Third Time’s Not a Charm in LLC Dissolution Case
April 22, 2019
As it approaches its sixth anniversary with little sign of letting up, the highly contentious litigation between brothers and business partners Nissim and Avraham Kassab is the gift that keeps on giving, at least to us outside observers and business divorce aficionados.
In one after another decision over the years, Justices Orin Kitzes (since retired) and Timothy J. Dufficy of the Queens County Supreme Court have tackled a series of thorny legal issues arising out of the brothers’ dysfunctional relationship as co-owners of a corporation (“Corner”) and an LLC (“Mall”) that own adjoining, vacant parcels in downtown Jamaica, Queens, operated together as a single parking lot and for weekend flea markets. In 2013, Nissim as 25% owner sought judicial dissolution of both on grounds of oppression, breach of fiduciary duty, and looting by Avraham who in turn accused NIssim of diverting parking lot and flea market revenues for his personal benefit.
Nissim ultimately won his bid to dissolve Corner under BCL § 1104-a. Justice Dufficy’s August 2017 post-trial decision appointed a receiver who, after Avraham declined the court’s offer to purchase Nissim’s shares for fair value, last year auctioned off Corner’s vacant parcels to a real estate developer for about $19 million.
The Court Dismisses Nissim’s First Attempt to Dissolve Mall
Nissim’s bid to dissolve Mall under LLC Law § 702 met a different fate, not for lack of trying. In 2014, Justice Kitzes dismissed Nissim’s initial dissolution claim on the basis that his oppression allegations did not meet either prong of the test for LLC dissolution decreed in the Second Department’s 1545 Ocean Avenue decision, i.e., that 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 continuing the entity is financially unfeasible.” Justice Kitzes’s decision was affirmed on appeal in 2016.
The Court Dismisses Nissim’s Second Attempt to Dissolve Mall
Nissim’s second bid to dissolve Mall came in the form of a new, hybrid proceeding filed soon after Justice Dufficy’s post-trial decision dissolving Corner, essentially taking advantage of Justice Dufficy’s findings of Avraham’s “despotic decision-making practices” and underreporting of parking lot income. Nissim’s pleading also included direct and derivative claims seeking damages against Avraham on behalf of both Mall and Corner.
Nissim’s petition alleged 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 adjoining 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.
As reported here, in June 2018 Justice Dufficy granted Avraham’s motion to dismiss Nissim’s new claim for judicial dissolution of Mall. The court’s decision found that Mall was not formed for the purpose of operating a parking lot and that, in any event, it could obtain street access to do so, and that Avraham’s exclusion of Nissim from participation in Mall’s operation, and their disparate views regarding selling or leasing the property for development, did not satisfy the first prong of the 1545 Ocean Avenue test.
As to the test’s second prong (“financially unfeasible”), Justice Dufficy found that Nissim did 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.”
In late 2018, Nissim perfected an appeal from the order of dismissal. I would not expect a decision until sometime in 2020.
The Court Dismisses Nissim’s Third Attempt to Dissolve Mall
You have to give Nissim and his counsel credit for persistence. In August 2018, Nissim filed an amended petition restating a claim for dissolution of Mall allegedly based upon new facts and circumstances that arose after the filing of the previous version of the Petition.
What were the new facts? According to Nissim, once Corner’s parcels were sold, the parking lot business could no longer operate because Mall’s parcel has no street access and, without parking lot revenue, Mall could not pay its expenses including property taxes which were in arrears, rendering Mall insolvent. In other words, whereas in his first two attempts at dissolution Nissim focused on managerial dysfunction, in his third attempt he pressed the case for financial unfeasibility.
In support of his position, Nissim cited the well-known Mizrahi v Cohen case in which the court granted judicial dissolution of a single-asset real estate LLC co-owned by two 50/50 members on the ground of financial unfeasibility. In that case, the LLC’s accountant testified that the LLC’s monthly expenses exceeded by $12,000 its monthly revenues, and that but for one of the member’s loans to the LLC, the mortgaged property faced foreclosure.
In his motion to dismiss Nissim’s amended petition for dissolution, Avraham argued that Mizrahi was distinguishable and that the amended petition failed to show that Mall, as the owner of an unencumbered property with an appraised value of $10 million, could not sustain itself financially by leasing or developing the property and, in the interim, using loans from Avraham to pay its expenses including property taxes. According to Avraham, it was “irrelevant” that he had not yet reopened the parking lot business on Mall’s parcel or come up with an alternative business plan to generate immediate revenues.
In his decision earlier this month, Justice Dufficy granted dismissal of the amended dissolution claim but not for the reason given by Avraham. Instead, Justice Dufficy dismissed the claim purely on procedural grounds, explaining:
As this Court in its Order of June 11, 2018, granted Avraham’s pre-answer motion and dismissed the original petition seeking judicial dissolution of Mall, the petition could not longer be amended, and the amended pleading cannot supercede the original petition. Therefore, as the amended petition is a nullity, that branch of the motion to dismiss the petition to the extent that it seeks judicial dissolution of Mall, is granted. Thus, the amended petition is dismissed.
Does this mean Nissim would have fared better had he commenced a new dissolution proceeding based on financial unfeasibility rather than amending his petition in the existing case? Perhaps. We’ll just have to wait and see whether Nissim pursues that route, or files another appeal, or both.
Meanwhile, the pending case goes on. In the same decision, Justice Dufficy denied Avraham’s motion to dismiss Nissim’s contract claim for failure to make distributions and for an accounting to the extent they pertain to the years 2016 and 2017 which were not addressed in the court’s prior rulings. Between those claims, the appeal already perfected, and appeals likely to come, there’s a decent chance I’ll be writing about this case for years to come.