Getting LLC Dissolution Right. In Re Dissolution of Beverwyck Abstract, LLC (NY AD 2008)

     posted by Gary Rosin

In Troubles with "Dissolution," I criticized some recent opinions that applied UPA dissolution concepts to LLCs.  I'm happy to report that in In Re Dissolution of Beverwyck Abstract, LLC, 2008 N.Y. Slip Op. 06337 (N.Y. A.D. July 17, 2008), the Court resisted that siren call.

After dispute with Gateway Title Agency, LLC, which was one of the members of Beverwyck Abstract, LLC, the other members sued for judicial dissolution, which was granted.  The plaintiffs argued that the effective date for the dissolution should be the date the dispute began, February 17, 2003, rather than the date of the dissolution order, May 26, 2005.  Id. at 1-2.  Both the trial court adopted the latter date, and the intermediate court affirmed:

We cannot agree with petitioners' heavy reliance upon case law regarding the dissolution of at-will partnerships and joint ventures to support their contention that the parties' fiduciary duties to each other as members of a limited liability company ended when they met and decided on February 17, 2003 that Gateway would no longer provide title insurance services to Beverwyck.  The pertinent provisions of the Limited Liability Company Law and Beverwyck's operating agreement provide sufficient guidance here.  Limited Liability Company Law § 701 provides for nonjudicial dissolution of a limited liability company upon "(2) the happening of events specified in the operating agreement" or "(3) . . . the vote or written consent of at least a majority in interest of the members." In article IX, Beverwyck's operating agreement similarly provides for dissolution upon the vote or written consent by a majority or a decree of judicial dissolution pursuant to the Limited Liability Company Law.

Here, it is uncontroverted that there was no formal vote or written consent of the majority of the members to dissolve.  Inasmuch as they failed to do so, petitioners' argument that they could have unilaterally dissolved Beverwyck because they held a majority interest is unavailing. In addition, the parties' agreement in February was only to end Gateway's services.  Dissolution was not discussed and Gateway continued to be a member. Absent written consent or formal vote of a majority of members, the only means of dissolution recognized by the operating agreement and applicable statute was by judicial dissolution. Accordingly, Supreme Court correctly determined the date of Beverwyck's dissolution.

Id. at 2-3 (emphasis added). 

I haven't seen the operating agreement, but I'd guess that it did not provide for a right to expel a member.  I'd also guess that the reason for seeking judicial dissolution, instead of dissolving by majority vote, was an attempt by the majority to continue the business for their own benefit.  And why not try to get a two-year head-start?

The take-home lessons are the usual ones.  Nothing beats having lawyers and judges experienced in the differences among the various UBEs.  Except, of course, an operating agreement drafted by a transactional lawyer that is so experienced.

Update:  See Peter A. Mahler's De Facto Dissolution of LLC Does Not Terminate Members' Fiduciary Duty or Avoid Accounting for Subsequent Profits for details on the case, including a link to the lower court order.