Breakdown in LLC Members’ Relationship Does Not Justify Dissolution

On May 14, 2024, Justice Borrok of the New York County Commercial Division issued a decision in Matter of Ruham, 2024 NY Slip Op. 31863(U), holding that a complete breakdown in the relationship between two LLC members did not justify dissolving the LLC, explaining:

Dissolution, the remedy sought here, is a drastic remedy. In a petition seeking dissolution pursuant to Limited Liability Company Law § 702, the petitioning member must establish, in the context of the terms of the operating agreement or articles of incorporation, that (i) 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 (ii) that continuing the entity is financially unfeasible. Based on In re 1545 Ocean Ave, the Court is constrained to hold that the Petition does not sufficiently allege either ground such that dissolution is not appropriate.

In fact, at bottom, the Petition alleges that the relationship between the parties has broken down, resulting in numerous lawsuits that implicate various other corporate entities the parties jointly own. With respect to the LLC, the parties’ breakdown revolves around an alleged freeze out of the Petitioner and disagreement as to a business decision made by the Respondent, i.e., Respondent’s reduction of rent, to which the Petitioner explicitly objected. The Petition specifically alleges that the Respondent (i) has moved funds from the LLC’s accounts to his own personal accounts, (ii) intercepted Property rental payments due the LLC and caused these payments to be routed to his own personal bank accounts, and (iii) removed the books and records of the LLC and has refused to produce them to the Petitioner. The Petition asserts that in light of this malfeasance continuing the LLC is financially unfeasible because, among other things, unpaid real estate taxes may lead to the foreclosure of the Property, the LLC’ s sole asset.

Since the souring of the parties’ relationship, the Respondent commenced a lawsuit on the LLC’ s behalf to recover back rent from the LLC’ s tenant and asserts that the action settled in exchange for a $170,000 payment to the LLC.
As discussed above, the Articles do not require majority vote to effectuate the purpose of the LLC. They expressly provide otherwise. As such, there is no risk of deadlock. As discussed above, nor does the Petition set forth another statutory basis for dissolution – the dispute at present between the members is not inimical to achieving the purpose of the LLC and there is no threatened foreclosure or other financial malady that threatens the viability of the LLC or its purpose. Thus, to the extent the Petition seeks dissolution, an injunction, and a receiver in support of such dissolution, it must be denied and dismissed without prejudice.

(Internal citations omitted).

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