Industry: Small Business
Commercial Division Holds That Fiduciary Duties Limit LLC Majority Members’ Ability to Adopt Amendments Aimed at Freezing Out Minority Members
Many LLC operating agreements expressly require the consent of all members to adopt or amend the operating agreement. However, some LLC operating agreements do not contain such provision, and instead simply require the consent of members holding a majority of the member interests. But such agreements do not simply allow majority members to make any amendments that they may see fit, as shown by the Commercial Division’s recent decision in Yu v. Guard Hill Estates, LLC. There, Justice Scarpulla explained that even amendments expressly authorized by an operating agreement can still give rise to breach of fiduciary duty claims if they are adopted for an illegitimate purpose.
The Commercial Division Reaffirms that Permissive Forum Selection Clauses Do Not Preclude Litigating in a Different Court
Attorneys drafting forum selection clauses were reminded of the distinction between permissive and mandatory forum language in Justice Andrea Masley’s recent decision, Duncan-Watt et al. v. Rockefeller et al., No. 655538/2016, 2018 BL 138448 (Sup. Ct., N.Y. Cty. Apr. 13, 2018). In Duncan-Watt, the Commercial Division ruled on Defendants’ motion to dismiss by holding that the dispute resolution clause in the parties’ licensing agreement failed to select Australian courts as the exclusive forum in which to litigate any disputes. As a result, the Court concluded that the contractual language at issue only reflected the parties’ consent to jurisdiction in Australia—not that the dispute had to be litigated there.
In Advanced 23, LLC v. Chambers House Partners, LLC, No. 650025/2016, 2017 BL 462831 (NY. Sup. Ct. Dec. 15, 2017), Justice Saliann Scarpulla of the Commercial Division ruled that Advanced 23, LLC (“Advanced”) and David Shusterman’s (“Shusterman” and collectively, “Petitioners”) petition for judicial dissolution of Chambers House Partners, LLC (“CHP”) needed to be held in abeyance pending an evidentiary hearing on whether Shusterman had breached his duties under the Operating Agreement. Advanced 23 confirms that although a corporate deadlock is not an independent ground to dissolve an LLC, the court must still examine whether the managers’ disagreement breaches the managers’ obligations under the LLC operating agreement.
Second Department Affirms Commercial Division Decisions Leaving Withdrawing LLC Members Without Compensation for Their Membership Interests or Derivative Standing
In Matter of Jacobs v. Cartalemi, No. 2016-05041, 2017 BL 435890 (2d Dep’t Dec. 6, 2017) (“Jacobs I”), a unanimous Appellate Division, Second Department panel affirmed an order by Westchester County Commercial Division Justice Linda S. Jamieson denying compensation to a withdrawing LLC member. The court held that a provision of an LLC operating agreement governing the sale of membership interests superseded the default rule of New York Limited Liability Company (“LLC Law”) § 509, entitling a member to “the fair value of his or her membership interest” upon withdrawal from the LLC. Jacobs I was decided along with two related appeals in which the panel also dismissed various derivative claims brought by the former minority member of Westchester Industrial Complex, LLC against the company and its majority member, applying the continuous ownership rule to find that the minority member lost standing to bring derivative claims upon his withdrawal from the company. See Jacobs v. Cartalemi, No. 2016-07813, 2017 BL 436813 (2d Dep’t Dec. 6, 2017) (“Jacobs II”); Jacobs v. Westchester Indus. Complex, LLC, No. 2016-07817, 2017 BL 436677 (2d Dep’t Dec. 6, 2017) (“Jacobs III”).
The Second Department Suggests That “Any Lawful Business” Clauses May Be Effectively Meaningless in LLC Dissolution Cases
In actions brought by minority members to dissolve an LLC, a key inquiry is whether the LLC’s managers are unable or unwilling to permit or promote the LLC’s “stated purpose.” In many cases, an LLC’s operating agreement provides that the LLC’s “stated purpose” is “any lawful business.” As a result, one might think that the central question in many judicial dissolution cases would end up being whether the LLC is engaged in lawful business. Not necessarily. Recently, in Mace v. Tunick, the Second Department suggested that an “any lawful business” purposes clause is insufficient to conclusively refute an allegation that an LLC was formed for a particular purpose. Mace could therefore be read to eliminate some of the protections against litigation that would be provided for by an “any lawful business” clause.
Suppose you’ve entered into a financial arrangement that resembles a lending agreement, but it is not formally designated as such, and you think you’re paying too much. Do you (a) sue for misrepresentation, on the grounds that you thought you were entering into a lending agreement and not some other kind of an agreement, or (b) sue on the theory that the agreement is a lending agreement, but it is usurious and therefore unlawful?
On October 11, 2016, in Matter of Skoler, 2016 BL 348290 (Sup. Ct. N.Y. Cnty.), Justice Lawrence K. Marks of the Commercial Division issued a decision regarding the strictures of judicial dissolution pursuant to Section 1104(a) of the New York Business Corporation Law (“BCL”). Petitioners sought judicial dissolution of County Group Inc. (“County Group”), a small, closely held New York domestic corporation. Petitioners hold 50% of the issued stock in County Group, and the “Responding Shareholders,” who opposed judicial dissolution, hold the remaining 50%. The Responding Shareholders cross-moved to dismiss the petition.