Category: Dissolution Issues

LLC BREAK-UPS

By , September 13, 2017 4:32 pm

The handling of LLC break-ups because of member deadlocks is a key area of LLC practice.  Set forth below are the title, citation, and and an excerpt of the introduction to an article about business entity break-ups by judicial dissolution.  The article is focused on NY law, but it has important implications in every other state.

38 Cardozo L. Rev. 1541
Cardozo Law Review
April, 2017
Note
Roxanne Makoff
Copyright © 2017 by Yeshiva University; Roxanne Makoff
JUDICIAL DISSOLUTION UNDER NEW YORK’S LIMITED LIABILITY COMPANY LAW: SHOULD BREAKING UP BE THIS HARD TO DO?

This Note addresses the issues that arise when member relations in New York LLCs become irreconcilably fractious and require judicial intervention. Because New York’s LLC Law does not provide exit-rights, parties who wish to sever relations with other members must either draft an operating agreement that provides for withdrawal or expulsion, negotiate an exit-right under hostile conditions, or persuade a court to order the remedy in the context of a judicial dissolution action.  Under current New York case law, disagreement–deadlock–between LLC members is not an independent ground for judicial dissolution. Rather, the petitioner must convince the court that the LLC is unable to practicably achieve its purpose or is financially unfeasible. The New York standard, which rejects the application of corporate and partnership principles to LLCs, gives extreme deference to the operating agreement and is more stringent than the same standard in Delaware, whose Limited Liability Company Act (Delaware LLC Act) is, like New York’s LLC Law, also grounded on principles of freedom of contract. Faced with an increasing number of petitions for judicial dissolution due to irreconcilable deadlock between LLC members, New York judges are finding creative ways to circumvent the current standard in order to grant dissolution.

This Note argues that New York should replace its current, flawed approach with a standard similar to that of Delaware, which permits deadlock as a ground for judicial dissolution. Under the Delaware standard, New York courts could order judicial dissolution when the relations between the parties have become so hostile that continuing to work together is futile. The Delaware standard, which can aptly be described as “deadlock-plus,” is desirable because it does not give judges unfettered freedom to order judicial dissolution. Rather, under the “deadlock-plus” standard the parties must show deadlock plus the nonexistence of an enforceable and adequate exit-mechanism within the four corners of the operating agreement, or, if an acceptable exit-mechanism is indeed provided for in the operating agreement, the continuation of the LLC is financially unfeasible. Ultimately, the “deadlock-plus” standard, as evidenced by Delaware case law, preserves principles of freedom of contract while promoting functioning business relationships.

MINORITY BAD FAITH IN LLC DISSOLUTIONS

By , October 20, 2016 1:44 pm

Dissolution is a common issue in LLC litigation (and probably in LLC arbitration).  In the new blog post under the link below, Peter Mahler provides a brief but excellent discussion of minority bad faith in minority claims for dissolution.

Here’s the link:  http://www.nybusinessdivorce.com/2016/09/articles/dissolution-defenses/bad-faith-defense-gets-boost-llc-dissolution-case/#more-17654

DELAWARE CASE RE: JOINT VENTURE DISSOLUTIONS

By , December 11, 2015 3:17 pm

LLCs are often the best entities through which to conduct joint ventures.  These ventures often end in acrimony.  The blog under the link below addresses a joint venture dispute under the Delaware corporation act, but it also has implications for LLC-based joint ventures.

Here’s the link:

http://delawarechancery.foxrothschild.com/dissolution-2/section-273-dissolution-inability-to-agree-upon-the-desirability-of-discontinuing-the-joint-venture/?utm_source=Fox+Rothschild+-+Delaware+Court+of+Chancery+Practice+Blog&utm_campaign=b68e55ddff-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_86821ff155-b68e55ddff-70733165

SPIN OFFS, SPLIT OFFS AND SPLIT UPS

By , November 19, 2015 2:18 pm

The excellent new blog post under the link below deals mainly with break-ups of state-law business corporations taxable as C or S corporations, but some of the concepts in the post are also relevant to the break-up of multi-member LLCs taxable as partnerships.   Here’s the link:

http://www.taxlawforchb.com/2015/10/breaking-up-is-hard-to-do-now-i-know/?utm_source=Tax+Law+for+the+Closely-Held+Business&utm_campaign=9c6efc2115-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_4d5d267118-9c6efc2115-73367009

DISSOLUTIONS

By , June 22, 2015 7:53 pm

For LLC junkies:  Here is a link to a good blog post about a really weird Delaware LLC dissolution:

http://www.delawarelitigation.com/2015/06/articles/chancery-court-updates/dissolution-of-profitable-llc-granted-despite-agreement-barring-voluntary-dissolution/.

EQUITABLE DISSOLUTIONS-THE CARLISLE CASE

By , May 6, 2015 1:19 pm

Here is a link to yet another comment, this one by Peter Mahler, on the rather astounding Delaware Court of Chancery Carlisle equitable dissolution case:  http://www.nybusinessdivorce.com/2015/05/articles/llcs/delaware-chancery-court-endorses-equitable-dissolution-of-llc/.

Personally, I think the facts in Carlisle were so unusual that it is unlikely that the case will have a broad impact.  (Famous last words?)

MORE ABOUT THE CARLISLE CASE

By , May 5, 2015 1:14 pm

In case you’re intrigued with the issue of petitions for “equitable dissolutions” of LLCs by “mere assignees” (admittedly a pretty rarified topic), Kurt Heyman, the partner of Vern Proctor (the co-author of my Wolters Kluwer book) has the following brief discussion (in quotes) about the Carlisle case, which addresses the issue.  Kurt handled the case in the Delaware Court of Chancery.

Delaware Court of Chancery Recognizes “Equitable Dissolution” of LLCs

The Court of Chancery, per Vice Chancellor Laster, just issued an Opinion (attached) denying a motion to dismiss the petition for dissolution in In re Carlisle Etcetera LLC, C.A. No. 10280-VCL.  This decision appears to be the first in Delaware to provide strong support for the concept of “equitable dissolution” of LLCs.

The respondent, Tom James Company, moved to dismiss on the grounds that the petitioners lacked standing to seek judicial dissolution under Section 18-802 of the LLC Act, because neither was a member of the LLC as a result of (a) the LLC agreement’s silence on the issue of assignments and (b) the original member’s (WU Parent) assignment of its interest to its wholly owned subsidiary (WU Sub).  (See Section 18-702 of the LLC Act regarding the effect of assignments where the LLC agreement is silent on the issue.)

The Vice Chancellor agreed with Tom James’ argument, notwithstanding the fact that Tom James was aware of the assignment when it occurred and treated the assignee as a member, and therefore held that the petitioners lacked standing to seek judicial dissolution under Section 18-802.

However, in a lengthy analysis of the Court’s equitable jurisdiction, the Vice Chancellor found that the assignee nevertheless had standing to seek “dissolution in equity,” and consequently denied the motion to dismiss.  The critical holding of the case is as follows:

“James argues that because neither WU Parent nor WU Sub can seek statutory dissolution under Section 18-802, this case must be dismissed. In my view, James errs in contending that Section 18-802 is the exclusive extra-contractual means of obtaining dissolution of an LLC.  Under the facts of this case, WU Sub has standing to seek dissolution in equity.”

Because the Court took pains to note that its finding was based on “the facts of this case,” a careful analysis of those facts is necessary before concluding that the decision applies to another case.

 

Proctor Heyman Enerio LLP represents the petitioners in this action.”

LLC PRACTICE

By , June 12, 2014 12:31 pm

Here is another superb post by Doug Batey in his “LLC Monitor” website concerning a recent Kentucky case involving difficult issues about the effect of LLC dissolutions and the liability shield of members of single-member LLCs when their LLCs are administratively dissolved.

The key points in the post, as I read it, include the following:  (i) Dissolution merely means the change of purpose of an LLC from that of a going concern to that of a concern that must wind up; it does not mean the termination of the existence of the LLC (a common misconception even among LLC lawyers.  (ii) Administrative dissolutions will be retroactively terminated if the LLC pays the Secretary of State the required annual fee, but the liability shield of the member of a dissolved single-member LLC will continue despite the administrative dissolution.

WAIVERS OF RIGHTS TO SEEK JUDICIAL DISSOLUTION

By , February 28, 2014 3:28 pm

This recent article in the ABA’s Business Law Today addresses the impact of the Delaware Court of Chancery Huatuco decision on the above waivers (which I’ve mentioned here in a previous post).  The underlying issue is this:  When should an operating agreement provide for these waivers?  The answer:  (i) Whenever some or all of the members want to prevent the risks associated with possible judicial dissolutions; and (ii) whenever the operating agreement contains some other way of handling member deadlocks, such as Texas shoot-out provisions.