November was a whirlwind month for New York LLC litigation. It featured disputes over how to wind up a judicially dissolved LLC, a bitter intra-family emergency indemnification/advancement injunction, and the finale of a decade-long battle over the enforceability of a partially baked operating agreement. Some of these recent cases add clarity to the growing body of New York LLC caselaw. Others add confusion. But all add precedential footholds for future arguments in disputes between members of New York LLCs. Members and their counsel take note.
Can the Members Wind Up a Judicially Dissolved LLC?
Section 704 of the LLC law describes the “winding up” process that happens when an LLC is dissolved. Lesser cited is section 703, which defines who can do the winding up. Section 703 gives a few options: First, “in the event of a dissolution of a limited liability company, except for a dissolution pursuant to [section 702], unless otherwise provided in the operating agreement, the members may wind up the limited liability company’s affairs.” Or, upon application by a member, the court may conduct the windup or appoint a liquidating trustee to do so.
I read section 703’s carve out—“except for dissolution pursuant to [section 702]”—to mean that the members of the LLC may not conduct the winding up when the LLC is judicially dissolved under LLC law 702. In that case, the court must either conduct the windup or appoint a liquidating trustee to do so. A recent decision from New York County, Mavridakis v Litvack, 2024 NY Slip Op. 33971[U], suggests otherwise.
Mavridakis concerns the dissolution of Styleline Studios, LLC. When two-thirds of the LLC’s members brought a petition for dissolution under LLC law 702, the remaining one-third answered that he did not oppose the judicial dissolution of the company. At the instruction of the Court, the parties therefore executed a stipulation dissolving the company pursuant to LLC law 702, which the Court So-Ordered.
Hanging over the dissolution proceeding was a claim by a secured creditor to whom the company owed approximately $6 million—substantially more than all of Styleline’s assets.
Ultimately, the company settled with the creditor for the proceeds of the sale of all of its assets, and that led to a disagreement over who would do the selling. The petitioning members argued that a receiver (i.e., a liquidating trustee) should be appointed under LLC law 703, while the remaining member argued that he should oversee the sales, since the creditor apparently trusted and expected him to do so.
Reasoning that because all of the sale proceeds would go to the creditor, and the fees of a liquidating trustee would only lower the recoverable amount, New York County Commercial Division Justice Patel held that the “appointment of a receiver pursuant to LLCL § 703 is unwarranted.”
Thus, despite the carve-out in section 703 for judicially dissolved LLCs, the one-third member would oversee the winding up of the company and sale of its assets.
Injunction Prevents Further Use of LLC’s Funds to Pay Legal Fees to Defend De Facto Dissolution Claim.
A Williamsburg brownstone sits at the center of the dispute in Hartill v Nunziata. 156 Ainslie St. LLC, which owns the brownstone, was originally owned by three siblings. One sibling passed away in 2007, and she had allegedly expressed her intention to leave her interest in the LLC to her three children. In 2023, the children of the deceased member brought suit against the remaining original members (their uncles) in which they asserted an ownership interest in the LLC and—without bringing a claim for dissolution—demanded that the brownstone be sold and the sale proceeds divided among the owners.
At the motion to dismiss stage, the case produced the curious decision that Peter Mahler covered in his annual Summer Shorts post (read here), finding that the 17-years-deceased member’s estate “maintains an interest in the entity.”
More recently, the plaintiffs learned that the defendants—the two surviving original members of the LLC—were using company funds to defend the action. They brought an order to show cause seeking a preliminary injunction enjoining the defendants from using company funds in defense of the action and directing that future rent proceeds be escrowed.
Defendants countered with three points: (i) Section 420 of New York’s LLC law expressly allows the LLC to provide its principals with advancement and indemnification rights, (ii) the company’s operating agreement did not restrict the rights of the LLC to indemnify its members, and (iii) even crediting the plaintiffs’ claim to a one-third membership interest in the LLC, the defendants as the majority still have the power to cause the LLC to indemnify them.
In an order dated November 21, 2024, Brooklyn Commercial Division Justice Ruchelsman sided with the plaintiffs, in another head-scratching decision (Hartill v Nunziata, 2024 NY Slip Op. 34119[U]). Citing to the Business Corporation Law, and corporate dissolution cases such as Petition of Levitt, 109 AD2d 502, 503 (1st Dept 1985) (discussed here), the Court observed:
In this case, although this is not a dissolution proceeding, the lawsuit is really one between individuals whereby the corporation is merely a nominal party. The corporation is not actively involved in this lawsuit in any capacity. Therefore, it is improper for individuals to utilize corporate funds to defend (or prosecute) this action.”
What corporation? Why cite the BCL in an LLC case? What about LLC law 420? How does the LLC’s involvement in the litigation relate to a member’s indemnification rights? The Court keeps us guessing.
The Court declined, however, to direct that the defendants return to the LLC the funds already spent: “plaintiff has not presented any evidence that mandating the defendant return the funds is of such unusual circumstances as to warrant the imposition of the injunction.”
Nascent-But-Signed LLC Operating Agreement Enforced in Decade-Long Battle Over Botched Real Estate Sale.
For a variety of reasons, many of the intra-owner LLC disputes that we litigate boil down to a dispute about the value of the real property owned by the LLC. And those disputes often become a battle between expert appraisers. Anyone with an interest in the litigation side of real property appraisal got a treat this month with a comprehensive report and recommendation by Special Referee Jeremy R. Feinberg, who considered the competing expert testimony of two heavyweights in the appraisal industry, Cushman & Wakefield and BBG, in 138-140 W. 32nd St. Assoc., LLC v 138-140 W. 32nd St. Assoc. (Sup Ct, New York County 2024).
The Special Referee’s decision also tackled an interesting question about the enforceability of an LLC operating agreement signed to consummate a sale that never occurred. Here are the basic facts:
- In 2013, David Moinian agreed to purchase 138-140 West 32nd Street from the defendants, Joseph and David Simhon for $6.5 million.
- After reaching a simple sale agreement in principle, the parties added layer after layer of complexity into the transaction: in one iteration, part of the sale price would for tax purposes be structured as a “loan” that would not be repaid; in another, defendant Joseph Simhon would “stay in the deal.”
- Ultimately, Moinian formed 138-140 W. 32nd Street LLC to acquire the property. He and Joseph executed two documents: (i) an operating agreement that made Joseph an “investor member” of the LLC; and (ii) a guaranty agreement that entitled Simhon to monthly payments for as long as he was an “investor member.”
- The deal failed to close, and after years of litigation New York County Justice Lebovits granted summary judgment on liability to the plaintiff and referred the case to the Special Referee to calculate damages.
The parties sharply disputed the agreed upon purchase price. The plaintiff insisted that the purchase price was $6.5 million—the sum of the down payment plus the “loan” that would never be repaid. The defendants argued that the purchase price was higher, because it also included the monthly payments promised to Joseph under the Operating Agreement and Guaranty.
Plaintiff disclaimed any obligations under the Operating Agreement, insisting that it was formed in contemplation of the sale that never occurred. Plaintiff cited the purpose clause of the Operating Agreement: to own and run the subject property. And since there was no purchase of the subject property, plaintiff argued, the operating agreement never took effect.
The Special Referee sided with the defendants. Citing the absence of any language in the Operating Agreement saying it was contingent upon the closing of the purchase of the property, the Referee found that despite “much testimony and argument based on the premise that the deal between the parties never closed, and therefore, the provisions of the Guaranty and Operating Agreement never took effect . . . I view this as a “red herring” and conclude that the failure of the deal to close does not exclude this as part of the contract price.”
Thus, the plaintiffs’ damages were offset by the income promised to defendants in the Operating Agreement. A poignant reminder about the perils of using broad operating agreements to govern single-purpose LLCs.