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Special Proceeding Seeking a Judicial Decree to Dissolve an LLC

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.

Factual Background

CHP has owned and operated a building located at 154 Chambers Street in Manhattan (“the Building”)[1] since January 18, 1982.[2]  Anita Margrill (“Anita”) and Herbert Margrill (“Herbert” and collectively, “the Margrills”) each hold a 25% membership interest in CHP.  Advanced [3] purchased a 50% membership share on February 1, 2013.[4] 

According to its Operating Agreement, CHP’s business purpose is “"to own and operate the building known and located at 154 Chambers Street, New York, NY 10013 . . . ; to provide a residence for its Members; and to conduct any lawful business as the Members may from time to time determine."[5]  Under the Operating Agreement, Shusterman and Herbert were co-managers with equal votes and material business decisions required a majority vote or unanimous consent of all members.[6] 

Shortly after Advanced purchased its interest in CHP, tensions began to escalate between Shusterman and the Margrills.  In 2015, Anita allegedly harassed Shusterman’s girlfriend and entered his apartment without permission.[7]  Then, according to the petition, Anita and Shusterman had a physical altercation, which resulted in police involvement.[8]  Additionally, Herbert had to hire an attorney to negotiate with Shusterman regarding the Operating Agreement’s obligations.[9]

Petitioners alleged that the Margrills took unilateral actions in violation of the Operating Agreement.[10]  First, the Margrills allegedly created a separate bank account for CHP to deposit the Building’s rent.[11]  Next, the petition asserted that the Margrills transferred $75,000 from CHP’s existing bank account into this new account without Shusterman’s knowledge; withdrawals from the existing account required the signatures of both managers.[12]  Thereafter, the Margrills unilaterally granted a tenant’s request to use her security deposit as payment for the rent.  Respondents alleged that these actions were necessary to ensure that CHP could timely pay its operating expenses.[13]

Petitioners commenced this special proceeding by a verified petition seeking, inter alia, a judicial decree dissolving CHP.

Discussion

In a special proceeding, the Commercial Division is to use the same standard of review as is used on a summary judgment motion and is to make a determination on the pleadings and papers to the extent there is no triable issue of fact.[14] 

Given that LLCs are created by statute, the Justice Scarpulla looked to the N.Y. Limited Liability Company Law.  Section 702 provides that a court may order the 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."[15]  Practicality is a fact-specific determination that requires a court to exercise discretion.[16]  The petitioner must show either that the under the circumstances, it is financially unfeasible to continue operating the business or management is unable or unwilling to promote the LLC’s business goals.[17] 

The court cautioned that a judicial dissolution of an LLC is a drastic remedy; a deadlock between LLC managers cannot be the sole reason for judicial dissolution. [18]   Rather, the court must evaluate the deadlock in the context of the operating agreement in order to assess whether the business can continue to operate despite the disagreement.[19]

In this case, the Commercial Division ruled that the Petitioners had made a prima facie showing that it was no longer practicable for CHP to achieve its stated business purpose because any material business decision, at a minimum, required a majority vote and the co-managers were not even on speaking terms.[20]  Herbert had undermined Shusterman’s right to co-manage CHP when he made unilateral decisions in violation of the Operating Agreement.  Here, the Operating Agreement required cooperation between the co-managers to achieve CHP’s business goals and the deterioration of the relationship between Shusterman and Herbert makes the continued operation of CHP impossible. 

Nonetheless, the Commercial Division also held that Respondents had raised a triable issue of fact as to whether Shusterman had breached his duties under the LLC’s Operating Agreement.[21]  Respondents alleged that Shusterman had attempted to force a dissolution and acquire control of the Building by interfering with CHP’s operation—thereby breaching his managerial obligations by delaying CHP’s ability to pay its operating expenses.[22]  As a result, the court ruled that a judicial dissolution could not be ordered at this time.  Instead, the court ordered an evidentiary hearing before a Special Referee to determine whether Shusterman had breached his duties under the Operating Agreement by trying to force CHP’s dissolution, and it held the dissolution petition in abeyance pending the Special Referee’s findings.[23]

Conclusion

Although deadlock alone is not a viable ground to dissolve an LLC, the underlying acts may give rise to a sufficient predicate to dissolve an LLC.  Nonetheless, if there are sufficient factual issues about whether LLC management has breached their duties, those breaches can be used to hold off a dissolution order.

 

[1] The Building contains one commercial unit and four residential units. Id. at *1.

[2] The Building was originally owned by a general partnership until November 8, 2007, when it was sold to CHP. Id.

[3] Shusterman owns 100% of Advanced. Id.

[4] Id.

[5] Id.

[6] Id. at *1-2. Dissolution required unanimous consent.

[7] Id. at *2.

[8] Id.

[9] Id. at *3.

[10] Id.

[11] Id.

[12] Id.

[13] Id.

[14] Id. at 4; CPLR § 409.

[15] N.Y. Ltd. Liab. Law § 702.

[16] Id.

[17] Id. at *4-5.

[18] Id. at *5.

[19] Id.  When an LLC can achieve its business purpose despite the disagreement, then dissolution will not be ordered. “See, e.g., Belardi-Ostroy, Ltd. v. American List Counsel, Inc., 2016 BL 128258, at *5-6 (NY. Sup. Ct. 2016 Apr. 14, 2016) ("the Operating Agreement provides a straightforward means of avoiding deadlock — having a tie-breaking fifth member on the Board."); Goldstein v. Pikus, 2015 BL 258452, at *19-21 (NY. Sup. Ct. July 20, 2015) (finding that dissolution was not warranted despite the parties being deadlocked over whether to sell or convert the property because the property was being managed and operated by an independent managing agent); Matter of Dissolution of 1545 Ocean Ave., LLC, 72 A.D.3d 121, 131 (2d Dep’t 2010) (finding that deadlock is not possible because the operating agreement “permit[s] each managing member to operate unilaterally in furtherance of [the limited liability company's] purpose").” Id. at *5-6.

[20] Id. at *5.

[21] Id. at *6.

[22] Id.

[23] Id. at *6-7.