Most judicial dissolution cases in New York courts involve a single entity. When the target of dissolution is structured as a holding company for one or more operating or asset-based companies with asymmetric management, the issues can get hairier.
Case in point: Brooklyn Commercial Division Justice Lawrence Knipel’s recent decision in Matter of Lev v Rosenberg, 2019 NY Slip Op 30824(U) [Sup Ct Kings County Mar. 13, 2019].
I’ll get to the mulligan in a bit.
The Lev case pits two co-owners against a third. The two petitioned under § 121-803 (a) of the Revised Limited Partnership Act for judicial supervision of the winding up of a real estate limited partnership of which the third owner was the sole managing 1% general partner. They also sought the appointment under LLC Law § 703 (a) of a liquidating trustee for an LLC formed by the three of them as co-equal one-third members to hold a 98.9% limited partner interest and a 0.25% general partner interest in the partnership. The partnership’s realty consists of a low-income residential apartment building in Brooklyn apparently valued north of $30 million.
The petitioners accused the respondent of self-dealing, misappropriation of LLC and partnership funds, withholding distributions, refusing to give access to books and records, and other dereliction of duties as the managing general partner. The respondent denied petitioner’s allegations of malfeasance and chastised them for complaining about being “frozen out” of the partnership’s day-to-day operations when, as the mere holders of interests in the LLC limited partner, they had no management rights to begin with. As respondent’s lawyer succinctly put it, “a limited partnership is not a democratic entity.”
Now we come to the mulligan. Prior to filing suit, the two petitioners executed two written agreements. The first dissolved the LLC pursuant to a provision in its operating agreement authorizing voluntary dissolution by members holding at least two-thirds of the membership interests. The second dissolved the limited partnership pursuant to a provision in the partnership agreement authorizing an election to dissolve “by all of the Limited Partners.” Their subsequent petition seeking a judicial winding up of the limited partnership named themselves individually as the petitioners instead of naming the LLC, presumably under the misapprehension that a dissolved LLC did not have standing to seek such relief.
The respondent naturally countered that the petitioners as non-partners lacked standing to seek dissolution of the limited partnership. The petitioners in turn executed a second agreement stating that “no action has been taken actually effecting the dissolution” of the LLC and further that they “retract” their prior agreement.
Justice Knipel found the maneuver “unavailing,” explaining that,
Whereas it is true that dissolution fails to immediately terminate an LLC and that the LLC continues in existence until the winding up of its affairs is completed (see LLC Law § 703), it does not follow that [petitioners] may retract their decision to dissolve [the LLC] to avail themselves of legal standing to directly (rather than through [the LLC]) seek liquidation of [the partnership].
Having denied petitioners a redo, Justice Knipel nonetheless threw them a lifeline by granting them leave to amend their petition to substitute the LLC as a limited partner seeking dissolution of the partnership in place of themselves in their individual capacity as members of the LLC.
Justice Knipel then took it a step further, by appointing a liquidating trustee for the LLC with authority pursuant to LLC Law § 703 (b) to “prosecute this proceeding on behalf of [the LLC]” as a limited partner for judicial dissolution of the partnership “following his report and recommendation to the Court whether, in accordance with Revised Limited Partnership Act (RLPA) § 121-802, “it is [or is not] reasonably practicable to carry on the business [of the partnership] in conformity with the partnership agreement.” In so ruling, Justice Knipel rejected the respondent’s argument that under the RLPA, only a general partner has standing to seek judicial dissolution.
Justice Knipel also rejected without specific comment the respondent’s argument that, assuming petitioners rightfully dissolved the LLC by written agreement — a proposition the respondent accepted without hesitation — a provision in the partnership agreement prohibited any distribution of the LLC’s limited and general partner interests to its members without respondent’s consent as managing partner, which consent was never granted. In other words, as respondent would have it under his rejected reading of the partnership agreement, the petitioners had the power to dissolve the LLC but were powerless to transfer or realize the value of its combined 99%+ limited and general partner interests upon liquidation.
Which brings to mind the maxim taught to first year law students, that there is no right without a remedy.