Court Denies Second Bite at Dissolution Cherry in Kassab Brothers Business Divorce
June 25, 2018
The hard-fought business divorce litigation between Nissim Kassab and his brother Avraham has provided plenty of fodder for this blog over the last several years (here, here, here, and here) with more to come, as evidenced by Queens County Supreme Court Justice Timothy J. Dufficy’s decision earlier this month dismissing Nissim’s second attempt to plead a claim for judicial dissolution of the brothers’ realty-holding company known as Mall 92-30 Associates LLC (“Mall”), which owns an unimproved lot in a prime development location in downtown Jamaica, Queens, valued around $10 million.
Justice Dufficy’s ruling in Matter of Kassab v Kasab, 2018 NY Slip Op 50934(U) [Sup Ct Queens County June 11, 2018], comes on the heels of a post-trial decision last year in a related case brought by Nissim in which Justice Dufficy conditionally ordered dissolution of their corporation known as Corner 160 Associates, Inc. (“Corner”) which owned two unimproved lots adjoining Mall’s lot. Justice Dufficy’s order gave Avraham the option to buy out Nissim’s 25% interests in both Corner and Mall at fair values determined by the court, but Avraham took a pass and subsequently failed to obtain an appellate stay of the dissolution order, leading to a public auction sale of Corner’s realty two weeks ago by the court-appointed receiver for $18 million.
Nissim’s second shot at dissolving Mall, like the first unsuccessful one, illustrates anew the hurdles faced by a minority member of a solvent, realty-holding LLC, particularly when there’s no operating agreement giving the minority member additional management rights, in satisfying the prevailing standard for judicial dissolution of LLCs as articulated in the 1545 Ocean Avenue case, namely, the LLC’s management “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 First Bite
Nissim’s first bite at dissolving Mall came to naught when since-retired Justice Orin Kitzes issued a decision in March 2014 granting Avraham’s motion to dismiss based on failure to plead a viable claim under the 1545 Ocean Avenue standard. That ruling was affirmed on appeal in March 2016, with the court finding inadequate Nissim’s allegations that Avraham oppressively excluded him from management of the LLC and also based on Nissim’s failure to plead that continuing the LLC’s business was financially unfeasible.
In 2017, Justice Dufficy conducted a bench trial of Nissim’s application to dissolve Corner, which necessarily encompassed evidence concerning Mall given that the adjoining parcels owned by the two entities were being used together as a single parking lot operation and for weekend flea markets. Justice Dufficy’s August 2017 post-trial decision included findings that Avraham under-reported and diverted cash receipts from the parking lot, unilaterally rejected third-party offers to buy or lease the properties, and generally engaged in “despotic decision-making practices.”
The Second Bite
Encouraged by the court’s findings in its post-trial decision, in November 2017, following the expiration of Avraham’s time to elect to purchase Nissim’s ownership interests, Nissim commenced a new “hybrid” proceeding again seeking dissolution of Mall and also asserting a series of direct and derivative claims against Avraham on behalf of both Mall and Corner.
Avraham responded with a motion to dismiss all claims in the new lawsuit. In regard to the claim to dissolve Mall, Avraham argued that Nissim’s allegations drawn from the court’s post-trial decision concerning the brothers’ dysfunctional and hostile relationship, Avraham’s diversion of parking lot income, and his exclusion of Nissim from management decision-making, were an insufficient basis to dissolve for the same reasons Nissim’s first dissolution petition was dismissed.
Nissim opposed the motion, contending that the allegations supporting dissolution of Mall were based on facts and events subsequent to his first dissolution petition and therefore not considered by the lower or appellate courts in their prior dismissal orders, and that the “new” allegations of abusive conduct by Avraham went well beyond the first petition’s allegations of exclusion from management.
Nissim also argued that the court-ordered dissolution of Corner made it not reasonably practicable to carry on Mall’s business since Corner and Mall were being operated as a single business on all three parcels; that only Mall had a license to operate the parking lot; and that there was no access directly from the street to Mall’s property.
Justice Dufficy’s Decision
Justice Dufficy’s decision begins with a thorough review of the brothers’ lengthy litigation history, a description of the new proceeding, and a statement of the governing legal standards. He then turns to Nissim’s claim for judicial dissolution of Mall under Section 702 of the LLC Law, detailing the parties’ contentions. Next, Justice Dufficy sets forth a useful summary of principles governing the circumstances under which judicial dissolution of an LLC is available (citations and internal quotation marks omitted):
- “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 its 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.”
Applying these principles to the allegations in Nissim’s petition, Justice Dufficy concludes that they fail to state a cause of action under LLCL § 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.” More specifically, Justice Dufficy cites the facts that:
- “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 an 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.”
- “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.”
All in all, the court held, Nissim’s factual allegations failed to demonstrate management’s inability or unwillingness to achieve Mall’s purpose as a real estate holding company, or that Mall is financially unfeasible.
The decision goes on to address the balance of Nissim’s non-dissolution claims, dismissing or time-limiting most of them on grounds of claim preclusion based on the court’s disposition of Nissim’s prior lawsuit.
Moral of the Story: I’ve preached for many years, if you’re contemplating taking a minority ownership stake in a New York closely held entity, and if you have a choice of entity form to use, all other things being equal, because of the different statutory schemes governing dissolution, you’re better off as a minority shareholder of a corporation than as a minority member of an LLC. It’s positively eerie how perfectly the Kassab case illustrates the point, as if it were a laboratory experiment, featuring two realty holding entities with essentially identical assets, operations, management and ownership; one a corporation, the other an LLC; each the subject of essentially identical claims of misconduct or overreaching by the majority owner; the corporation judicially dissolved, the LLC not.