To Dissolve to Not to Dissolve, that is the Question. The Answer is Both.
June 21, 2021
Like the Energizer bunny, some business divorce lawsuits keep going and going and going. Years of protracted litigation, brutal though they may be upon the parties, are a bonanza for voyeuristic business divorce practitioners when the result is thoughtful, precedential decisions that clarify prior rules of law, or better yet, announce new ones. Kassab v Kasab is a perfect example.
Begun nine years ago, Kassab involves two brothers so at odds they seem to disagree how to spell their own last name. For years, 75% owner Avraham and 25% owner Nissim battled over their interests in two entities, one a corporation referred to “Corner,” the other a limited liability company referred to as “Mall,” each of which owned an adjacent parcel of vacant land operated together as a parking lot in Jamaica, Queens.
Over the years, Kassab has spawned no less than five separate lawsuits, five appearances on this blog (read here, here, here, here, and here), and five published appeals court decisions, the latest two issued just last week by the Brooklyn-based Appellate Division – Second Department.
Last week’s companion decisions are Kassab v Kasab, ___ AD3d ___, 2021 NY Slip Op 03837 [2d Dept June 16, 2021], and Kassab v Kasab, ___ AD3d ___, 2021 NY Slip Op 03836 [2d Dept June 16, 2021]. The former emanated from a post-trial decision granting a petition for corporate dissolution. The latter emanated from a pre-answer decision dismissing a petition for LLC dissolution. Polar opposite outcomes.
Side-by-side, last week’s Kassab decisions perfectly illustrate a point we have made on this blog many times: the legal standards for judicial dissolution of corporations and limited liability companies are very different, the standards to dissolve an LLC in some ways more exacting and difficult to prove, and so allegations that might suffice to dissolve a corporation may not even come close to dissolve an LLC. Certain language from the latter Kassab decision addressing LLC dissolution may also have implications for another important issue no New York appeals court has addressed: whether New York law would recognize a viable cause of action for “common-law dissolution” of an LLC.
The Corporate Dissolution Decision
The corporate dissolution decision had six essential holdings, three addressing dissolution, three involving alleged breach of certain contracts between Avraham and Nissim. We’ll focus only the dissolution holdings.
Holding #1: The Court denied Nissim’s motion to dismiss a portion of Avraham’s appeal for mootness “on the grounds that Corner’s properties were sold at auction and the proceeds were distributed.” The Court disagreed with Nissim, ruling that “the sale of Corner’s real property and the distribution of Corner’s assets did not render academic Avraham’s challenges to the dissolution of Corner and the attendant purchase option, as this Court could provide relief from dissolution and direct restitution, and could condition such relief on modified purchase terms.”
Holding #2: The Court affirmed the lower court’s post-trial decision, as amended in a later order, granting Nissim’s dissolution petition, ruling that Nissim established grounds to dissolve Corner under Section 1104-a of the Business Corporation Law (the “BCL”). Relying exclusively upon the seminal decision in Matter of Kemp & Beatley, the Court ruled that the lower court’s “determinations that Avraham had engaged in oppressive actions and diversion of corporate assets sufficient to warrant dissolution of Corner, and that liquidation of the corporation was the only feasible means whereby Nissim may reasonably expect to obtain a fair return on his investment, were supported by the record and the court’s credibility determinations, and will not be disturbed.”
Holding #3: The Court affirmed the lower court’s decision to give Avraham – as an alternative to dissolution – a 90-day buyout option for Nissim’s 25% interest in Corner at a valuation established at trial of $1.6 million. The Court ruled that “the terms of the purchase option, including the purchase price upon modification, the interest rate, and the 90–day period within which to exercise the option, properly reflected the fair value of Nissim’s shares as of the date prior to commencement of the dissolution proceeding, and were reasonable.”
The LLC Dissolution Decision
The outcome could hardly have been more different for Nissim in the LLC dissolution decision. That decision had three essential holdings.
Holding #1: The Court affirmed the lower court’s decision dismissing Nissim’s dissolution petition insofar as it relied upon conduct that pre-dated a prior Appellate Division decision dismissing a similar petition Nissim filed in an earlier lawsuit. The Court ruled, “To the extent Nissim’s current allegations predated the prior petition, they were barred by res judicata and collateral estoppel.”
Holding #2: The Court affirmed the lower court’s decision dismissing Nissim’s petition for dissolution insofar as it relied upon conduct that post-dated the Appellate Division prior order dismissing his prior petition. The Court ruled that the lower court “properly determined that, based on allegations postdating the prior petition, the instant petition failed to state a cause of action for judicial dissolution of Mall. Neither the parties’ disagreements, nor the dissolution of Corner, made it reasonably impracticable for Mall to operate in conformity with the operating agreement, as Mall continued to be a viable real estate holding company.”
Holding #3: Affirming dismissal of Nissim’s LLC dissolution petition on alternative grounds, the Court made explicit two interrelated concepts that have been implicit in many New York appeals court decisions, though not stated with such clarity since the same Court’s seminal decision 11 years ago in Matter of 1545 Ocean Ave.: (i) it’s comparatively difficult to dissolve a New York LLC versus a corporation ; and (ii) the legal standards for dissolution of corporations are inapplicable to LLCs. The Court ruled:
Moreover, dissolution could not properly be based upon the findings of oppressive conduct and diversion of corporate assets underlying the dissolution of Corner, regardless of the fact that the parties operated the businesses in many ways as a single entity. Limited Liability Company Law § 702 provides the sole basis for judicial dissolution of a limited liability company, and includes a ‘more stringent’ standard than that for dissolution of a corporation (Matter of Horning v Horning Constr., LLC, 12 Misc 3d 402, 413 [Sup Ct, Monroe County]; see Matter of 1545 Ocean Ave., LLC, 72 AD3d 121, 126 [2d Dept 2010]). As a consequence, ‘it would be inappropriate for this Court to import dissolution grounds from the Business Corporation Law or Partnership Law to the Limited Liability Company Law’ (Matter of 1545 Ocean Ave., LLC, 72 AD3d at 126), and the ‘reasonably practicable’ standard of the Limited Liability Company Law ‘is not to be confused with the standard for the judicial dissolution of corporations or partnerships’ (id. at 127, 893 N.Y.S.2d 590; see Widewaters Herkimer Co., LLC v Aiello, 28 AD3d 1107, 1108 [4th Dept 2006]).
Thoughts on Kassab
If the ultimate goal of any business divorce is for co-owners to separate, Kassab is a reminder to practitioners and prospective co-owners that forming and operating a business venture through interrelated entities in different forms may impede if not defeat that goal. In Kassab, brother Nissim, who wants to leave the business, is stuck in limbo, half in, half out, one entity dissolved and its assets sold, the other continuing in seeming perpetuity. In fact, while the LLC dissolution appeal in Kassab was pending, Nissim commenced a third LLC dissolution proceeding alleging that the dissolution and sale of the corporate entity “makes it impossible to continue or resume the parking lot business” operated by Mall on the adjacent parcel of land because Mall has no curb cut of its own for cars to enter the lot and now conducts “no business activity.” Like its two predecessors, the petition was dismissed, and that decision is now fully briefed on appeal.
As alluded to at the beginning of this article, I believe language in Kassab also suggests that the appeals court might be disinclined to recognize a claim for common-law LLC dissolution. As we wrote about recently, one lower court recently recognized such a claim, but then changed its mind. In Kassab, the Second Department stated for the first time that LLC Law 702 “provides the sole basis for judicial dissolution of a limited liability company” (emphasis added), and repeated (also for the first time) its holding in Ocean Ave. that the LLC dissolution standard is “not to be confused with the standard for the judicial dissolution of corporations or partnerships,” so it would be “inappropriate for this Court to import dissolution grounds from the Business Corporation Law or Partnership Law to the Limited Liability Company Law.” If I were opposing a claim for common-law LLC dissolution, Kassab would be the first case I would cite, followed immediately by Ocean Ave.
Nearly thirty years after it was decided, Kemp & Beatley remains the authority on the standards for corporate dissolution under BCL 1104-a. New York’s State’s highest court, the Court of Appeals, has never had occasion to consider an appeal in a LLC judicial dissolution proceeding, so we lack an analogously weighty authority under LLC Law 702. Perhaps one day Kassab (which as far I can tell from the NYSCEF docket is not yet “final”) or another case like it will be a suitable candidate for the Court of Appeals granting leave to appeal to consider the correct interpretation of LLC Law 702.