Court Refuses to Dissolve LLC, Holding That Members' Disputes Were Insufficient to Justify Dissolution

On June 11, 2018, Justice Dufficy of the Queens County Commercial Division issued a decision in Matter of Kassab v. Kasab, 2018 NY Slip Op. 50934(U), refusing to dissolve an LLC despite the many disputes between the members, explaining:

A court may order the dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. The statute does not define the term reasonably practicable. In determining whether a limited liability company should be dissolved, pursuant to Section 702, the court must first examine the limited liability company's operating agreement to determine, in light of the circumstances presented, whether it is or is not reasonably practicable for the limited liability company to continue to carry on its business in conformity with the operating agreement, and not whether it is impossible. The petitioner seeking judicial dissolution must either show that 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 that continuing the entity is financially unfeasible. If the general nature of the business purpose is ultimately vague, the evidence must make it clear that the purpose of the company is no longer being fulfilled to necessitate dissolution.

Disputes between members are not sufficient to warrant the exercise of judicial discretion to dissolve an LLC that is operated in a manner within the contemplation of it purposes and objectives as defined in its articles of organization and/or operating agreement. It is only where discord and disputes by and among the members are shown to be inimical to achieving the purpose of the LLC will dissolution under the not reasonably practicable standard imposed by LLC § 702 be considered by the court to be an available remedy to the petitioner.

Here, accepting as true the facts alleged in the petition/complaint and according the petitioner the benefit of every favorable inference the petitioner has failed to state a cause of action for judicial dissolution of the LLC, pursuant to Limited Liability Company Law § 702, based on his allegations of oppressive conduct and the respondent's efforts to exclude him from the management of the LLC which are alleged to have occurred in the years since the filing of the first unsuccessful petition to dissolve Mall.

Mall's Operating Agreement, dated March 13, 2001, and signed by both Nissim and Avraham, states that its purpose is "engaging in any lawful act or activity for which limited liabilities companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing." Nissim and Avraham did not execute a subsequent Operating Agreement. As a result of the Corner dissolution proceeding, that portion of the parking lot that exists on Corner's two adjoining lots has been closed and said properties are to be sold.

Mall continues to hold a license to operate a parking lot. Contrary to the petitioner's allegations, this Court did not find that Mall's property, Lot 24, is completely inaccessible from the street. A portion of Mall's real property abuts the public sidewalk, but does not currently have a curb cut or driveway that would allow vehicles to enter said property from the street. However, the absence of a curb cut or driveway on Lot 24 is not determinative here, as the petitioner does not claim that Mall was formed for the purpose of operating a parking lot/flea market on its property, or that Mall is required to continue to operate such a business. It is undisputed that Mall is a real estate holding company and that it owns a unimproved parcel of real property (Block 10101, Lot 24). Petitioner does not allege that Mall is unable to pay its expenses related to the ownership of its real property, and, therefore, it continues to be a viable real estate holding company. Petitioner's allegations, thus, are insufficient to demonstrate that the management of Mall is unable or unwilling to reasonably permit or promote the stated purpose of the entity to be realized or achieved or that continuing the entity is financially unfeasible.

The Court further finds that the petitioner's allegations are insufficient to demonstrate that the discord and disputes between himself and Avraham are inimical to achieving Mall's purpose. The fact that Avraham has excluded Nissim from participating in the operation of Mall, and that in the past they have had different views regarding business opportunities related to the real property owned by Corner and Mall, is insufficient to warrant a dissolution of the subject limited liability company. Accordingly, that branch of respondent's motion which seeks to dismiss the petition for judicial dissolution of Mall, on the grounds of failure to state a cause of action, is granted.

(Internal quotations and citations omitted) (emphasis added).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.