Source: http://www.nybusinessdivorce.com/2010/02/articles/llcs/it-only-took-16-years-new-york-appellate-court-defines-standard-for-judicial-dissolution-of-limited-liability-companies/
Timestamp: 2017-05-29 15:17:59
Document Index: 215849222

Matched Legal Cases: ['§702', '§702', '§702', '§102', '§702', '§702', '§5601']

By Peter Mahler on February 8, 2010 Posted in Grounds for Dissolution, LLCs, Operating Agreement No more complaining about the absence of appellate guidance on the standard for judicial dissolution of limited liability companies under §702 of the LLC Law. Finally, almost 16 years after the cryptically-worded statute became law, the Appellate Division, Second Department, in Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121, 2010 NY Slip Op 00688 (2d Dept Jan. 26, 2010), offers a carefully considered explanation of what §702 means — and what it doesn’t mean — in a decision also notable for a two-judge dissent from the majority’s disposition of the case without an evidentiary hearing.
It’s no surprise that the signed opinion’s author is Associate Justice Leonard B. Austin (pictured) who was appointed to the appellate bench in 2009 after serving ten years as trial judge in the Commercial Division of the Nassau County Supreme Court. Justice Austin’s Commercial Division caseload, among other types of business disputes, included a steady influx of judicial dissolution proceedings involving closely held corporations and LLCs. That experience undoubtedly gave him a first-hand feel for the analytical and practical difficulties posed by these cases and an appreciation of the legal and business community’s need for greater certainty in applying the broad and undefined terms of the dissolution statutes. There’s another reason I’m not surprised by Justice Austin’s authorship. In June 2002, I wrote an article for the New York State Bar Association Journal on LLC dissolution (read it here) in which I observed that most of the few cases decided to that point freely borrowed from corporate dissolution norms applicable in cases involving oppressed minority shareholders and internal dissension. I did, however, cite a trial court decision in a case called Matter of Quinn, NYLJ Apr. 20, 2000, p. 32, col. 6 (Sup. Ct. Nassau County), as the sole example I’d found of a court, consistent with §702’s language, focusing on whether the complained-of grounds for dissolution conformed to the members’ operating agreement. The judge who decided Quinn? Justice Austin.
Ocean Suffolk appealed the order of dissolution to the Brooklyn-based Appellate Division, Second Department. Justice Austin’s opinion for the 5-judge panel reverses the lower court’s order, denies the petition and dismisses the proceeding. Presiding Justice Steven Fisher, joined by Associate Justice Cheryl Chambers, wrote a partial dissent in which he would have remitted the matter to the lower court for a fact-finding hearing to determining whether Crown Royal’s petition met the newly-articulated standard for dissolution. The LLC Dissolution Statute Distinguished from its Corporate and Partnership Counterparts The analysis section of Justice Austin’s opinion in 1545 Ocean, as its first order of business, tells the bench and bar what the standard for LLC dissolution is not, namely, it is not the standard developed for close corporations under the Business Corporation Law (BCL).
He then observes that, while there is no definition of “not reasonably practicable” in the context of LLC dissolution, “[s]uch standard . . . is not to be confused with the standard for the judicial dissolution of corporations or partnerships” (citations omitted). He notes that the BCL and Partnership Law by statutory definition apply only to business corporations and partnerships, respectively, and that “[l]imited liability companies thus fall within the ambit of neither the Business Corporation Law nor the Partnership Law.” He also cites §102(m) of the LLC Law, which likewise excludes corporations and partnerships from its ambit, in concluding that “the existence and character of these various entities are statutorily dissimilar as are the laws relating to their dissolution.” The Court’s Articulation of the Standard for Dissolution under §702
The “not reasonably practicable” standard is linked textually in §702 to “conformity with the articles of organization or operating agreement.” This linkage leads Justice Austin to state, quite significantly, that LLCL 702 is clear that unlike the judicial dissolution standards in the Business Corporation Law and the Partnership Law, the court must first examine the limited liability company’s operating agreement (see Matter of Spires v Lighthouse Solutions, LLC, 4 Misc 3d at 432) to determine, in light of the circumstances presented, whether it is or is not “reasonably practicable” for the limited liability company to continue to carry on its business in conformity with the operating agreement (id. at 433). Thus, the dissolution of a limited liability company under LLCL 702 is initially a contract-based analysis. [Emphasis added.]
Third, if aggrieved by Van Houten’s actions as manager Crown Royal has an alternative remedy in the form of a common law derivative action under Tzolis v. Wolff, 10 NY3d 100 (2008). Such remedy, however, “cannot serve as the basis for dissolution unless the wrongful acts of a managing member which give rise to the derivative claim are contrary to the contemplated functioning and purpose of the limited liability company.” Justice Fisher’s Partial Dissent
The requirement or not of a hearing in judicial dissolution proceedings can be as important to the outcome of the dispute as the formulation of the dissolution standard. I’ve seen dozens of appellate decisions reversing the grant or denial of a dissolution petition due to the lower court’s failure to conduct an evidentiary hearing in the presence of conflicting affidavits concerning material issues of fact. I doubt that the majority’s summary dismissal of Crown Royal’s petition is intended to signal a change in direction on that score. Rather, the majority’s disposition likely reflects its belief, not shared by the dissenters, that even crediting all of Crown Royal’s factual allegations, along with its admissions as to the quality of VHC’s work, it still does not meet the threshold for judicial dissolution of 1545 LLC. Under §5601(a) of the Civil Practice Law and Rules, the dissent by two justices of the Appellate Division may permit Crown Royal to appeal as of right to New York’s highest court, known as the Court of Appeals, at least with respect to the issue of its entitlement to a hearing. We’ll just have to wait and see whether Crown Royal exercises its appellate rights or, perhaps, reaches some buy-out agreement or other accommodation with its business partner.
Addendum: Read here Professor Larry Ribstein’s commentary on the Ocean 1545 case, from which I here quote his concluding paragraph emphasizing the importance of careful drafting of the LLC agreement: In short, it seems that NY is joining Delaware in emphasizing the role of the operating agreement in judicial dissolution cases. As noted above, this could emerge as an important distinction between LLCs and close corporations, and therefore a factor in choice of form. It also places new emphasis on the need for care in drafting the operating agreement. However, New York has not yet explicitly embraced the operating agreement as determinative. We will have to await further developments to see if New York can shed its long legacy of close corporation law in LLC dissolution cases.
This case is consistent with a case I lost in the 3rd Dept– Beverwyk Abstract v. Gateway Title, 53 AD3d 903 which ignored partnership concepts of when fiduciary duties started and ended and applied a strict contract-based analysis in the dissolution accounting proceeding allowing a member in name only to collect profits up to the date of the dissolution despite that for 1 and 1/2 years only one member had run the business.
I think the development of LLC law as completely focused on contract terms is UNFORTUNATE. I think the common law concepts which have developed around partnerships are better suited for the small organizations which dominate the LLC landscape. Clearly the courts are focused on the importance of predictability that flows from a contract-bassed analysis.
Of course good drafting is key. However what this trend means is when 2 or 3 people have a joint vision of a business opportunity and want to jump on it, go to a lawyer and want to get a LLC operating agreement prepared the adversarial nature of negotiating for all the provisions that could cause dissolution and the potential fallout from those reasons to break up the enterprise will dominate the effort to get a business off the ground.
PAM: My post concerning the Beverwyk case mentioned by Mr. Ganz can be found here: http://www.nybusinessdivorce.com/2008/07/articles/llcs/de-facto-dissolution-of-llc-does-not-terminate-members-fiduciary-duty-or-avoid-accounting-for-subsequent-profits/index.html