Page 3 - Commercial Litigation

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Commercial Litigation | MONDAY, AUGUST 8, 2016 | S3

of organization or operating agreement.” to hold onto the property as a rental prop- should be a wake-up call for parties enter- This has created a deadlock situation like

Though the statute does not define what erty.6 Importantly, however, the asset was ing into LLC agreements. Imagine two friends the one in Goldstein.
is reasonably practicable, case law helps still making money for the parties. Judge who have known each other for years. One Unfortunately for Mr. A and Mrs. B, they
explain the parameters. Surprisingly to many, Ramos did not find that there was any day they decide that, given one person’s failed to include anything in the operating
the parties being deadlocked may not be a conflict between the facts as described means and the other person’s management agreement for how to unwind the business,
suficient independent basis for dissolution by the petitioner and the LLC’s ability to prowess, they should enter into business thinking instead that (1) they would never
under LLCL §702.2 “Instead, the court must continue on with its business purpose as together for the purpose of buying and want to unwind the business and (2) if they
consider the managers’ disagreement in light stated in the operating agreement. The managing real properties. The two create did, they would igure it out together when
of the operating agreement and the contin- operating agreement provided that the an LLC, the operating agreement for which the time came. If one of them sues for dis-
ued ability of [the] LLC to function in that “business and purpose” of the company states that the purpose of the business is to solution, the judge, following Goldstein,

context.”3
was to:
purchase, develop, rent and sell mixed use could dismiss the action because: (1) the
In a 2015 decision on the application of acquire, own, hold, expand, renovate, buildings. Each of them is a 50/50 member LLC is still fulilling the business purpose
LLCL §702, Judge Charles Ramos established lease, manage, sell, operate the real of the LLC with equal rights and responsi- stated in the operating agreement to pur-
criteria for granting a petition for judicial dis- property located at 10 Sheridan Square, bilities. From the beginning of the business chase, develop, rent and sell mixed use
solution.4 In Goldstein, Judge Ramos explains New York, New York (the “Premises”) relationship, one member, Mr. A, has run the buildings; (2) the deadlock is not affect-
that in order for a petition for dissolution to and such other business activities and day-to-day operations of the business while ing the LLC’s ability to continue as a going
be granted:
operations that are reasonable related the other, Mrs. B, generally had no involve- concern; and (3) Mr. A and Mrs. B are still
ment in managing the properties. Over the receiving handsome monthly distributions.
the petitioning member must establish, in thereto, subject to the conditions here-
the context of the terms of the operating inafter contained.7
years, the LLC’s investments have been very Mr. A and Mrs. B could end up stuck in this
agreement or articles of incorporation, successful, turning a large proit for both relationship indeinitely, almost enslaved to
that (1) the management of the entity is The petitioner did not allege, and could members.
one another, even though they cannot stand
unable or unwilling to reasonably per- not have alleged, that the LLC was unable Eventually the business relationship each other.
mit or promote the stated purpose of to function in accordance with the operat- sours. Mrs. B now believes that Mr. A is not What Mr. A and Mrs. B should have
the entity to be realized or achieved, or ing agreement or that either the LLC or the managing the business appropriately and included in their operating agreement. Mr.
(2) continuing the entity is inancially property was failing inancially.8 Because wants to hire a new manager to oversee A. and Mrs. B should have included a clause
unfeasible.deadlock is not an independent basis for the business. Mr. A refuses to step down. addressing what would trigger the separa-
5
dissolution, and because the property could The relationship between Mr. A and Mrs. B tion/dissolution provisions in the operat-

In Goldstein, the petitioner contended still be operated proitably, Judge Ramos becomes so strained that they agree that ing agreement. A deinition of “Deadlock”
that the members’ “dispute, over whether determined judicial dissolution was an they can no longer be in business with one could have been included in the operating
or when to sell the Property, ha[d] ‘dead- inappropriate remedy under the circum- another, but cannot agree how to divorce. If agreement as a triggering event that would
locked’ the Company’s operations,” and that stances, leaving the parties stuck with one at one point Mr. A wants to sell, Mrs. B does force the parties into the unwinding process.
unanimity could not be reached because one another.9
not. And vice versa at another point. Based That bargained-for contract right could take
member wanted to maximize the value of Hypothetical Scenario Where/When upon mutual distrust, Mr. A and Mrs. B can the parties out of the Goldstein situation of
the assets and sell, while the other wanted
Things Go South. The Ramos Decision
never be on the same page at the same time.
potentially having to show—as » Page S10

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