June 17, 2024

In a recent decision by Justice Andrew Borrok in the New York County Commercial Part, the court was faced with several common issues which arise when two LLC members find themselves in court. In the May 14, 2024 decision handed down in Matter of the Petition for Dissolution pursuant to NY LLC Law v. Gad Ruhman, Index No. 656166/2023, the court addressed several issues including (i) when dissolution of an LLC is warranted; (ii) whether a cause of action sounding in breach of fiduciary duty of care and loyalty can be asserted in a derivative action based upon allegations that the respondent had failed to provide access to the books and records of the LLC; and (iii) whether the respondent entered into certain transactions not in the best interests of the LLC and/or against the express interest of the petitioner.

Not surprisingly, Justice Borrok, noting that dissolution is a “drastic remedy,” found that the petitioner had failed to establish that dissolution was warranted under N.Y. Limited Liability Company Law § 702, which requires the petitioner to establish (i) the management of the entity was 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 was financially unfeasible.  In connection with the LLC in question, where the Articles of Incorporation did not require a majority vote to effectuate the purposes of the LLC and no operating agreement had been entered into between the parties, the court held that where the dispute at present between the members was not “inimicable” to achieving the purpose of the LLC or that the financial viability of the LLC or its purpose were not in issue, dissolution was not warranted under the statute.  Practitioners in this area are well aware of the difficult hurdles that must be satisfied to obtain dissolution of an LLC which is operating in accordance with its purpose—even if one or more members are upset with the actions of their fellow members that may have breached their fiduciary obligations to one another.

The court did hold, however, that the facts as alleged may have presented a cause of action sounding in breach of fiduciary duty of care and loyalty potentially asserted in a derivative action based on the allegations that respondent had failed to provide access to the books and records of the LLC, entered into transactions not in the best interests of the LLC and/or against the express interests of petitioner as a 50% owner.  In regard to the production of the books and records, without an operating agreement to establish the standards for review of books and records beyond the statutory requirement, N.Y. Limited Liability Law § 1102 provides that each member of a New York LLC, subject to reasonable standards that may be set forth in an operating agreement, may inspect and/or copy at his or her own expense, for purposes reasonably related to the member’s interest as a member, any financial statements maintained by the limited liability company for the three most recent fiscal years as well as other information regarding the affairs of the limited liability company as is just and reasonable.  Accordingly, the court ordered the production of such information. Of course, much of what is in dispute in this litigation could have been avoided if the parties had taken the time to negotiate a clear and controlling operating agreement that would have addressed such contingencies in such a way to avoid the cost and expense of such litigation