New York LLCs without operating agreements are as common as noodles in Naples. Most function just fine without one. Their members just rely upon the statutory default rules found in the New York Limited Liability Company Law (the “LLC Law”) to govern their affairs.

But the absence of an operating agreement becomes a big problem when someone sues to judicially dissolve the company under LLC Law § 702.

Under the prevailing legal standard for LLC dissolution — which the Court of Appeals still has never had occasion to consider — the petitioner must satisfy the following test:

A member of a limited liability company seeking dissolution pursuant to Limited Liability Company Law § 702 must establish, in the context of the terms of the operating agreement or articles of incorporation, that (1) the management of the entity is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved, or (2) continuing the entity is financially unfeasible.

(Ribeiro v Libutti, 244 AD3d 861 [2d Dept 2025]).

Articles of organization seldom say anything about the company’s “purpose.” So almost always, courts must look to the operating agreement’s so-called “purpose clause.” But what if there is no contract?

A recent Decision and Order After Bench Trial authored by Richmond County Acting Supreme Court Justice Catherine M. DiDomenico highlights how New York courts endeavor to discern an LLC’s purpose in the absence of an operating agreement so specifying.

When Last We Met

Andris v 1376 Forest Realty, LLC made its first appearance on the blog in an article by my partner, Peter Sluka, about a pair of appellate decisions linked here and here. Back then, the Appellate Division – Second Department resurrected a dismissed cause of action for judicial dissolution of 1376 Forest Realty, LLC (the “Company” or the “LLC”). The petitioner, Stephanie Andris (“Stephanie”), was an executrix suing on behalf of the estate (the “Estate”) of a deceased member, Elizabeth Ayvis (“Elizabeth”). The Court concluded that even though Stephanie was a non-member, she had standing under LLC Law § 608 to sue to dissolve, found issues of fact on the merits of dissolution under LLC Law § 702, and sent the case back down for trial.

Fast forward three years. In the lawsuit’s latest chapter, Justice DiDomenico issued post-trial findings of fact and conclusions of law after four days of trial testimony by eight witnesses. The outcome was a goose egg for Stephanie, whose aim most certainly was to either force a sale of the Company’s principal asset, a piece of mixed-used real property in Staten Island, or to force a buyout of Elizabeth’s former equity interest in the Company.

But Stephanie’s dissolution lawsuit reached a dead end – as so many LLC § 702 proceedings do – because of her inability to show the company’s manager was failing to achieve the entity’s purpose.

The Open Question

In her petition, Stephanie alleged that the “purpose” of the Company was to “profitably own and operate” the Company’s real property. Was it really?

Justice DiDomenico wrote in her Decision, “No formal operating agreement or articles of organization were drafted for the LLC.” One cannot form a New York LLC without articles of organization, so the latter cannot be true. Presumably, the articles just never found their way into evidence.

In any event, there was a separate “Agreement” pre-dating formation of the Company between Elizabeth (the decedent) and Astrid Spatola (“Astrid”), the respondent and current de facto manager of the Company. In the Agreement, which governed Elizabeth and Astrid’s then-ownership of the Company’s real estate as 50/50 tenants in common, the two agreed to permit the survivor of either of them to manage the property, collect and retain rents, and pay expenses, “including but not limited to . . . insurance, and ordinary maintenance and upkeep.”

Based upon this contract – which certainly was not an operating agreement – Stephanie argued that the “purpose” of the Company was to “keep the building . . . adequately maintained and insured.” Justice DiDomenico wrote that Astrid did “not suggest an alternative ‘purpose’ for the LLC.”

Justice DiDomenico agreed, writing: “The ‘purpose’ of a holding company is generally to own, maintain and insure real property and to limit the liability of its owners. See Cinque v Largo Enters., 212 AD2d 608 (2d Dept 1995); G.F.A. Advanced Sys., Ltd. v Local Ocean LLC, 137 AD3d 479 (1st Dept 2016) . . . .”

The Trial Testimony and the Court’s Conclusions

With the Company’s purpose so defined, much of the testimony at trial, and much of the Court’s decision, focused upon whether Astrid, an elderly, absentee landlord, so poorly maintained the 100-year-old property that dissolution was appropriate. The building had a pizzeria tenant on the first floor, a residential tenant on the second floor, the owner of the pizzeria lived on the third floor rent free in exchange for acting as de facto “superintendent” of the building, and utility companies leased a portion of the roof for cell phone antennas.

According to Stephanie, the roof leaked from defectively-installed cell phone equipment, causing mold inside the building. Stephanie called three experts in her case – an engineer, a mold assessor, and a real estate appraiser – and four fact witnesses – herself, Astrid, the Company’s accountant, and the pizzeria owner / third-floor resident / building superintendent. Astrid called one additional witness in her case – a mold expert.

The Court concluded:

After considering the credible testimony offered by both Petitioner’s and Respondents’ witnesses, this Court finds that Petitioner has failed to meet her burden of establishing that Respondent Spatola is ‘unwilling or unable’ to achieve the ‘purpose’ of Respondent 1376 Forest Realty LLC to maintain and repair the property. This court credits the testimony of Petitioner’s witnesses as to the defects and conditions that they observed, many of which are undisputed. However, this Court also credits the testimony of Respondent’s witnesses who established that necessary repairs have been conducted to address those conditions. It was not Petitioner’s burden to establish the presence of defects in a more than 100-year-old building, rather it was Petitioner’s burden to prove that Respondent Spatola is ‘unwilling or unable’ to address those defects (citation modified).

Turning to the “failing financially” prong of the dissolution standard, the testimony at trial demonstrated that the pizzeria paid modest annual rent of $15,600, the second-floor tenant paid modest annual rent of $19,800 per year, and the cell companies with antennas on the roof paid annual rent of $76,000 per year. According to expert testimony, the cell phone antenna leases increased the market value of the building by several hundred thousand dollars. The Court concluded that Astrid’s “decision to forego rent” in exchange for the pizzeria owner’s maintenance of the property did not mean the Company was failing financially. The Court wrote:

The standard of financial feasibility does not require the LLC to maximize its profitability . . . . Rather, ‘financial feasibility’ relates to Respondent’s ability to keep the property free of liens, judgments and other indicia of financial instability. In this regard Respondent has credibly testified that she has always timely paid all the bills and expenses related to the building. This Court finds that Petitioner has woefully failed to establish that the LLC is in financial turmoil, insolvent, or otherwise cannot meet its debts and obligations and thus has failed to prove that continuing the LLC would be ‘financially unfeasible” (citation modified).

The Court concluded that the “trial record supports a finding that Respondent Spatola has consistently taken reasonable steps to preserve and maintain the building, despite its age, has insured the same, and that the building remains profitable. . . . Accordingly, the Petition is denied with prejudice.” So after seven years of litigation, the Estate walked away with nothing.

What’s the “Purpose”?

It’s impossible to say whether the existence of an operating agreement, had the members adopted one, might have averted the need for a trial in Andris. A vague or boilerplate purpose clause in an operating agreement is the functional equivalent of expressing no particular purpose at all, ordinarily requiring a trial. At minimum, if the members in Andris had the foresight to adopt an operating agreement with a carefully defined purpose clause, they probably could have saved themselves a huge amount of money in lawyer fees litigating over the Company’s purpose.

Despite the importance of purpose clauses in operating agreements, generic ones with language like “any lawful purpose” are still common. Why is that?

First, many LLC operating agreements pre-date the Appellate Division – Second Department’s adoption of the prevailing dissolution standard, and its heavy focus upon the entity’s contractual purpose, in In re 1545 Ocean Ave., LLC (72 AD3d 121 [2d Dept 2010]).

Second, even after Ocean Ave., a lot of transactional lawyers do not seem to appreciate just how important purpose clauses are until it is too late, when dissolution litigation has already erupted among the partners.

Third, a lot of operating agreements are off-the-rack forms with minimal or no customization. Sometimes banks make LLCs adopt bare-bones operating agreement before they will lend or permit the company to undertake financial transactions. Some companies adopt them for the bank, then forget they exist until litigation is underway. Sound far-fetched? It’s true. I’ve seen law firms make this mistake.

If you’re considering forming or becoming a member of an LLC, take the time, spend the money, and do it right with a bespoke operating agreement containing a particularized purpose clause. The consequence of taking the cheap route can be rough. If you’re in the minority, it can mean expensive entrapment. If you’re in the majority, it can mean a ton of legal fees fending off a dissolution claim that a well-tailored purpose clause might have nipped in the bud.