New York’s First Department Holds That An LLC May Not Be Summarily Dissolved Where A Factual Issue Exists

This month, in Matter of Cline, 2010 N.Y. Slip Op. 02862 (1st Dep’t April 8, 2010), New York’s Appellate Division, First Department, held that ″where a ′factual issue exists which may be raised by answer′ ” to the petition, the trial court is precluded from summarily granting a member’s petition for judicial dissolution of a limited liability company — that is, from dissolving the LLC without (i) the filing of an answer by the objecting member(s) and/or (ii) an evidentiary hearing.

To read the Matter of Cline decision, scroll down to pages 19-24 of this link.

The Second Department’s Matter of Cline decision must be viewed in light of the recent decision in Matter of 1545 Ocean Avenue,2010 N.Y. Slip Op. 688 (2d Dep’t Jan. 26, 2010), in which New York’s Appellate Division, Second Department, restricted the grounds on which a member may obtain judicial dissolution of an LLC. The Matter of Cline decision may indicate that, following the 1545 Ocean Avenue decision, New York’s Appellate Division is more likely to reverse trial courts’ summary dissolutions of LLCs.

This law firm’s Facebook page’s February 4, 2010 post on the First Department’s 1545 Ocean Avenue decision is linked here.

Matter Of Cline

In Matter of Cline, the petitioner individual and the respondent individual each were members with a 50% ownership interest in a limited liability company, PCM Interest Holding, LLC (“Holding”). Holding, in turn, was a member with a 20% ownership interest in another limited liability company, Private Capital Management, LLC (“Capital Management”). Capital Management was in the business of buying, managing, and selling nonperforming real estate mortgages.

The petitioner sought to dissolve Holding because the petitioner and the respondent “no longer speak to each other,” had taken antagonistic positions in a related, ongoing lawsuit, and were “deadlock[ed].” The parties disputed the authenticity of Holding’s purported operating agreement, which appeared to be signed by both parties. The respondent contended that the parties’ signatures on the operating agreement were genuine, while the petitioner maintained that he had never signed the agreement and that the document was fraudulent.

The trial court had granted the petitioner’s application to dissolve Holding and had denied the respondent’s motion, pursuant to N.Y. C.P.L.R. 404(a) and 406, to dismiss the petition for failure to state a cause of action. The Appellate Division, First Department, modifying the trial court’s order, denied the petition for dissolution of Holding and, under N.Y. C.P.L.R. 404(a), permitted the respondent to serve an answer to the petition.

The First Department held that “[T]he disputed operating agreement . . . was . . . a sound reason to grant [the petitioner] leave to serve an answer. Under such circumstances, where a ′factual issue exists which may be raised by answer′, it was improvident for the motion court to deny [the petitioner’s] application for leave to serve an answer.″

As stated, the Matter of Cline case may signal that, given the Second Department’s recent decision in Matter of 1545 Ocean Avenue, New York’s appellate courts are more apt than they previously were to reverse summary dissolutions of LLCs and to remand for the filing by the objecting member(s)of an answer to the petition and/or for an evidentiary hearing.

Matter Of 1545 Ocean Avenue

New York Limited Liability Company Law § 702 provides that, on application by a member, the Supreme Court “may decree 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.” Earlier this year, in Matter of 1545 Ocean Avenue, 2010 N.Y. Slip Op. 688 (2d Dep’t Jan. 26, 2010), New York’s Appellate Division, Second Department, issued the first published decision construing section 702’s “not reasonably practicable to carry on the business” standard for judicial dissolution of an LLC. The 1545 Ocean Avenue Court, reversing the order of the Supreme Court granting the petition of a member for an LLC’s dissolution, held that “for dissolution of a limited liability company pursuant to LLCL 702, the petitioning member 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.”

If your company wants to bring, or needs a lawyer to defend it in, business litigation and you are located in the Manhattan, NYC area, call Attorney David S. Rich at (347) 603-1143.