Swing and a Miss: Unopposed LLC Dissolution Claim Denied
August 23, 2021
In an article from a little over a month ago, we summarized New York’s LLC judicial dissolution statute with the comment, “Breaking up can be hard to do.”
Our remark was meant to encapsulate the frequency with which trial level courts dismiss – and appeals courts affirm dismissal and reverse denial of dismissal – of LLC judicial dissolution petitions / complaints at the pleadings stage for failure to plead, and inability to show, the two-pronged standard for judicial LLC dissolution.
A Decision and Order issued last week by Brooklyn Commercial Division Justice Reginald A. Boddie provides an added twist on that phrase: “Even if it’s unopposed, breaking up can be hard to do.”
The Allegations in the Complaint
In Azaria v Uhr, a 52% member of 695 Monroe Street, LLC, sued his 48% co-member for an accounting, judicial dissolution, and appointment of a receiver to wind up the LLC’s affairs. In his complaint, Azaria alleged that the “purpose” of 695 Monroe was to “convert” a residential apartment building in Brooklyn “into a residential condominium” through a formal Offering Plan filed with and approved by the Office of the New York State Attorney General.
695 Monroe was a manager-managed LLC. Rubin, a non-member, served as the LLC’s manager. According to Azaria, Rubin, allegedly at the behest of Azaria’s minority co-member, Uhr, made regulatory filings with the Attorney General falsely stating that Azaria was not an owner of 695 Monroe, the “sponsor” of the condominium, in violation of the Martin Act, a section of which, General Business Law 352-e, makes it “illegal and prohibited” to fail to disclose in a condominium offering plan “the names, addresses and business background of the principals” of the sponsor.
According to Azaria, absent disclosure of his role as principal of 695 Monroe, the Offering Plan was ineligible for approval by the Attorney General, “frustrating the purpose of the formation of 695 Monroe,” and making it “no longer reasonably practicable to carry on the business of 695 Monroe in conformity with the Operating Agreement.”
The Language of the Operating Agreement
Azaria’s characterization of the LLC’s purpose, though, did not correspond with the words of the Operating Agreement. A garden-variety purposeless purpose clause, Art. II. Sec. 1, provided that the “purpose” of 695 Monroe was to “engage in any business” in which an LLC “may lawfully engage” in New York.
The only reference anywhere in the Operating Agreement to a condominium conversion project was in a separate provision, Art. 8, Sec. 2, addressing member “contributions,” stating, “Building shall be condos and sold as 4 condos . . .”
But immediately after, in the very same provision, the Operating Agreement addressed “rental” as an alternative to condo conversion: “In the event we determine that [a] sale is not [a] feasible option and turn it into [a] rental building, after [the] building is stabilized we shall refinance” with the “proceeds” distributed to the members in the “same” manner as if the building was converted to condos.
Separately, Art. 10, Sec. 5 of the Operating Agreement provided two “events of dissolution”: (i) “Failure to make when due any contribution, advance or other payment” required under the Operating Agreement; or (ii) “Violation of any of the other provisions of this Agreement and failure to remedy” the breach upon demand of the manager. The Operating Agreement required the “unanimous decision of all managers” (i.e., Rubin) for either triggering event to be “deemed events of dissolution.” It was unclear from Azaria’s pleading whether he ever made a demand upon Rubin to deem the LLC dissolved.
The Decision and Order
Uhr defaulted in answering or moving to dismiss the complaint. Azaria moved for a default judgment on his complaint, filing a lawyer affirmation, client affidavit, and memorandum of law. Uhr then defaulted on the motion, an awfully precarious position for a defendant.
Despite Uhr’s lack of opposition to either the complaint or the motion for default, Justice Boddie denied dissolution, finding Azaria’s allegations in the complaint insufficient as a matter of law.
The Court explained that under the default motion standard of CPLR 3215, “Plaintiff’s motion must provide the Court with sufficient facts to determine whether there exists a viable cause of action.” The Court ruled that the complaint and Azaria’s accompanying affidavit failed to satisfy this minimal standard.
The Court noted that Azaria “argued, accurately,” that under Art. 8, Sec. 2 of the Operating Agreement, “the parties intended to develop condos and sell them.” But it was “evident” to the Court from the same provision that “the parties contemplated a rental building as an alternative.” “Moreover,” the Court continued, “Article 2 of the operating agreement, titled Purposes, provided ‘[t]he purpose of the Company shall be to engage in any business in which a Limited Liability Company may lawfully engage in the State of New York.’”
Based upon these two provisions of the Operating Agreement, the Court concluded:
Here, the complaint failed to allege Uhr was unwilling or unable to reasonably permit 695 Monroe from engaging ‘… in any business in which a Limited Liability Company may lawfully engage in the State of New York.’ The operating agreement indicated that the parties contemplated alternatively renting the units, and there was no showing that the continued operation of 695 Monroe is financially unfeasible. . . Therefore, plaintiff failed to establish entitlement to judicial dissolution and the consequent appointment of a receiver.
Comments on Azaria
New York courts often deny default judgment motions, but typically for procedural reasons like failure to prove proper service of process, or failure to prove compliance with the statutory requirement of sending an additional mailing of the complaint. It’s quite rare to see courts deny a default judgment based upon facial insufficiency of the pleading itself.
For Azaria, denial of his unopposed default motion likely spells doom for his lawsuit unless he is capable of somehow re-pleading additional facts that might satisfy the judicial dissolution standard of LLC Law 702, or instead, pleading entirely new causes of action.
Azaria is another reminder to prospective LLC dissolution petitioners – among so many examples we have written about in the case law – that the language of the operating agreement is indispensably important to the merits of one’s dissolution claim. Even at the pre-answer stage – when the allegations in the complaint are “assumed to be true” – courts often refuse to rely upon the pleader’s characterization of an LLC’s “stated purpose” and whether the LLC’s management is “unable or unwilling” to achieve that purpose, instead closely scrutinizing the words of the operating agreement itself to determine whether the facts, as pled, are susceptible of demonstrating sufficient legal grounds to dissolve the company.