Judicial Dissolution of an LLC in New York: How to End Your Business.
How do you dissolve a Limited Liability Company in New York?
Business owners don’t always plan for their business to end. They start with a lot of hope and count on it being a success. Things often change, though. Adversity strikes, cash flow slows, enmity grows, and positions harden. One owner might want to take more risks to turn things around, while the other becomes more cautious, not wanting to lose even more. Eventually, one might want the business to end while the other tries to keep it afloat. If that was your business, what would you do? A lot depends on the type of business entity involved; there are distinct rules for each.
Limited Liability Companies, otherwise known as LLC’s, are common in New York; and business disputes between owners are, too. It’s a good idea to know how to dissolve an LLC before you form one, because going to court to force the judicial dissolution of an LLC is not as easy as you might think. An interesting New York case, In re 1545 Ocean Ave., LLC, 72 A.D.3d 121, 893 N.Y.S.2d 590 (2nd Dept. 2010), proves this point.
1545 Ocean Ave. LLC (“1545 LLC”) was formed to purchase and develop a piece of real property, by rehabilitating an existing building and building a second one. It had only two members, Crown Royal LLC (“Crown Royal”), and Ocean Suffolk Properties LLC (“Ocean Suffolk”); each owned 50%. It had just two managers; one a member of Ocean Suffolk (Van Houten) and one a member of Crown Royal (King). Their relationship broke down over the renovation of the existing building. They wound up in court when one member (Crown Royal) tried to stop the renovation and have the court dissolve 1545 LLC, claiming the business couldn’t function as intended because the members were deadlocked; the other (Ocean Suffolk) tried to keep it alive saying, basically, that their only real dispute was that they couldn’t agree on the terms of a buyout.
The litany of complaints is impressive, demonstrates the bad blood between the members, and shows just how hard it was for 1545 LLC to complete its main purpose: to develop the property. The complaints sound familiar; they are about who’s doing the work, whether they are getting paid too much, and who’s ultimately running the business.
One of the managers, Van Houten, had a construction company (VHC) that began the renovation work. The manager from Crown Royal (King) alleged VHC did the work without his approval. The manager from Ocean Properties (Van Houten, who owned VHC) said VHC did the work because the managers (he and King) agreed it could, because there were no other bona fide bidders. King claimed VHC didn’t have the proper equipment to do the work efficiently and began the work without the required permits. Van Houten evidently billed for extras, including remediation of what he said were structural flaws in the building. King said he agreed to pay VHC’s invoice on the condition that it would no longer unilaterally work on the site; VHC evidently continued anyway. When the building permits were applied for, the town required an environmental review, which showed an environmental hot spot that had to be remediated. One of the members, Crown Royal, recommended a remediation firm, F&E, that provided an estimate. King said Van Houten hired, and paid for, a second firm to provide an estimate, without King’s approval. Van Houten said that Ocean Suffolk paid for both environmental reviews out of its own funds, and, that after F&E performed the remediation, he agreed to pay their bill even though it was more than 20% above their original estimate. King also complained that Van Houten would not meet regularly, and that the whole project was in jeopardy, though he admitted VHC’s work was “awesome.” Things got so bad that King (Crown Royal) said he wanted to withdraw his investment from 1545 LLC. Van Houten (Ocean Suffolk) took this to mean King resigned as manager. VHC (Van Houten’s Construction Company) continued to unilaterally work on the site, while the parties tried to negotiate a buy-out. The work was eventually stopped, about three weeks from completion, when Crown Royal sought judicial dissolution of 1545 LLC. Continue reading