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Commercial Division Dismisses Petition to Dissolve LLCs Based on Broadly Stated Purpose Provision

In Lazar v. Attena LLC, Justice Andrea Masley of the New York County Commercial Division granted Arik Mor and Uriel Zichron’s (together, “Respondents”) motion to dismiss a petition to dissolve three limited liability companies, Attena LLC, Hemera LLC, and Nessa LLC (collectively, the “LLCs”).[1]  The Court’s opinion addressed whether the LLCs should be dissolved on the ground that they were no longer functioning in accordance with their stated purpose, which was defined broadly to include “any lawful business purpose.”[2] 

Background

Gabriel Lazar and Joel Scheinbaum (“Petitioners”), who were members of the LLCs, initiated a special proceeding under New York Limited Liability Company Law § 702 to dissolve the LLCs.[3]  Section 702 permits judicial dissolution of an LLC, upon application of one of its members, “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”  In order to show entitlement to such a dissolution, the member seeking such relief “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.”[4] 

Petitioners alleged that: the sole purpose of the LLCs was to acquire, own, and operate five separate multi-family properties located in Manhattan; such properties were acquired between 2012 and 2013; and all of these properties were sold in 2015.[5]  Accordingly, Petitioners alleged, the LLCs had run their course and could no longer be operated consistent with their purpose.[6] 

Respondents, who were also members of the LLCs, moved to dismiss the petition, arguing that Petitioners had failed to establish a prima facie case under Section 702. 

Justice Masley’s Opinion

The Court began its analysis by rejecting Petitioners’ allegation regarding the purpose of the LLCs.  The Court stated that, “[n]owhere in the operating agreements does it state, as [P]etitioners allege, that the ‘sole purpose of the LLCs was to acquire, own and operate five separate multifamily properties located in Manhattan.’”[7]  Rather, the Court explained, the stated purpose of the LLCs according to their operating agreements was “any lawful business purpose.”[8]  And, the Court noted, Petitioners had not claimed that “[R]espondents have failed to promote or permit [that] stated purpose.”[9]  Thus, the Court held that Petitioners had not satisfied the failed-purpose test of Section 702.

In so holding, the Court distinguished two cases cited by Petitioners, Matter of Fassa Corp. and Matter of 47th Rd. LLC.[10]  The Court distinguished Fassa Corp., in part, because the operating agreement in that case specifically provided that the company’s purpose was to acquire real property and resell the property.[11]  And the Court found that 47th Rd. was distinguishable because there was clear evidence in that case that the broad stated purpose of the company was no longer being fulfilled.[12]

The Court then cited Yu v. Guard Hill Estates, LLC as an example of another case where the Commercial Division dismissed a dissolution petition on the basis of a broad purpose provision.[13]  In Yu, the operating agreement provided that “the purpose of the companies was to acquire certain real property and engage in any other lawful act or activity for which limited liability companies may be formed under [New York law] and engaging in any and all activities necessary or incidental to the foregoing.”[14] 

The Court next held that Petitioners failed to satisfy the financial-failure test of Section 702, noting that there was “no evidence that the LLCs are in financial turmoil, insolvent or otherwise cannot meet their debts and obligations.”[15]  Finally, the Commercial Division held that Petitioners’ allegations regarding Respondents’ “oppressive conduct,” even if true, did not justify dissolution.[16] 

Conclusion

The Lazar decision highlights how a broad purpose clause can pose a substantial obstacle to members of LLCs who petition for dissolution under Section 702.  It bears highlighting, however, that at least one appellate court has reached a different conclusion on similar facts, albeit in a different procedural posture – i.e., a plenary action in which allegations must be accepted as true, as opposed to a summary proceeding, in which evidence is to be considered, as in Lazar.[17]

In Mace v. Tunick, the Second Department held, in denying a motion to dismiss, that a broad purpose provision did not conclusively establish a defense as a matter of law to the plaintiff’s dissolution cause of action.  It remains to be seen whether and how Lazar and Mace might be reconciled.


[1] Lazar v. Attena LLC, 2020 N.Y. Slip Op. 33003(U), 2020 N.Y. Misc. LEXIS 5706 (N.Y. Sup. Ct. Sept. 9, 2020).

[2] Id. at *4.

[3] Id. at *1.

[4] FR Holdings, FLP v. Homapour, 154 A.D.3d 936, 937–38, 63 N.Y.S.3d 89, 91 (2d Dep’t 2017).

[5] Lazar, 2020 N.Y. Misc. LEXIS 5706 at *2–3.

[6] Id. at *3.

[7] Id. at *4. 

[8] Id.

[9] Id.

[10] Matter of Fassa Corp., 31 Misc. 3d 782, 785, 924 N.Y.S.2d 736 (N.Y. Sup. Ct. 2011); Matter of 47th Rd. LLC, 54 Misc. 3d 1217[A], 54 N.Y.S.3d 610 (N.Y. Sup. Ct. 2017).

[11] Lazar, 2020 N.Y. Misc. LEXIS 5706 at *5.

[12] Id.

[13] Yu v. Guard Hill Estates LLC, 2018 N.Y. Slip Op. 32008(U), N.Y. Misc. LEXIS 3514 (N.Y. Sup. Ct. Aug. 15, 2018).

[14] Lazar, 2020 N.Y. Misc. LEXIS 5706 at *5–6 (internal quotation marks and citations omitted).

[15] Id. at *6.

[16] Id. at *6–7.

[17] Mace v. Tunick, 60 N.Y.S.3d 314 (2d Dep’t 2017).