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Family Feud: Commercial Division Dissolves LLC Owned by Quarrelling Brothers

Justice Timothy J. Dufficy in the Queens County Commercial Division recently entered an order dissolving a limited liability company owned by two brothers whose disagreements regarding the management of the LLC culminated in a physical altercation.  Matter of Dissolution of 47th Road LLC, No. 705060/16, 2017 BL 49187 (Sup. Ct. Feb. 16, 2017).  The court applied an exception to the general rule that disputes between members are insufficient to warrant judicial dissolution, and found that the antagonism between the brothers made it impracticable for the business to carry on.

Vincent and James Cortazar each owned a 50% interest in 47th Road, LLC.  The company’s sole asset was an apartment building in Long Island City, Queens.   The brothers borrowed approximately $1 million, secured by the property, to purchase one hundred acres of land in California.  When Vincent discovered that the California property was titled only in James’s name, there was a “physically violent confrontation” between the brothers.  James then locked Vincent out of the company’s day-to-day operations, and collected rents from the Queens property without paying down the loan secured by property.  As a result, the property went into foreclosure.  Vincent attempted to negotiate an extension on the loan, but was unsuccessful without the consent of his brother.[1]

Vincent filed an action seeking dissolution of the LLC.  In doing so, he sought to, among other things, wind up the company’s affairs, enjoin James from transacting any business or exercising any powers with respect to the company, and appoint a receiver to collect the rents and profits of the company.[2]

The court noted that Section 702 of the New York Limited Liability Company Law provides for judicial dissolution of an LLC “whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.”[3]  Here, the operating agreement stated only that the company was formed for “any lawful business purpose.”  As such, it did not assist the court in making a determination under Section 702.  However, the court found that the evidence made clear that the purpose of the LLC was to operate the apartment building in Queens.[4]

With that purpose in mind, the court turned to the question of whether it was reasonably practicable to carry on the business under the circumstances.  The court noted that “[d]isputes between members are alone not sufficient to warrant the exercise of judicial discretion to dissolve an LLC that operates in a manner within the contemplation of its purposes and objectives.”[5]  But where “discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC,” dissolution may be appropriate.[6]

The court found that the dissension between the Cortazar brothers had not only resulted in a physical altercation, but had driven the company’s only asset into foreclosure, resulted in one owner collecting rents without making loan payments or making repairs on the property, and engendered litigation between the owners.  “Due to the violent relationship between the managers,” the court held, “the company will be unable to achieve its purpose of operating an apartment building . . . [and] it is not reasonably practicable to carry on the business.”[7]  Accordingly, the court dissolved 47th Road, LLC and entered various orders to wind up the company’s affairs.[8]

This case demonstrates one circumstance under which an LLC may be dissolved, and the showing that proponents of dissolution must make to obtain this relief.

By Eric B. LaPre and Muhammad U. Faridi

[1] Matter of Dissolution of 47th Road LLC, No. 705060/16, 2017 BL 49187, at *1-2 (Sup. Ct. Feb. 16, 2017).

[2] Id. at *2.

[3] Id. at *4 (quoting N.Y. Ltd. Liab. Co. Law § 702).

[4] Id.

[5] Id. at *5.

[6] Id.

[7] Id.

[8] Id. at *5-8.