Court Dismisses Action to Dissolve LLC in Light of High Burden for LLC Dissolution Actions

On August 15, 2018, Justice Scarpulla issued a decision in Yu v. Guard Hill Estates, LLC, 2018 NY Slip Op. 32008(U), dismissing an action to dissolve an LLC in light of the high burden for dissolving an LLC, explaining:

Limited Liability Company Law section 702 provides that dissolution of a limited liability corporation may be ordered when it has been proven that it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement. A party seeking dissolution must establish that the management of the equity 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.

Patrick argues that the actions taken by the defendants regarding Guard Hill and 33 East demonstrate the defendants' unwillingness and failure to promote the purpose of the entities, and that the continued operation of Guard Hill and 33 East is financially unfeasible. He maintains that the LLCs have been used, instead, as tools to further the Yu family's personal vendetta against Patrick.

The operating agreement for Guard Hill provides that the Company is formed for the purpose of acquiring a remainder interest in the premises located at 713 Guard Hill Road, Bedford, New York and engaging in any other lawful act or activity for which limited liability companies may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing. 33 East's stated purpose is acquiring, owning, operating, financing, managing and developing the premises located at 33 East 38th Street, New York, New York and engaging in any other lawful act or activity for which LLCs may be formed under the LLCL and engaging in any and all activities necessary or incidental to the foregoing.

Given the broad language in the operating agreements, Patrick has failed sufficiently to plead the requisite grounds for dissolution of the LLCs in his complaint. He does not adequately allege that the LLCs are not operating in a manner within the contemplation of their purposes and objectives as defined in their respective operating agreements, or that continuing their operation would be financially unfeasible. He provides no factual support or basis which would support an allegation that the individual defendants are unable or unwilling to promote the purpose of the LLCs or that it is not reasonably practicable to carry on the business of the LLCs in conformity with the operating agreements.

While Patrick complains that his family members have been engaged in certain activities to further their personal "vendetta" against him, his unflattering characterization of his family's actions is not sufficient to support a cause of action that his family has abandoned the purpose of the LLCs and/or rendered the operation of the LLCs financially unfeasible.

(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). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.