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.

Leave a Comment