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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,[1] 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.

Nicholas Tunick (“Tunick”) and his father, Peter Tunick held ownership interests in Ceres Chemical Co., Inc. (“Ceres”).  In 2007, Tunick, his father and David J. Mace formed Pedani Realty Services, LLC (“Pedani”), which bought a parcel of real property in Westchester.  From 2007 to 2014, Ceres occupied the property pursuant to a lease.  In 2014, Tunick, who by then had become the sole owner of Ceres, relocated Ceres out of state.[2]  Thereafter on October 2015 – following a dispute between Mace and Tunick over the proper use of the property – Mace sued Tunick and Pedani,[3] seeking inter alia, Pedani’s judicial dissolution.  The defendants moved to dismiss the judicial dissolution cause of action pursuant to CPLR 3211(a).  Commercial Division Justice Alan D. Scheinkman of the Commercial Division for the Supreme Court of Westchester County granted the motion.[4]

Mace appealed, and the Second Department reversed.  The Second Department began by explaining that on a motion to dismiss under CPLR 3211(a)(7), the court must accept as true the facts alleged in the complaint and should only grant a motion to dismiss on the basis of evidence extrinsic to the complaint if that evidence shows “that a material fact as claimed by the [plaintiff] to be one is not a fact at all and unless it can be said that no significant dispute exists regarding it.”[5]  The Second Department then explained that based on Matter of Dissolution of 1545 Ocean Avenue, LLC,[6] an LLC member seeking judicial dissolution of the LLC must demonstrate that either: (1) the management of the entity is unable or unwilling to promote the LLC’s stated purpose, or (2) continuing the entity is financially unfeasible. 

Mace’s complaint had alleged that Pedani was formed for the purpose of acquiring real property that would serve as Ceres’ corporate headquarters.  Once Ceres moved out of state, Pedani could no longer fulfill its stated purpose.  The defendants argued that this reading of Pedani’s purpose was wrong, pointing to Pedani’s operating agreement, which provided that Pedani’s purpose was “conduct[ing] any lawful business for which limited liability companies may be formed.”[7]  The Second Department sided with Mace, stating that “the operating agreement did not set forth any particular purpose for Pedani,” and that the Supreme Court’s “determination that Pedani's purpose was simply to acquire and manage property constituted an impermissible factual finding.”[8]  The Appellate Division then concluded that the defendants were also not entitled to dismissal of the judicial-dissolution cause of action under CPLR 3211(a)(1) because neither the operating agreement nor the leases in question “utterly refuted the plaintiff's allegation as to Pedani's purpose.”[9]

Mace therefore suggests that “any lawful business” clauses do not set forth an LLC’s purpose with sufficient particularity to justify dismissal of a judicial-dissolution complaint based on the LLC’s alleged abandonment of its stated purpose.  Mace further indicates that in certain cases, courts will consider extrinsic evidence regarding an LLC’s purpose when deciding motions pursuant to CPLR 3211(a).  Drafters of LLC operating agreements and litigants involved in judicial dissolution cases may wish to take this decision into account in guiding how to structure LLCs and how to litigate dissolution cases.

By Benjamin F. Jackson and Stephen P. Younger

[1]     No. 68644/15, 2017 N.Y. Slip. Op. 06170, 2017 BL 286948 (2d Dep’t Aug. 16, 2017).

[2]     The facts and procedural background described here are drawn both from the Second Department’s decision and from Justice Scheinkman’s decision and order dated May 23, 2016, which is available here.

[3]     Mace also named as a defendant “Nicholas Tunick as trustee for the benefit of Nicholas Tunick under agreement, dated November 27, 2012.”

[4]     The defendants also sought to dismiss other causes of action pursuant to CPLR 3211(a); the Second Department’s decision addressed only the branch of the motion seeking dismissal of the cause of action for judicial dissolution.

[5]     2017 BL 286948, at *2 (quoting Guggenheimer v. Ginzburg, 43 N.Y.2d 268, 274-275 (1977)).

[6]     893 N.Y.S.2d 590 (2d Dep’t 2010).

[7]     The text of Pedani’s purpose clause is set forth in Justice Scheinkman’s decision.

[8]     Mace, 2017 BL 286948, at *2. (emphasis added).

[9]    Id.