The Court ruled:Moreover, dissolution could not properly be based upon the findings of oppressive conduct and diversion of corporate assets underlying the dissolution of Corner, regardless of the fact that the parties operated the businesses in many ways as a single entity. Limited Liability Company Law § 702 provides the sole basis for judicial dissolution of a limited liability company, and includes a ‘more stringent’ standard than that for dissolution of a corporation (Matter of Horning v Horning Constr., LLC, 12 Misc 3d 402, 413 [Sup Ct, Monroe County];seeMatter of 1545 Ocean Ave., LLC, 72 AD3d 121, 126 [2d Dept 2010]). As a consequence, ‘it would be inappropriate for this Court to import dissolution grounds from the Business Corporation Law or Partnership Law to the Limited Liability Company Law’ (Matter of 1545 Ocean Ave., LLC, 72 AD3d at 126), and the ‘reasonably practicable’ standard of the Limited Liability Company Law ‘is not to be confused with the standard for the judicial dissolution of corporations or partnerships’ (id.at 127, 893 N.Y.S.2d 590;seeWidewaters Herkimer Co., LLC v Aiello, 28 AD3d 1107, 1108 [4th Dept 2006]).
—to make an assessment that was not grossly negligent. . . When the controller exercised his stockholder-level voting power, he acted consistently with his fiduciary duties.If that were the end of the story, the Court observed, judgment would enter in favor of Lampert. But the Court was also called to review, subject to the entire fairness standard, the end-stage transaction that eliminated the interests of the minority shareholders. V.C. Laster found that the end-stage transaction failed that entire fairness review. What Does Sears Hometown Mean for Closely Held New York Corporations?The public corporation in Sears and New York closely held corporations start at the same place: the basic principle that a majority shareholder owes fiduciary duties to the minority (Richbell Info. Services, Inc. v Jupiter Partners, L.P., 309 AD2d 288, 300 [1st Dept 2003]). And New York Courts routinely look to Delaware law to inform them on issues of corporate governance (see In re 1545 Ocean Ave., LLC, 72 AD3d 121, 130 [2d Dept 2010]).With those principles in mind, consider how the roadmap set forth in Sears might migrate to New York Courts considering fiduciary duties in the context of closely held corporations.On the one hand, closely held corporations are far more likely to see the majority shareholder play several roles, including being an officer and/or director. So the need to distinguish between shareholder-level fiduciary duties and director-level fiduciary duties might not be as pressing in the closely held business context.On the other hand, V.C. Laster’s decision convincingly argues that perhaps holding the majority shareholders to the same rigorous fiduciary duties as directors, for actions taken solely in their shareholder capacity, misses the mark. In order to enjoy the basic rights associated with share ownership, majority shareholders must have considerably more freedom than a director, finds the Sears Court. For instance, majority shareholders can refuse to sell their shares for any
ide an accounting. In Gottlieb v Northriver Trading Co., 58 A.D.3d 550, 872 N.Y.S.2d 46 (1st Dept. 2009), the First Department gave life to an LLC member’s common-law right to seek an equitable accounting. The court’s decision adopted the Court of Appeals’ reasoning in Tzolis v Wolff finding a common-law right to sue derivatively on the LLC’s behalf.2010: Member Expulsion Only if Authorized in the Operating Agreement. New York’s LLC Law, unlike the Revised Uniform LLC Act, does not provide for judicial expulsion of a member. In Chiu v. Chiu, 71 A.D.3d 646, 896 N.Y.S.2d 131 (2d Dept. 2010), the Second Department held that, while LLC Law Section 701 mentions member expulsion as an event triggering possible non-judicial dissolution, New York courts have neither statutory nor common-law authority to compel the expulsion of an LLC member absent an enabling provision in the operating agreement.2010: Setting the Standard for LLC Dissolution Under Section 702.Matter of 1545 Ocean Avenue, LLC, 72 A.D.3d 121, 893 N.Y.S.2d 590 (2d Dept. 2010), far and away is the most consequential decision impacting judicial dissolution proceedings involving LLCs. There, the Second Department adopted a contract-centric approach that explicitly rejected the importation to the LLC Law of grounds for dissolution under the Business Corporation and Partnership Laws. Under Section 702 as interpreted by the Second Department, the petitioner “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.” The standard has been adopted in courts throughout the state.2013: Buyout an Appropriate Equitable Remedy in “Certain Circumstances”. In Mizrahi v Cohen, 104 A.D.3d 917, 961 N.Y.S.2d 538 (2d Dept. 2013), after the lower court found grounds for judicial dissolution under Section 702, over the respondent
rs of shares representing at least 20% of all voting shares to petition for dissolution when, inter alia: (i) the directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; or (ii) the property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation. A minority shareholder holding less than 20% of the shares entitled to vote can also petition for common law dissolution.Those standards are generally friendlier to minority shareholders than the involuntary dissolution standard for LLCs, which requires showing that “it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement,” particularly where many operating agreements state that the LLC is formed for “any valid business purpose” (LLC Law § 702; Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121 [2d Dept Jan. 26, 2010] [discussed here]).Better Transferability.Shares held by a corporation are freely transferrable: they can be sold, traded, bequeathed, and inherited.That transferability can be a valuable asset for minority owners: it gives them a means to exit the corporation or pass on their shares.Membership in an LLC, by contrast, is not freely assignable.Under LLC Law § 603, a member may assign her interest in an LLC, but the assignee of a member’s interest does not become a member in the LLC; they become an “economic interest holder,” permitted to receive distributions, but not permitted to participate in the management of the LLC, sue derivatively, or petition for dissolution of the LLC (although, perhaps—as this post considers—the heirs to a deceased member may petition for dissolution after all).Cleaner ManagementRoles.Unless otherwise set forth in the shareholders agreement, minority shareholders have limited management rights. They can vote to elect the Board of Direc
the remaining members (collectively, “Defendants”), moved to dismiss Antonia’s action, and they pulled no punches in accusing Antonia of a cash-grab—seeking to “parlay [her inherited stake in Bull-Poet] into an exorbitant payout for herself, out of the pockets of the two surviving members.” The Scrivener’s ErrorAntonia hinged her dissolution claim on Article VIII, Section 1(b) of the Operating Agreement, which requires the dissolution of Bull-Poet upon the death of a member. By its terms, the limitation on dissolution set forth in Article VIII, Section 2, Antonia argued, applied to events of voluntary withdrawal set forth in “Article 7 paragraph 1,” but not to the events requiring dissolution listed in Article VIII.Defendants, backed by a high-powered litigation team at Paul, Weiss, responded with a two-pronged argument: First, they argued that dissolution of Bull-Poet was improper because Antonia could not satisfy the requirements of LLC Law 702 and Matter of 1545 Ocean Ave., LLC, 72 AD3d 121, 131 (2d Dept 2010) (discussed here) that it is not reasonably practicable to carry on the business of the LLC. Second, Defendants argued that “the only logical reading of Article VIII, Section 2, is that it is intended to carve out an exception to the directly preceding section—Article VIII, Section 1—and that the reference to ‘Article 7 paragraph 1’ is merely a scrivener’s error.”Notably, the “only logical reading” offered by Defendants is not very logical. It makes no sense for Article VIII, Section 2’s requirement of member consent to dissolution to apply to dissolution under Article VIII, Section 1(a) (members’ consent), 1(c) (sale of the business), or 1(d) (judicial decree of dissolution).Although courts have the equitable power to correct “a mistake solely in the reduction of an agreement to writing” (Stang LLC v Hudson Sq. Hotel, LLC, 2017 N.Y. Slip Op. 31243[U], 15 [N.Y. Sup Ct, New York County 2017]), a unilateral mistake of one party is “not enough to rewrite an agreement that is complete on
Rather, a minority member seeking to have an LLC dissolved must show that “it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.” (LLC Law 702; Matter of 1545 Ocean Avenue, LLC, 72 AD3d 121 [2d Dept Jan. 26, 2010] [its influence on dissolution of LLCs discussed here]). So as long as the company is (i) operating–i.e., generating revenue–and (ii) acting in accordance with its stated purpose, dissolution of an LLC is difficult to obtain.
For one, it reaffirms that the BCL does not apply to derivative suits on behalf of unincorporated entities, such as condominiums and LLCs; the common law does. (See also Matter of 1545 Ocean Avenue, LLC,72 AD3d 121 [2d Dept 2010][holding that the BCL’s dissolution sections do not apply to LLCs]). Nonetheless, the BCL may be instructive in interpreting that common law.28 Cliff St. also clarifies that the First Department’s 2016 ruling in Tsui involves application of the common law.
etitioner analogized to prior instances of New York courts applying equitable / common-law principles to find remedies that do not exist as a matter of statute:Lyons v Salamone, 32 AD3d 757 [1st Dept 2006]: the Court announced that courts may, upon dissolution, order an equitable buyout of one LLC member by another in lieu of liquidationTzolis v Wolff, 10 NY3d 100 [2008]: the Court ruled that LLC members may sue derivatively on behalf of the LLC, notwithstanding the absence of a derivative remedy under the LLC LawGottlieb v Northriver Trading Co. LLC, 5 AD3d 550 [1st Dept 2009]: the Court announced that members of a limited liability company may seek an equitable accounting under common lawRespondents moved to dismiss the petition. In their dismissal memorandum of law (you can also read the opposition and reply submissions here), respondents argued that the existence of LLC Law 702 supplanted any potential common-law dissolution remedy, relying upon some seemingly strong language from In re 1545 Ocean Ave., LLC, 72 AD3d 121 [2d Dept 2010]:[T]he Legislature can only have intended the dissolution standard therein provided to remain the sole basis for judicial dissolution of a limited liability company . . . Phrased differently, since the Legislature, in determining the criteria for dissolution of various business entities in New York, did not cross-reference such grounds from one type of entity to another, it would be inappropriate for this Court to import dissolution grounds from [corporate law] or [partnership law] to [LLC law].The DecisionIn its decision, the Court dismissed the second cause of action for statutory dissolution under LLC 702, holding that the petitioner’s “allegations of oppression and freezing out,” and the “crux of the petition” – that “respondents, as managers of the corporation essentially stole over a million dollars by diverting rental incomes and committed other improprieties as well” – “while supporting common law dissolution, do not support statutory dissolution at all” under th
The court held, “While this standard has never been construed in the case law, the Court interprets it to mean that judicial dissolution will be ordered only where the complaining member can show that the business sought to be dissolved is unable to function as intended, or else that it is failing financially.” Though Justice Kornreich’s “failing financially” prong receivedsome criticism at the time as unsupported by the plain language of the statute itself, years later the Appellate Division – Second Department, relying upon Schindler, adopted herstandard inMatter of 1545Ocean Avenue, LLC, 72 AD3d 121 [2d Dept 2010]. In JG Club Holdings, LLC v Jacaranda Holdings, LLC, 35 Misc 3d 1217 [A] [Sup Ct, NY County 2012], Justice Kornreich became the first court in New York to hold that a member of a member of an LLC lacks standing to sue to dissolve the entity.
The LLC dissolution statute, LLC Law § 702, does not speak in terms of deadlock, nor is deadlock alone sufficient to dissolve an LLC. As the court held in In re 1545 Ocean Ave., LLC, 72 AD3d 121, 129 [2d Dept 2010], “‘[d]eadlock’ is a basis, in and of itself, for judicial dissolution under Business Corporation Law § 1104,” but “no such independent ground for dissolution is available under LLCL 702.” “Instead, the court must consider the managers’ disagreement in light of the operating agreement and the continued ability of 1545 LLC to function in that context.”