distribution of alcohol, SLA denied CCBB a liquor license.
CCBB hired an attorney to reapply for a liquor license. Because the SLA apparently deemed Vigoroux responsible for CCBB’s unlicensed sale of alcohol, the lawyer believed the SLA would not issue CCBB a liquor license if its corporate records listed Vigoroux as an owner. According to the complaint, the lawyer “devised a plan whereby he would falsely make it appear to the SLA that Vigouroux was removed from ownership of CCBB in order to mislead it with respect to a new application by CCBB for a liquor license.”
To carry out the alleged scheme, the lawyer drafted four “Registration Certificates” collectively assigning all of Vigouroux’s membership interest in the LLC to other minority members. None of the Registration Certificates was executed. The lawyer also submitted an unexecuted promissory note purporting to indebt CCBB to Vigouroux for $90,000 for the “sale” of his membership interest. With these documents, the lawyer allegedly misrepresented to the SLA that Vigouroux no longer was a member of CCBB.
The Operating Agreements
Eventually, Vigouroux met defendant Pooyan Aslani, who asked to acquire a membership interest. Aslani personally drafted an operating agreement for CCBB (the “First Operating Agreement”) identifying Vigouroux and Aslani as 39% and 10% members, respectively. Both executed the document.
When CCBB’s lawyer learned of the First Operating Agreement, he wrote Vigouroux that the First Operating Agreement could not be the “record” operating agreement of the LLC because it listed Vigoroux as an owner, something the SLA would not accept. Vigoroux responded that the First Operating Agreement was intended to be an “inside deal” and should not be shared with the SLA. Aslani drafted a new operating agreement (the “Second Operating Agreement”) which he said was “for SLA purposes.”
The Second Operating Agreement, which Vigouroux never signed, didn’t list Vigouroux as a member, but in contemporaneous emails Aslani continued to refer to Vigouroux as a member. Allegedly based in part on the Second Operating Agreement, the SLA issued CCBB a liquor license.
After CCBB received a liquor license, conflicts arose between Vigouroux and Aslani, who purported to fire Vigouroux. Aslani then asserted that the Second Operating Agreement was enforceable and that Vigouroux had no ownership interest in CCBB. Aslani attempted to forcefully remove Vigouroux from the premises and changed the locks. A majority of the members then passed a resolution ousting Aslani, who refused to recognize the resolution as valid.
Vigouroux sued Aslani seeking, in part, a ruling that the First Operating Agreement was enforceable and the Second Operating Agreement was not. According to the complaint, “the [Second] Operating Agreement was created for the sole purpose of deceiving the SLA into believing that the original members . . . whose names were on the rejected SLA application, were no longer members of the CCBB.” Aslani moved to dismiss the complaint
In the heart of the decision on Aslani’s dismissal motion, Justice Knipel made five legal rulings:
First, the court found that the “Registration Certificates were never signed and were, therefore, patently insufficient to show a transfer of Vigouroux’s interest in CCBB.”
Second, the court found that there was “no evidence” after the First Operating Agreement named Vigouroux a member “of any subsequent written consent by a majority of the members of CCBB to a transfer of Vigouroux’s interest in CCBB.”
Third, the court ruled that Aslani could not rely upon the promissory note to show that Vigouroux sold his membership interest because it was “not signed by CCBB and, as such, was unenforceable.”
Fourth, the court held that the Second Operating Agreement was “ineffective to deprive Vigouroux of his membership interest in CCBB” because it was not signed by Vigouroux and “changes to an operating agreement that adversely affect a member’s right to distributions require the consent of that member in writing.”
Fifth, the court held:
[W]hile Aslani relies upon submissions to the SLA, his own emails demonstrate that he was involved in a scheme to misrepresent who the actual members of CCBB were to the SLA and that the representations as to Vigouroux’s lack of a membership interest in CCBB were being made solely for “SLA purposes” so that CCBB would be able to obtain a liquor license. Aslani has previously admitted Vigouroux’s membership interest by his certification of the [First] Operating Agreement, and such a previous admission regarding a membership interest in a limited liability company is binding.
So, in the end, CCBB filed documents with the SLA to establish ownership, and the SLA seems to have relied upon those documents in issuing CCBB a liquor license. Yet, the court found the entity’s agency filings to be non-controlling on the issue of ownership. If CCBB and its principals had not committed an apparent deception upon the SLA, the outcome might have been very different.
A recent search on SLA’s website listed CCBB’s liquor license status as “Inactive.” Based on the court’s decision, it’s not hard to imagine why.